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,
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).
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
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.
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.
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:
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Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
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Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
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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).
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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.
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
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
|
Quoted prices in active markets for identical assets
|
(In millions)
|
Fair Value
|
|
Level 1
|
|
Fair Value
|
|
Level 1
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
12
|
|
|
$
|
12
|
|
Foreign currency derivatives
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Non-qualified trust
|
30
|
|
|
30
|
|
|
34
|
|
|
$
|
34
|
|
Total assets at fair value
|
$
|
77
|
|
|
$
|
77
|
|
|
$
|
46
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total liabilities at fair value
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
(In millions)
|
Fair value
|
|
Carrying value
|
|
Unamortized discount and issuance costs
|
|
Fair value
|
|
Carrying value
|
|
Unamortized discount and issuance costs
|
2024 Notes
|
$
|
401
|
|
|
$
|
370
|
|
|
$
|
5
|
|
|
$
|
394
|
|
|
$
|
369
|
|
|
$
|
6
|
|
2025 Notes
|
408
|
|
|
394
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
809
|
|
|
$
|
764
|
|
|
$
|
11
|
|
|
$
|
394
|
|
|
$
|
369
|
|
|
$
|
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.
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.
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)
|
2017
|
|
2016
|
|
2015
|
Financial position
|
|
|
|
|
|
Current assets
|
$
|
105
|
|
|
$
|
86
|
|
|
|
Current liabilities
|
(69
|
)
|
|
(55
|
)
|
|
|
Working capital
|
36
|
|
|
31
|
|
|
|
Noncurrent assets
|
25
|
|
|
24
|
|
|
|
Noncurrent liabilities
|
(1
|
)
|
|
(2
|
)
|
|
|
Stockholders’ equity
|
$
|
60
|
|
|
$
|
53
|
|
|
|
Results of operations
|
|
|
|
|
|
Sales
|
$
|
289
|
|
|
$
|
255
|
|
|
$
|
275
|
|
Income from operations
|
53
|
|
|
46
|
|
|
48
|
|
Net income
|
25
|
|
|
23
|
|
|
24
|
|
Amounts recorded by Valvoline
|
|
|
|
|
|
Investments and advances
|
$
|
30
|
|
|
$
|
26
|
|
|
$
|
29
|
|
Equity income (loss)
(a)
|
12
|
|
|
12
|
|
|
(2
|
)
|
Distributions received
|
8
|
|
|
16
|
|
|
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)
|
September 30, 2017
|
|
September 30, 2016
|
Trade and other accounts receivable
|
$
|
390
|
|
|
$
|
368
|
|
Less: Allowance for doubtful accounts
|
(5
|
)
|
|
(5
|
)
|
|
$
|
385
|
|
|
$
|
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.
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)
|
2017
|
|
2016
|
Finished products
|
$
|
180
|
|
|
$
|
149
|
|
Raw materials, supplies and work in process
|
31
|
|
|
21
|
|
LIFO reserves
|
(33
|
)
|
|
(29
|
)
|
Excess and obsolete inventory reserves
|
(3
|
)
|
|
(2
|
)
|
|
$
|
175
|
|
|
$
|
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)
|
2017
|
|
2016
|
Land
|
$
|
51
|
|
|
$
|
50
|
|
Buildings
(a)
|
286
|
|
|
216
|
|
Machinery and equipment
|
442
|
|
|
382
|
|
Construction in progress
|
44
|
|
|
79
|
|
Total property, plant and equipment
|
823
|
|
|
727
|
|
Accumulated depreciation
(b)
|
(432
|
)
|
|
(403
|
)
|
Net property, plant and equipment
|
$
|
391
|
|
|
$
|
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
|
|
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)
|
Core North America
|
|
Quick Lubes
|
|
International
|
|
Total
|
Balance at September 30, 2015
|
$
|
89
|
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
170
|
|
Acquisitions
(a)
|
—
|
|
|
94
|
|
|
—
|
|
|
94
|
|
Balance at September 30, 2016
|
89
|
|
|
135
|
|
|
40
|
|
|
264
|
|
Acquisitions
(b)
|
—
|
|
|
66
|
|
|
—
|
|
|
66
|
|
Balance at September 30, 2017
|
$
|
89
|
|
|
$
|
201
|
|
|
$
|
40
|
|
|
$
|
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)
|
2017
|
|
2016
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
Definite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
$
|
2
|
|
|
(1
|
)
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Customer relationships
|
5
|
|
|
(2
|
)
|
|
3
|
|
|
3
|
|
|
$
|
(2
|
)
|
|
1
|
|
Other intangible assets
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
$
|
—
|
|
|
1
|
|
Total definite-lived intangible assets
|
$
|
8
|
|
|
$
|
(3
|
)
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
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.
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)
|
2017
|
|
2016
|
Non-qualified trust investments
|
$
|
30
|
|
|
$
|
34
|
|
Notes receivable from customers
|
35
|
|
|
26
|
|
Customer incentive programs
|
11
|
|
|
16
|
|
Other
|
12
|
|
|
13
|
|
|
$
|
88
|
|
|
$
|
89
|
|
|
|
|
|
The following table provides the components of Accrued expenses and other liabilities in the Consolidated Balance Sheets as of September 30:
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
2016
|
Sales deductions and rebates
|
$
|
54
|
|
|
$
|
67
|
|
Accrued pension and other postretirement plans
|
20
|
|
|
24
|
|
Incentive compensation
|
23
|
|
|
21
|
|
Accrued vacation
|
20
|
|
|
18
|
|
Accrued taxes (excluding income taxes)
|
6
|
|
|
14
|
|
Accrued payroll
|
10
|
|
|
9
|
|
Accrued interest
|
7
|
|
|
4
|
|
Other current taxes payable
|
1
|
|
|
5
|
|
Other
|
55
|
|
|
42
|
|
|
$
|
196
|
|
|
$
|
204
|
|
|
|
|
|
The following table provides the components of Other noncurrent liabilities in the Consolidated Balance Sheets as of September 30:
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
2016
|
Obligations to Ashland
(a)
|
$
|
74
|
|
|
$
|
71
|
|
Self-insurance reserves
|
17
|
|
|
25
|
|
Deferred compensation
|
14
|
|
|
8
|
|
Unfavorable leasehold interest
|
6
|
|
|
7
|
|
Capitalized lease obligations
|
25
|
|
|
6
|
|
Financing obligations
|
33
|
|
|
19
|
|
Other
|
9
|
|
|
7
|
|
|
$
|
178
|
|
|
$
|
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.
NOTE 11 – DEBT
The following table summarizes Valvoline’s short-term borrowings and long-term debt at September 30:
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
2016
|
2025 Notes
|
$
|
400
|
|
|
$
|
—
|
|
2024 Notes
|
375
|
|
|
$
|
375
|
|
Term Loans
|
285
|
|
|
375
|
|
2017 Accounts Receivable Securitization
|
75
|
|
|
—
|
|
Revolver
|
—
|
|
|
—
|
|
Other
(a)
|
(11
|
)
|
|
(7
|
)
|
Total debt
|
$
|
1,124
|
|
|
$
|
743
|
|
Short-term debt
|
75
|
|
|
—
|
|
Current portion of long-term debt
|
15
|
|
|
19
|
|
Long-term debt
|
$
|
1,034
|
|
|
$
|
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,
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.
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
|
|
$
|
90
|
|
2019
|
|
30
|
|
2020
|
|
30
|
|
2021
|
|
211
|
|
2022
|
|
—
|
|
Thereafter
|
|
776
|
|
Total
|
|
$
|
1,137
|
|
NOTE 12 – LEASE COMMITMENTS
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)
|
|
Operating leases
(a)
|
|
Capital leases and financing obligations
|
2018
|
|
$
|
21
|
|
|
$
|
6
|
|
2019
|
|
19
|
|
|
6
|
|
2020
|
|
14
|
|
|
7
|
|
2021
|
|
11
|
|
|
6
|
|
2022
|
|
10
|
|
|
6
|
|
Thereafter
|
|
38
|
|
|
52
|
|
Total future minimum lease payments
|
|
$
|
113
|
|
|
$
|
83
|
|
|
|
|
|
|
(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)
|
$
|
18
|
|
|
$
|
15
|
|
|
$
|
12
|
|
Contingent rentals
|
2
|
|
|
2
|
|
|
2
|
|
Sublease rental income
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
$
|
19
|
|
|
$
|
16
|
|
|
$
|
13
|
|
NOTE 13 – INCOME TAXES
For the years ended September 30, income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
Federal
|
$
|
47
|
|
|
$
|
99
|
|
|
$
|
81
|
|
State
|
8
|
|
|
24
|
|
|
16
|
|
Foreign
|
14
|
|
|
12
|
|
|
13
|
|
|
69
|
|
|
135
|
|
|
110
|
|
Deferred
|
|
|
|
|
|
Federal
(a)
|
106
|
|
|
14
|
|
|
(5
|
)
|
State
(b)
|
12
|
|
|
2
|
|
|
(1
|
)
|
Foreign
|
(1
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
117
|
|
|
13
|
|
|
(9
|
)
|
Income tax expense
|
$
|
186
|
|
|
$
|
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.
Temporary differences that give rise to significant deferred tax assets and liabilities are presented in the following table as of September 30:
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
Federal net operating loss carryforwards
(a)
|
$
|
96
|
|
|
$
|
—
|
|
Foreign net operating loss carryforwards
(b)
|
1
|
|
|
1
|
|
State net operating loss carryforwards
(c)
|
28
|
|
|
18
|
|
Employee benefit obligations
|
132
|
|
|
351
|
|
Compensation accruals
|
29
|
|
|
17
|
|
Environmental, self-insurance and litigation reserves (net of receivables)
|
6
|
|
|
10
|
|
Credit carryforwards
(d)
|
13
|
|
|
20
|
|
Other items
|
7
|
|
|
5
|
|
Valuation allowances
(e)
|
(8
|
)
|
|
(12
|
)
|
Total deferred tax assets
|
304
|
|
|
410
|
|
Deferred tax liabilities
|
|
|
|
Goodwill and other intangibles
(f)
|
3
|
|
|
—
|
|
Property, plant and equipment
|
17
|
|
|
21
|
|
Unremitted earnings
|
3
|
|
|
2
|
|
Total deferred tax liabilities
|
23
|
|
|
23
|
|
Net deferred tax asset
|
$
|
281
|
|
|
$
|
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.
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)
|
2017
|
|
2016
|
|
2015
|
Income before income taxes
|
|
|
|
|
|
United States
(a)
|
$
|
433
|
|
|
$
|
382
|
|
|
$
|
245
|
|
Foreign
|
57
|
|
|
39
|
|
|
52
|
|
Total income before income taxes
|
$
|
490
|
|
|
$
|
421
|
|
|
$
|
297
|
|
|
|
|
|
|
|
Income taxes computed at U.S. statutory rate (35%)
|
$
|
171
|
|
|
$
|
147
|
|
|
$
|
104
|
|
Increase (decrease) in amount computed resulting from
|
|
|
|
|
|
Uncertain tax positions
|
2
|
|
|
3
|
|
|
1
|
|
State taxes
|
17
|
|
|
16
|
|
|
9
|
|
International rate differential
|
(7
|
)
|
|
(5
|
)
|
|
(8
|
)
|
Permanent items
(b)
|
(8
|
)
|
|
(11
|
)
|
|
(5
|
)
|
Tax Matters Agreement activity
|
10
|
|
|
—
|
|
|
—
|
|
Other items
|
1
|
|
|
(2
|
)
|
|
—
|
|
Income tax expense
|
$
|
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
.
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
|
$
|
4
|
|
Increases related to positions taken on items from prior years
|
1
|
|
Balance at September 30, 2015
|
5
|
|
Increases related to positions taken on items from prior years
|
2
|
|
Increases related to positions taken in the current year
|
1
|
|
Balance at September 30, 2016
|
8
|
|
Increases related to positions taken in the current year
|
2
|
|
Balance at September 30, 2017
|
$
|
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.
|
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.
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)
|
Pension benefits
|
|
Other postretirement benefits
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Net periodic benefit (income) costs
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
86
|
|
|
11
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Expected return on plan assets
|
(145
|
)
|
|
(17
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
(a)
|
—
|
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
(1
|
)
|
|
—
|
|
Actuarial (gain) loss
|
(63
|
)
|
|
(42
|
)
|
|
2
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
Pre-separation allocation from Ashland
(b)
|
—
|
|
|
21
|
|
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
(120
|
)
|
|
$
|
(24
|
)
|
|
$
|
46
|
|
|
$
|
(16
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Weighted-average plan assumptions
(c)
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for service cost
(d)
|
2.15
|
%
|
|
4.10
|
%
|
|
4.08
|
%
|
|
2.95
|
%
|
|
4.25
|
%
|
|
—
|
|
Discount rate for interest cost
(d)
|
2.84
|
%
|
|
3.23
|
%
|
|
4.08
|
%
|
|
2.64
|
%
|
|
2.92
|
%
|
|
—
|
|
Rate of compensation increase
|
2.99
|
%
|
|
3.23
|
%
|
|
3.15
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected long-term rate of return on plan assets
|
6.56
|
%
|
|
6.77
|
%
|
|
5.34
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
The following table shows the amortization of prior service cost (credit) recognized in accumulated other comprehensive loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement benefits
|
(In millions)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Transfer in of unrecognized prior service cost (credit)
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(81
|
)
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
12
|
|
|
1
|
|
Total amount recognized in accumulated other comprehensive income
|
—
|
|
|
1
|
|
|
12
|
|
|
(80
|
)
|
Net periodic benefit income
|
(120
|
)
|
|
(24
|
)
|
|
(16
|
)
|
|
(1
|
)
|
Total amount recognized in net periodic benefit income and accumulated other comprehensive income
|
$
|
(120
|
)
|
|
$
|
(23
|
)
|
|
$
|
(4
|
)
|
|
$
|
(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)
|
Pension benefits
|
|
Other postretirement benefits
|
Prior service credit
|
$
|
—
|
|
|
$
|
(12
|
)
|
Obligations and funded status
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Pension benefits
|
|
Other postretirement benefits
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Change in benefit obligations
|
|
|
|
|
|
|
|
Benefit obligations at October 1
|
$
|
3,138
|
|
|
$
|
59
|
|
|
$
|
73
|
|
|
$
|
—
|
|
Transfer from Ashland
|
—
|
|
|
3,523
|
|
|
—
|
|
|
75
|
|
Service cost
|
2
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Interest cost
|
86
|
|
|
11
|
|
|
1
|
|
|
—
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
3
|
|
|
1
|
|
Benefits paid
|
(210
|
)
|
|
(20
|
)
|
|
(16
|
)
|
|
(3
|
)
|
Actuarial (gain)
|
(60
|
)
|
|
(66
|
)
|
|
(5
|
)
|
|
—
|
|
Foreign currency exchange rate changes
|
4
|
|
|
1
|
|
|
1
|
|
|
—
|
|
Transfers in
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailment/Settlement
|
(585
|
)
|
|
(373
|
)
|
|
—
|
|
|
—
|
|
Benefit obligations at September 30
|
$
|
2,381
|
|
|
$
|
3,138
|
|
|
$
|
57
|
|
|
$
|
73
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Value of plan assets at October 1
|
$
|
2,307
|
|
|
$
|
46
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Transfer from Ashland
|
—
|
|
|
2,653
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
148
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
Employer contributions
|
412
|
|
|
6
|
|
|
13
|
|
|
2
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
3
|
|
|
1
|
|
Benefits paid
|
(210
|
)
|
|
(20
|
)
|
|
(16
|
)
|
|
(3
|
)
|
Foreign currency exchange rate changes
|
3
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Curtailment/Settlement
|
(585
|
)
|
|
(373
|
)
|
|
—
|
|
|
—
|
|
Transfers in
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Value of plan assets at September 30
|
$
|
2,081
|
|
|
$
|
2,307
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Unfunded status of the plans
|
$
|
(300
|
)
|
|
$
|
(831
|
)
|
|
$
|
(57
|
)
|
|
$
|
(73
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets
|
|
|
|
|
|
|
Current benefit liabilities
|
$
|
(11
|
)
|
|
$
|
(11
|
)
|
|
(8
|
)
|
|
(11
|
)
|
Noncurrent benefit liabilities
|
(289
|
)
|
|
(820
|
)
|
|
(49
|
)
|
|
(62
|
)
|
Net amount recognized
|
$
|
(300
|
)
|
|
$
|
(831
|
)
|
|
$
|
(57
|
)
|
|
$
|
(73
|
)
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income (loss)
|
|
|
|
|
Prior service cost (credit)
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
(68
|
)
|
|
$
|
(80
|
)
|
Total amount in accumulated other comprehensive income (loss)
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
(68
|
)
|
|
$
|
(80
|
)
|
|
|
|
|
|
|
|
|
Weighted-average plan assumptions
|
|
|
|
|
|
|
|
Discount rate
|
3.76
|
%
|
|
3.54
|
%
|
|
3.48
|
%
|
|
2.92
|
%
|
Rate of compensation increase
|
3.13
|
%
|
|
3.10
|
%
|
|
—
|
|
|
—
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2017
|
2016
|
Benefit Obligation
|
|
Plan Assets
|
|
Benefit Obligation
|
|
Plan Assets
|
Plans with projected benefit obligation in excess of plan assets
|
$
|
2,381
|
|
|
$
|
2,081
|
|
|
$
|
3,138
|
|
|
$
|
2,307
|
|
Plans with accumulated benefit obligation in excess of plan assets
|
2,368
|
|
|
2,072
|
|
|
3,125
|
|
|
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)
|
Total fair value
|
|
|
Quoted prices in active markets for identical assets Level 1
|
|
|
Significant other observable inputs Level 2
|
|
|
Significant unobservable inputs
Level 3
|
|
Cash and cash equivalents
|
$
|
13
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. government securities
|
339
|
|
|
207
|
|
|
132
|
|
|
—
|
|
Other government securities
|
86
|
|
|
—
|
|
|
86
|
|
|
—
|
|
Corporate debt instruments
|
1,197
|
|
|
934
|
|
|
263
|
|
|
—
|
|
Corporate stocks
|
16
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Other investments
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Total assets in fair value hierarchy
|
$
|
1,667
|
|
|
$
|
1,154
|
|
|
$
|
497
|
|
|
$
|
16
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
|
Private equity and hedge funds
|
$
|
414
|
|
|
|
|
|
|
|
Total investments measured at net asset value
|
$
|
414
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
2,081
|
|
|
$
|
1,154
|
|
|
$
|
497
|
|
|
$
|
16
|
|
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)
|
Total fair value
|
|
|
Quoted prices in active markets for identical assets Level 1
|
|
|
Significant other observable inputs Level 2
|
|
|
Significant unobservable inputs
Level 3
|
|
Cash and cash equivalents
|
$
|
81
|
|
|
$
|
81
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. government securities
|
85
|
|
|
—
|
|
|
85
|
|
|
—
|
|
Other government securities
|
73
|
|
|
—
|
|
|
73
|
|
|
—
|
|
Corporate debt instruments
|
1,077
|
|
|
877
|
|
|
200
|
|
|
—
|
|
Corporate stocks
|
242
|
|
|
134
|
|
|
108
|
|
|
—
|
|
Other investments
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Total assets in fair value hierarchy
|
$
|
1,581
|
|
|
$
|
1,092
|
|
|
$
|
466
|
|
|
$
|
23
|
|
Investments measured at net asset value:
|
|
|
|
|
|
|
|
Private equity and hedge funds
|
$
|
726
|
|
|
|
|
|
|
|
Total investments measured at net asset value
|
$
|
726
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
2,307
|
|
|
$
|
1,092
|
|
|
$
|
466
|
|
|
$
|
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)
|
|
|
Total Level 3 assets
|
Balance at September 30, 2015
|
|
|
$
|
—
|
|
Transfer in
|
|
|
23
|
|
Balance at September 30, 2016
|
|
|
$
|
23
|
|
Actual return on plan assets related to assets held at September 30, 2017
|
|
|
(7
|
)
|
Balance at September 30, 2017
|
|
|
$
|
16
|
|
Investments and Strategy
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
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.
|
|
|
|
|
|
|
|
|
|
Target
|
|
2017
|
|
2016
|
Plan assets allocation
|
|
|
|
|
|
Equity securities
|
10-30%
|
|
20
|
%
|
|
46
|
%
|
Debt securities
|
70-90%
|
|
78
|
%
|
|
52
|
%
|
Other
|
0-20%
|
|
2
|
%
|
|
2
|
%
|
|
|
|
100
|
%
|
|
100
|
%
|
Funding and Benefit Payments
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)
|
Pension benefits
|
|
Other postretirement benefits
|
2018
|
$
|
145
|
|
|
$
|
8
|
|
2019
|
145
|
|
|
6
|
|
2020
|
146
|
|
|
4
|
|
2021
|
147
|
|
|
3
|
|
2022
|
148
|
|
|
3
|
|
Thereafter
|
737
|
|
|
15
|
|
Total
|
$
|
1,468
|
|
|
$
|
39
|
|
Other plans
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 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)
|
|
2017
|
Stock appreciation rights
|
|
$
|
3
|
|
Nonvested stock awards
|
|
5
|
|
Performance awards
|
|
2
|
|
Total stock-based compensation expense, pre-tax
|
|
10
|
|
Tax benefit
|
|
(4
|
)
|
Total stock-based compensation expense, net of tax
|
|
$
|
6
|
|
|
|
|
Stock Appreciation Rights
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.
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
|
|
$
|
7.44
|
|
Assumptions (weighted average)
|
|
|
|
Risk-free interest rate
(a)
|
|
|
1.7
|
%
|
Expected dividend yield
|
|
|
0.9
|
%
|
Expected volatility
(b)
|
|
|
22.8
|
%
|
Expected term (in years)
(c)
|
|
|
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
|
1,896
|
|
|
17.53
|
|
|
|
|
|
Exercised
(a)
|
(45
|
)
|
|
17.93
|
|
|
|
|
—
|
|
Forfeited
|
(27
|
)
|
|
20.24
|
|
|
|
|
|
SARs outstanding at September 30, 2017
|
1,824
|
|
|
$
|
17.48
|
|
|
7.1 years
|
|
$
|
11
|
|
SARs exercisable at September 30, 2017
|
975
|
|
|
$
|
14.90
|
|
|
5.6 years
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
(a) The aggregate intrinsic value of awards exercised was less than
$1 million
.
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.
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
|
|
843
|
|
|
22.65
|
|
Granted
|
|
447
|
|
|
22.82
|
|
Vested and distributed
|
|
(7
|
)
|
|
22.65
|
|
Forfeitures
|
|
(8
|
)
|
|
22.55
|
|
Outstanding shares at September 30, 2017
|
|
1,275
|
|
|
$
|
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)
|
|
1.2
|
%
|
Expected dividend yield
|
|
1.0
|
%
|
Expected volatility
(b)
|
|
21.0
|
%
|
Expected term (in years)
|
|
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%
.
The following table summarizes performance award 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 performance-based awards to Valvoline awards
|
|
258
|
|
|
18.44
|
|
Cancellations
|
|
(76
|
)
|
|
7.15
|
|
Outstanding shares at September 30, 2017
|
|
182
|
|
|
$
|
23.20
|
|
|
|
|
|
|
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)
|
|
2017
|
|
2016
|
|
2015
|
Numerator
|
|
|
|
|
|
|
Net income
|
|
$
|
304
|
|
|
$
|
273
|
|
|
$
|
196
|
|
Denominator
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
(a)
|
|
204
|
|
|
170
|
|
|
170
|
|
Effect of dilutive securities
(b)
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares used to compute diluted EPS
|
|
204
|
|
|
170
|
|
|
170
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
Basic
|
|
$
|
1.49
|
|
|
$
|
1.60
|
|
|
$
|
1.15
|
|
Diluted
|
|
$
|
1.49
|
|
|
$
|
1.60
|
|
|
$
|
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.
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
|
|
Dividend Per Common Share
|
|
Cash Outlay
(in millions)
|
|
Cash Paid to Ashland
(in millions)
|
November 15, 2016
|
|
December 5, 2016
|
|
December 20, 2016
|
|
$
|
0.049
|
|
|
$
|
10
|
|
|
$
|
8
|
|
January 24, 2017
|
|
March 1, 2017
|
|
March 15, 2017
|
|
$
|
0.049
|
|
|
$
|
10
|
|
|
$
|
8
|
|
April 27, 2017
|
|
June 1, 2017
|
|
June 15, 2017
|
|
$
|
0.049
|
|
|
$
|
10
|
|
|
$
|
—
|
|
July 27, 2017
|
|
September 1, 2017
|
|
September 15, 2017
|
|
$
|
0.049
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
(In millions)
|
Before tax
|
|
Tax benefit (expense)
|
|
Net of tax
|
|
Before tax
|
|
Tax benefit (expense)
|
|
Net of tax
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
4
|
|
|
(8
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Total other comprehensive income (loss)
|
$
|
(3
|
)
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
9
|
|
|
$
|
(2
|
)
|
|
$
|
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.
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.
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)
|
2016
|
|
2015
|
Information technology
|
$
|
20
|
|
|
$
|
17
|
|
Financial and accounting
|
12
|
|
|
13
|
|
Building services
|
11
|
|
|
10
|
|
Legal and environmental
|
6
|
|
|
7
|
|
Human resources
|
5
|
|
|
4
|
|
Shared services
|
2
|
|
|
2
|
|
Other general and administrative
|
23
|
|
|
26
|
|
Total
|
$
|
79
|
|
|
$
|
79
|
|
Joint Venture Transactions
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from external customers
|
|
Net (liabilities) assets
|
|
Property, plant and equipment - net
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
$
|
1,504
|
|
|
$
|
1,397
|
|
|
$
|
1,413
|
|
|
$
|
(321
|
)
|
|
$
|
(520
|
)
|
|
$
|
352
|
|
|
$
|
286
|
|
International
|
580
|
|
|
532
|
|
|
554
|
|
|
204
|
|
|
190
|
|
|
39
|
|
|
38
|
|
|
$
|
2,084
|
|
|
$
|
1,929
|
|
|
$
|
1,967
|
|
|
$
|
(117
|
)
|
|
$
|
(330
|
)
|
|
$
|
391
|
|
|
$
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by geography expressed as a percentage of total consolidated sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the years ended September 30
|
Sales by Geography
|
2017
|
|
2016
|
|
2015
|
North America
(a)
|
74
|
%
|
|
75
|
%
|
|
74
|
%
|
Europe
|
7
|
%
|
|
7
|
%
|
|
8
|
%
|
Asia Pacific
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
Latin America & other
|
5
|
%
|
|
4
|
%
|
|
4
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
(a) Valvoline includes only the United States and Canada in its North American designation.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by Product Category for Sales by Product Category
|
Core North America
|
|
Quick Lubes
|
|
International
|
|
2017
|
2016
|
|
|
2017
|
|
2016
|
|
|
2017
|
2016
|
Lubricants
|
86
|
%
|
87
|
%
|
|
Lubricants
|
94
|
%
|
94
|
%
|
|
Lubricants
|
89
|
%
|
89
|
%
|
Chemicals
|
4
|
%
|
4
|
%
|
|
Chemicals
|
1
|
%
|
1
|
%
|
|
Chemicals
|
4
|
%
|
7
|
%
|
Antifreeze
|
7
|
%
|
7
|
%
|
|
Filters
|
5
|
%
|
5
|
%
|
|
Antifreeze
|
6
|
%
|
3
|
%
|
Filters
|
3
|
%
|
2
|
%
|
|
|
100
|
%
|
100
|
%
|
|
Filters
|
1
|
%
|
1
|
%
|
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
100
|
%
|
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
|
|
|
|
|
|
|
Years ended September 30
|
(In millions)
|
2017
|
|
2016
|
|
2015
|
Sales
|
|
|
|
|
|
Core North America
|
$
|
1,004
|
|
|
$
|
979
|
|
|
$
|
1,061
|
|
Quick Lubes
|
541
|
|
|
457
|
|
|
394
|
|
International
|
539
|
|
|
493
|
|
|
512
|
|
|
$
|
2,084
|
|
|
$
|
1,929
|
|
|
$
|
1,967
|
|
Equity income (loss)
|
|
|
|
|
|
Core North America
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Quick Lubes
|
—
|
|
|
—
|
|
|
—
|
|
International
|
12
|
|
|
12
|
|
|
(2
|
)
|
|
12
|
|
|
12
|
|
|
(2
|
)
|
Other income
|
|
|
|
|
|
Core North America
|
3
|
|
|
1
|
|
|
1
|
|
Quick Lubes
|
3
|
|
|
2
|
|
|
2
|
|
International
|
7
|
|
|
4
|
|
|
7
|
|
|
13
|
|
|
7
|
|
|
10
|
|
|
$
|
25
|
|
|
$
|
19
|
|
|
$
|
8
|
|
Operating income (loss)
|
|
|
|
|
|
Core North America
|
$
|
199
|
|
|
$
|
212
|
|
|
$
|
200
|
|
Quick Lubes
|
130
|
|
|
117
|
|
|
95
|
|
International
|
76
|
|
|
74
|
|
|
65
|
|
Unallocated and other
(a)
|
127
|
|
|
28
|
|
|
(37
|
)
|
|
$
|
532
|
|
|
$
|
431
|
|
|
$
|
323
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
|
|
|
Core North America
|
$
|
35
|
|
|
$
|
41
|
|
|
$
|
20
|
|
Quick Lubes
|
29
|
|
|
20
|
|
|
19
|
|
International
|
3
|
|
|
5
|
|
|
6
|
|
Unallocated and other
|
1
|
|
|
—
|
|
|
—
|
|
|
$
|
68
|
|
|
$
|
66
|
|
|
$
|
45
|
|
|
|
|
|
|
|
Depreciation and amortization
(b)
|
|
|
|
|
|
Core North America
|
$
|
15
|
|
|
$
|
16
|
|
|
$
|
17
|
|
Quick Lubes
|
22
|
|
|
17
|
|
|
16
|
|
International
|
5
|
|
|
5
|
|
|
5
|
|
|
$
|
42
|
|
|
$
|
38
|
|
|
$
|
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.
|
|
|
|
|
|
|
|
|
|
|
Years ended September 30
|
(In millions)
|
2017
|
|
2016
|
Assets
(a)
|
|
|
|
Core North America
|
$
|
554
|
|
|
$
|
525
|
|
Quick Lubes
|
483
|
|
|
370
|
|
International
|
306
|
|
|
271
|
|
Unallocated and other
|
572
|
|
|
659
|
|
|
$
|
1,915
|
|
|
$
|
1,825
|
|
|
|
|
|
Equity method investments
|
|
|
|
Core North America
|
$
|
—
|
|
|
$
|
—
|
|
Quick Lubes
|
—
|
|
|
—
|
|
International
|
30
|
|
|
26
|
|
Unallocated and other
|
—
|
|
|
—
|
|
|
$
|
30
|
|
|
$
|
26
|
|
|
|
|
|
Property, plant and equipment, net
(a)
|
|
|
|
Core North America
|
$
|
117
|
|
|
$
|
123
|
|
Quick Lubes
|
183
|
|
|
149
|
|
International
|
47
|
|
|
46
|
|
Unallocated and other
|
44
|
|
|
6
|
|
|
$
|
391
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
(In millions except per share amounts)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales
|
|
$
|
489
|
|
|
$
|
456
|
|
|
$
|
514
|
|
|
$
|
480
|
|
|
$
|
534
|
|
|
$
|
499
|
|
|
$
|
547
|
|
|
$
|
494
|
|
Cost of sales
|
|
$
|
304
|
|
|
$
|
280
|
|
|
$
|
316
|
|
|
$
|
288
|
|
|
$
|
337
|
|
|
$
|
300
|
|
|
$
|
349
|
|
|
$
|
300
|
|
Gross profit as a percentage of sales
|
|
37.8
|
%
|
|
38.6
|
%
|
|
38.5
|
%
|
|
40.0
|
%
|
|
36.9
|
%
|
|
39.9
|
%
|
|
36.2
|
%
|
|
39.3
|
%
|
Operating income
|
|
$
|
120
|
|
|
$
|
96
|
|
|
$
|
117
|
|
|
$
|
104
|
|
|
$
|
104
|
|
|
$
|
113
|
|
|
$
|
191
|
|
|
$
|
118
|
|
Net income
|
|
$
|
72
|
|
|
$
|
65
|
|
|
$
|
71
|
|
|
$
|
68
|
|
|
$
|
56
|
|
|
$
|
75
|
|
|
$
|
105
|
|
|
$
|
65
|
|
Net income per common share
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(a)
|
|
$
|
0.35
|
|
|
$
|
0.38
|
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
$
|
0.27
|
|
|
$
|
0.44
|
|
|
$
|
0.52
|
|
|
$
|
0.38
|
|
Diluted
(a)
|
|
$
|
0.35
|
|
|
$
|
0.38
|
|
|
$
|
0.35
|
|
|
$
|
0.40
|
|
|
$
|
0.27
|
|
|
$
|
0.44
|
|
|
$
|
0.52
|
|
|
$
|
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2017
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
201
|
|
Accounts receivable, net
|
|
—
|
|
|
57
|
|
|
389
|
|
|
(61
|
)
|
|
385
|
|
Inventories, net
|
|
—
|
|
|
94
|
|
|
81
|
|
|
—
|
|
|
175
|
|
Other current assets
|
|
—
|
|
|
25
|
|
|
4
|
|
|
—
|
|
|
29
|
|
Total current assets
|
|
—
|
|
|
275
|
|
|
576
|
|
|
(61
|
)
|
|
790
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
—
|
|
|
353
|
|
|
38
|
|
|
—
|
|
|
391
|
|
Goodwill and intangibles
|
|
—
|
|
|
333
|
|
|
2
|
|
|
—
|
|
|
335
|
|
Equity method investments
|
|
—
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
30
|
|
Investment in subsidiaries
|
|
606
|
|
|
447
|
|
|
—
|
|
|
(1,053
|
)
|
|
—
|
|
Deferred income taxes
|
|
145
|
|
|
122
|
|
|
14
|
|
|
—
|
|
|
281
|
|
Other assets
|
|
314
|
|
|
80
|
|
|
6
|
|
|
(312
|
)
|
|
88
|
|
Total noncurrent assets
|
|
1,065
|
|
|
1,365
|
|
|
60
|
|
|
(1,365
|
)
|
|
1,125
|
|
Total assets
|
|
$
|
1,065
|
|
|
$
|
1,640
|
|
|
$
|
636
|
|
|
$
|
(1,426
|
)
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75
|
|
|
$
|
—
|
|
|
$
|
75
|
|
Current portion of long-term debt
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Trade and other payables
|
|
2
|
|
|
198
|
|
|
53
|
|
|
(61
|
)
|
|
192
|
|
Accrued expenses and other liabilities
|
|
103
|
|
|
60
|
|
|
33
|
|
|
—
|
|
|
196
|
|
Total current liabilities
|
|
120
|
|
|
258
|
|
|
161
|
|
|
(61
|
)
|
|
478
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
1,032
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
1,034
|
|
Employee benefit obligations
|
|
—
|
|
|
321
|
|
|
21
|
|
|
—
|
|
|
342
|
|
Other liabilities
|
|
30
|
|
|
453
|
|
|
7
|
|
|
(312
|
)
|
|
178
|
|
Total noncurrent liabilities
|
|
1,062
|
|
|
776
|
|
|
28
|
|
|
(312
|
)
|
|
1,554
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
(117
|
)
|
|
606
|
|
|
447
|
|
|
(1,053
|
)
|
|
(117
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
1,065
|
|
|
$
|
1,640
|
|
|
$
|
636
|
|
|
$
|
(1,426
|
)
|
|
$
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
For the year ended September 30, 2016
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
93
|
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
172
|
|
Accounts receivable, net
|
|
1
|
|
|
304
|
|
|
64
|
|
|
(6
|
)
|
|
363
|
|
Inventories, net
|
|
—
|
|
|
72
|
|
|
67
|
|
|
—
|
|
|
139
|
|
Other current assets
|
|
5
|
|
|
50
|
|
|
1
|
|
|
—
|
|
|
56
|
|
Total current assets
|
|
6
|
|
|
519
|
|
|
211
|
|
|
(6
|
)
|
|
730
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
—
|
|
|
288
|
|
|
36
|
|
|
—
|
|
|
324
|
|
Goodwill and intangibles
|
|
—
|
|
|
265
|
|
|
2
|
|
|
—
|
|
|
267
|
|
Equity method investments
|
|
—
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Investment in subsidiaries
|
|
354
|
|
|
160
|
|
|
—
|
|
|
(514
|
)
|
|
—
|
|
Deferred income taxes
|
|
36
|
|
|
336
|
|
|
17
|
|
|
—
|
|
|
389
|
|
Other assets
|
|
25
|
|
|
80
|
|
|
5
|
|
|
(21
|
)
|
|
89
|
|
Total noncurrent assets
|
|
415
|
|
|
1,155
|
|
|
60
|
|
|
(535
|
)
|
|
1,095
|
|
Total assets
|
|
$
|
421
|
|
|
$
|
1,674
|
|
|
$
|
271
|
|
|
$
|
(541
|
)
|
|
$
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19
|
|
Trade and other payables
|
|
6
|
|
|
131
|
|
|
46
|
|
|
(6
|
)
|
|
177
|
|
Accrued expenses and other liabilities
|
|
4
|
|
|
172
|
|
|
28
|
|
|
—
|
|
|
204
|
|
Total current liabilities
|
|
29
|
|
|
303
|
|
|
74
|
|
|
(6
|
)
|
|
400
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
722
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
724
|
|
Employee benefit obligations
|
|
—
|
|
|
860
|
|
|
26
|
|
|
—
|
|
|
886
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Other liabilities
|
|
|
|
155
|
|
|
9
|
|
|
(21
|
)
|
|
143
|
|
Total noncurrent liabilities
|
|
722
|
|
|
1,017
|
|
|
37
|
|
|
(21
|
)
|
|
1,755
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit
|
|
(330
|
)
|
|
354
|
|
|
160
|
|
|
(514
|
)
|
|
(330
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
421
|
|
|
$
|
1,674
|
|
|
$
|
271
|
|
|
$
|
(541
|
)
|
|
$
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
|
|
|
|
|
For the year ended September 30, 2017
|
|
|
|
|
|
|
|
|
(In millions)
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Sales
|
$
|
—
|
|
|
$
|
1,618
|
|
|
$
|
523
|
|
|
$
|
(57
|
)
|
|
$
|
2,084
|
|
Cost of sales
|
—
|
|
|
986
|
|
|
377
|
|
|
(57
|
)
|
|
1,306
|
|
Gross profit
|
—
|
|
|
632
|
|
|
146
|
|
|
—
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
(7
|
)
|
|
291
|
|
|
91
|
|
|
—
|
|
|
375
|
|
Pension and other postretirement plan non-service income and remeasurement adjustments, net
|
—
|
|
|
(134
|
)
|
|
(2
|
)
|
|
—
|
|
|
(136
|
)
|
Separation costs
|
1
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
32
|
|
Equity and other income
|
—
|
|
|
(37
|
)
|
|
12
|
|
|
—
|
|
|
(25
|
)
|
Operating income
|
6
|
|
|
481
|
|
|
45
|
|
|
—
|
|
|
532
|
|
Net interest and other financing expense
|
36
|
|
|
4
|
|
|
2
|
|
|
—
|
|
|
42
|
|
(Loss) income before income taxes
|
(30
|
)
|
|
477
|
|
|
43
|
|
|
—
|
|
|
490
|
|
Income tax (benefit) expense
|
(3
|
)
|
|
178
|
|
|
11
|
|
|
—
|
|
|
186
|
|
Equity in net income of subsidiaries
|
331
|
|
|
32
|
|
|
—
|
|
|
(363
|
)
|
|
—
|
|
Net income
|
$
|
304
|
|
|
$
|
331
|
|
|
$
|
32
|
|
|
$
|
(363
|
)
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
$
|
303
|
|
|
$
|
330
|
|
|
$
|
43
|
|
|
$
|
(373
|
)
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
|
|
|
|
|
For the year ended September 30, 2016
|
|
|
|
|
|
|
|
|
(In millions)
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Sales
|
$
|
—
|
|
|
$
|
1,500
|
|
|
$
|
476
|
|
|
$
|
(47
|
)
|
|
$
|
1,929
|
|
Cost of sales
|
—
|
|
|
878
|
|
|
337
|
|
|
(47
|
)
|
|
1,168
|
|
Gross profit
|
—
|
|
|
622
|
|
|
139
|
|
|
—
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
—
|
|
|
285
|
|
|
80
|
|
|
—
|
|
|
365
|
|
Pension and other postretirement plan non-service income and remeasurement adjustments, net
|
—
|
|
|
(26
|
)
|
|
4
|
|
|
—
|
|
|
(22
|
)
|
Separation costs
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Equity and other income
|
—
|
|
|
(21
|
)
|
|
2
|
|
|
—
|
|
|
(19
|
)
|
Operating income
|
—
|
|
|
378
|
|
|
53
|
|
|
—
|
|
|
431
|
|
Net interest and other financing expense
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Net loss on acquisition
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
(Loss) income before income taxes
|
(9
|
)
|
|
377
|
|
|
53
|
|
|
—
|
|
|
421
|
|
Income tax (benefit) expense
|
(4
|
)
|
|
143
|
|
|
9
|
|
|
—
|
|
|
148
|
|
Equity in net income of subsidiaries
|
278
|
|
|
44
|
|
|
—
|
|
|
(322
|
)
|
|
—
|
|
Net income
|
$
|
273
|
|
|
$
|
278
|
|
|
$
|
44
|
|
|
$
|
(322
|
)
|
|
$
|
273
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
$
|
280
|
|
|
$
|
285
|
|
|
$
|
53
|
|
|
$
|
(338
|
)
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Comprehensive Income
|
|
|
|
|
|
|
For the year ended September 30, 2015
|
|
|
|
|
|
|
|
|
(In millions)
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Sales
|
$
|
—
|
|
|
$
|
1,527
|
|
|
$
|
494
|
|
|
$
|
(54
|
)
|
|
$
|
1,967
|
|
Cost of sales
|
—
|
|
|
985
|
|
|
351
|
|
|
(54
|
)
|
|
1,282
|
|
Gross profit
|
—
|
|
|
542
|
|
|
143
|
|
|
—
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
—
|
|
|
275
|
|
|
73
|
|
|
—
|
|
|
348
|
|
Pension and other postretirement plan non-service income and remeasurement adjustments, net
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Equity and other income
|
—
|
|
|
(13
|
)
|
|
5
|
|
|
—
|
|
|
(8
|
)
|
Operating income
|
—
|
|
|
258
|
|
|
65
|
|
|
—
|
|
|
323
|
|
Net loss on acquisition
|
—
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
(Loss) income before income taxes
|
—
|
|
|
232
|
|
|
65
|
|
|
—
|
|
|
297
|
|
Income tax (benefit) expense
|
—
|
|
|
90
|
|
|
11
|
|
|
—
|
|
|
101
|
|
Equity in net income of subsidiaries
|
196
|
|
|
54
|
|
|
—
|
|
|
(250
|
)
|
|
—
|
|
Net income
|
$
|
196
|
|
|
$
|
196
|
|
|
$
|
54
|
|
|
$
|
(250
|
)
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
$
|
162
|
|
|
$
|
162
|
|
|
$
|
24
|
|
|
$
|
(186
|
)
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
For the year ended September 30, 2017
|
|
|
|
|
|
|
|
|
(In millions)
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Cash flow (used in) provided by operating activities
|
$
|
97
|
|
|
$
|
(180
|
)
|
|
$
|
(47
|
)
|
|
$
|
—
|
|
|
$
|
(130
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
—
|
|
|
(64
|
)
|
|
(4
|
)
|
|
—
|
|
|
(68
|
)
|
Proceeds from disposal of property, plant and equipment
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Acquisitions, net of cash required
|
—
|
|
|
(68
|
)
|
|
—
|
|
|
—
|
|
|
(68
|
)
|
Advance to subsidiary
|
(312
|
)
|
|
—
|
|
|
—
|
|
|
312
|
|
|
—
|
|
Total cash used in investing activities
|
(312
|
)
|
|
(131
|
)
|
|
(4
|
)
|
|
312
|
|
|
(135
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Net transfers from Ashland
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Proceeds from borrowings, net of issuance costs of $5
|
395
|
|
|
—
|
|
|
75
|
|
|
—
|
|
|
470
|
|
Repayments on borrowings
|
(90
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(90
|
)
|
Repurchase of common stock
|
(50
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(50
|
)
|
Cash dividends paid
|
(40
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40
|
)
|
Other intercompany activity, net
|
(5
|
)
|
|
317
|
|
|
—
|
|
|
(312
|
)
|
|
—
|
|
Total cash provided by financing activities
|
215
|
|
|
317
|
|
|
75
|
|
|
(312
|
)
|
|
295
|
|
Effect of currency exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Increase in cash and cash equivalents
|
—
|
|
|
6
|
|
|
23
|
|
|
—
|
|
|
29
|
|
Cash and cash equivalents - beginning of year
|
—
|
|
|
93
|
|
|
79
|
|
|
—
|
|
|
172
|
|
Cash and cash equivalents - end of year
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
For the year ended September 30, 2016
|
|
|
|
|
|
|
|
|
(In millions)
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Cash flows (used in) provided by operating activities
|
$
|
(35
|
)
|
|
$
|
307
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
311
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
—
|
|
|
(60
|
)
|
|
(6
|
)
|
|
—
|
|
|
(66
|
)
|
Proceeds from disposal of property, plant and equipment
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Acquisitions, net of cash required
|
—
|
|
|
(83
|
)
|
|
—
|
|
|
—
|
|
|
(83
|
)
|
Total cash used in investing activities
|
—
|
|
|
(142
|
)
|
|
(6
|
)
|
|
—
|
|
|
(148
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Net transfers to Ashland
|
(1,504
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,504
|
)
|
Cash contributions from Ashland
|
60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60
|
|
Proceeds from initial public offering, net of offering costs of $40
|
719
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
719
|
|
Proceeds from borrowings, net of issuance costs of $15
|
1,372
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,372
|
|
Repayments on borrowings
|
(637
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(637
|
)
|
Other intercompany activity, net
|
25
|
|
|
(72
|
)
|
|
47
|
|
|
—
|
|
|
—
|
|
Total cash provided by (used in) financing activities
|
35
|
|
|
(72
|
)
|
|
47
|
|
|
—
|
|
|
10
|
|
Effect of currency exchange rate changes on cash and cash equivalents
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Increase in cash and cash equivalents
|
—
|
|
|
93
|
|
|
79
|
|
|
—
|
|
|
172
|
|
Cash and cash equivalents - beginning of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents - end of year
|
$
|
—
|
|
|
$
|
93
|
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
For the year ended September 30, 2015
|
|
|
|
|
|
|
|
|
(In millions)
|
Valvoline Inc.
(Parent Issuer)
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Cash flows provided by operating activities
|
$
|
—
|
|
|
$
|
247
|
|
|
$
|
83
|
|
|
$
|
—
|
|
|
$
|
330
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
—
|
|
|
(40
|
)
|
|
(5
|
)
|
|
—
|
|
|
(45
|
)
|
Proceeds from disposal of property, plant and equipment
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Acquisitions, net of cash required
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
Proceeds from sale of operations
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Total cash used in investing activities
|
—
|
|
|
(21
|
)
|
|
(5
|
)
|
|
—
|
|
|
(26
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
Net transfers to Ashland
|
(304
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(304
|
)
|
Other intercompany activity, net
|
304
|
|
|
(226
|
)
|
|
(78
|
)
|
|
—
|
|
|
—
|
|
Total cash used in financing activities
|
—
|
|
|
(226
|
)
|
|
(78
|
)
|
|
—
|
|
|
(304
|
)
|
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
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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.