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 leader in vehicle care delivering quick, easy, and trusted preventive maintenance services in its stores throughout the United States (“U.S.”) and Canada. The Company operates and franchises over 1,700 service center locations and is the second and third largest chain in the U.S. and Canada, respectively, by number of stores through its Valvoline Instant Oil Change and Great Canadian Oil Change retail locations. From cabin air filters to battery replacements to tire rotations, the Company’s stay-in-your-car service model offers a vast array of solutions for all types of vehicles.
Established in 1866, Valvoline’s heritage spans more than 155 years, during which it has developed recognition across multiple channels. Valvoline's services performed at its retail stores using Valvoline-branded passenger car motor oils and complementary products are designed to serve evolving maintenance needs and improve vehicle and engine performance and lifespan.
Strategic separation
On July 31, 2022, the Company entered into a definitive agreement to sell its Global Products business to Aramco for a cash purchase price of $2.65 billion, subject to customary adjustments with respect to working capital and net indebtedness. The transaction is subject to standard closing conditions, including regulatory approvals and is expected to close in early calendar year 2023. Global Products sells engine and automotive products in more than 140 countries and territories to retailers, installers, and commercial customers to service light- and heavy-duty vehicles and equipment.
In all periods presented within these consolidated financial statements, the assets and liabilities associated with the Global Products disposal group have been classified as held for sale within the Consolidated Balance Sheets and its operations have been classified as discontinued operations within the Consolidated Statements of Comprehensive Income and Cash Flows. Refer to Note 3 for additional information regarding the Global Products business, including the assets and liabilities held for sale and income from discontinued operations. Unless otherwise noted, disclosures within the remaining notes to these consolidated financial statements relate solely to the Company's continuing operations.
As a result of classifying the former Global Products reportable segment as a discontinued operation, the Company has determined that it now operates a single reportable segment as the chief operating decision maker allocates resources and assesses performance on a consolidated basis for the continuing operations.
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 Securities and Exchange Commission (“SEC”) regulations. The financial statements are presented on a consolidated basis for all periods presented and include the operations of the Company and its majority-owned and controlled subsidiaries. All intercompany transactions and balances 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.
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 periods presented, except when otherwise disclosed, are described below.
Use of estimates, risks and uncertainties
The preparation of the consolidated 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 matters. 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.
Valvoline has substantially maintained its operations throughout the novel coronavirus ("COVID-19") pandemic to-date and has continued precautionary measures to protect the Company's employees and customers and manage through the currently known impacts on its business. Given the unprecedented nature of the pandemic, the extent of future impacts cannot be reasonably estimated at this time due to numerous uncertainties, including the ultimate duration and severity of the pandemic.
Held for sale and discontinued operations
The Company classifies assets and liabilities to be sold (disposal group) as held for sale in the period when all of the applicable criteria are met, including: (i) management commits to a plan to sell, (ii) the disposal group is available to sell in its present condition, (iii) there is an active program to locate a buyer, (iv) the disposal group is being actively marketed at a reasonable price in relation to its fair value, (v) significant changes to the plan to sell are unlikely, and (vi) the sale of the disposal group is generally probable of being completed within one year. Management performs an assessment at least quarterly or when events or changes in business circumstances indicate that a change in classification may be necessary.
Assets and liabilities held for sale are presented separately within the Consolidated Balance Sheets with any adjustments necessary to measure the disposal group at the lower of its carrying value or fair value less costs to sell. Depreciation of property, plant and equipment and amortization of intangible and right-of-use assets are not recorded while these assets are classified as held for sale. For each period the disposal group remains classified as held for sale, its recoverability is reassessed and any necessary adjustments are made to its carrying value.
The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that will have a major effect on its operations and financial results. The results of discontinued operations are reported as Income from discontinued operations, net of tax in the Consolidated Statements of Comprehensive Income for the current and prior periods commencing in the period in which the held for sale criteria are met. Income from discontinued operations includes direct costs attributable to the divested business and excludes any cost allocations associated with any shared or corporate functions unless otherwise dedicated to the divested business. Income from discontinued operations will include any gain or loss recognized upon disposition or from adjustment of the carrying amount to fair value less costs to sell while classified as held for sale.
Transactions between the businesses held for sale and businesses held for use that are expected to continue after the disposal are not eliminated in order to appropriately reflect the continuing operations as well as the activity to be disposed of. Interest costs are included as a component of Income from discontinued operations for debt specifically attributable to the discontinued operation or debt that is obligated to be repaid in connection with the completion of the divestiture. Activity within comprehensive income directly associated with a divested business is not realized as a component of Income from discontinued operations until completion of the sale or disposition.
Cash and cash equivalents
All short-term, highly liquid investments having original maturities of three months or less are considered to be cash equivalents.
Receivables and allowance for credit losses
The majority of Valvoline’s sales are tendered at the point of service in its retail stores, and its receivables are generally limited to those with its fleet customers and independent store operators, in addition to credit card receivables. Valvoline recognizes a receivable within its Consolidated Balance Sheets once control is transferred, typically upon the completion of services, at which point its right to consideration becomes unconditional and only the passage of time is required before payment of that consideration is due. As the majority of the Company’s performance obligations are satisfied at a point in time and customers typically do not make material payments in advance, nor does Valvoline have a right to consideration in advance of control transfer, the Company has no contract assets or contract liabilities.
Valvoline adopted guidance in fiscal 2021 that changed the recognition of credit losses from an incurred or probable loss methodology to a current expected credit loss model, which results in the immediate recognition of losses that are expected to occur over the life of the financial instruments, principally trade and other receivables. Allowances are maintained to estimate expected lifetime credit losses that are based on a broad range of reasonable and supportable information and factors, including the length of time receivables are past due, the financial health of its customers, macroeconomic conditions, and historical collection experience. 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 receivables against the allowance when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.
Inventories
Inventories are comprised of purchased finished goods that are carried at the lower of cost or net realizable value using the weighted average cost method. The Company regularly reviews inventory quantities on hand and the estimated utilization of inventory. Excess and obsolete reserves are established when inventory is estimated to not be usable based on forecasts, demand, life cycle, or utility.
Property, plant and equipment
Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Buildings generally have useful lives of seven to twenty years and machinery and equipment typically have five to seven year useful lives, dependent on the nature and utility of the assets. Building and leasehold improvements are depreciated over the shorter of their estimated useful lives or the period from which the date the assets are placed in service to the end of the lease term, as appropriate. Depreciation expense is recognized in Cost of sales or Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income based on the function the underlying asset supports. 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 and generally reported in Other income, net.
Property, plant and equipment carrying values are evaluated for recoverability at the lowest level of identifiable cash flows when impairment indicators are present. Such indicators could include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of long-lived assets that are not expected to be recovered through undiscounted future net cash flows are written down to 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).
Leases
Certain of the properties Valvoline utilizes, including its retail service center stores, offices, and storage facilities, in addition to certain equipment, are leased, with a small portion subleased primarily to Valvoline's franchisees. In fiscal 2020, Valvoline adopted new guidance related to leases using the optional transition approach, with
prospective application from adoption on October 1, 2019 and the financial statements prior to adoption reported in accordance with the previous guidance. Valvoline's policies under the new guidance are outlined below.
Valvoline determines if an arrangement contains a lease at inception primarily based on whether or not the Company has the right to control the asset during the contract period. For all agreements where it is determined that a lease exists, the related lease assets and liabilities are recognized within the Consolidated Balance Sheets as either operating or finance leases at the commencement date.
The lease liability is measured based on the present value of future payments over the lease term, and the right-of-use asset is measured as the lease liability, adjusted for prepaid lease payments, lease incentives, and initial direct costs (e.g., commissions). Valvoline's leases generally have terms ranging from less than one year to more than 20 years, and leases with an initial term of 12 months or less are included in the measurement of its right-of-use asset and lease liability balances. The lease term includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
Fixed rental payments, including variable payments based on a rate or index, are included in the determination of the lease liability. Many leases also require the payment of taxes, insurance, operating expenses, and maintenance. In instances where these other components are fixed, they are included in the measurement of the lease liability due to Valvoline's election to combine lease and non-lease components and account for them as a single component. Otherwise, these components are recognized along with other variable lease payments in the Consolidated Statements of Comprehensive Income in the period in which the obligation for those payments is incurred.
As most leases do not provide the rate implicit in the lease, the Company estimates its incremental borrowing rate to best approximate the rate of interest that Valvoline would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Valvoline applies the incremental borrowing rate to groups of leases with similar lease terms in determining the present value of future payments. In determining the incremental borrowing rate, the Company considers information available at the commencement date, including lease term, interest rate yields for specific interest rate environments and the Company's credit spread.
Business combinations
The Company allocates the purchase consideration to the identifiable assets acquired and liabilities assumed in business combinations 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, or if the fair value of the net assets acquired exceeds the purchase consideration, a bargain purchase gain is recorded. Factors giving rise to goodwill generally include operational synergies that are anticipated as a result of the business combination and growth expected to result in economic benefits from 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.
The incremental financial results of the businesses that Valvoline has acquired are included in the Company’s consolidated financial results from the respective dates of each acquisition.
Goodwill and other intangible assets
Valvoline evaluates goodwill for impairment annually as of July 1 or when events and circumstances indicate an impairment may have occurred. This assessment consists of evaluating each reporting unit’s fair value compared to its carrying value. Goodwill has been assigned to reporting units for purposes of impairment testing based upon the relative fair value of the asset to each reporting unit. At the time of Company’s annual impairment assessment, Valvoline’s reporting units were consistent with its former reportable segments of Retail Services and Global Products. Subsequent to this annual assessment and as a result of classifying the former Global Products reportable segment as a discontinued operation, the Company has determined it has one reporting unit as of September 30, 2022.
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, the Company 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 considered include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance, among others.
Under the quantitative assessment, if the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, is measured as the excess of the carrying value of the reporting unit’s goodwill over its fair value, not to exceed the total goodwill allocated to the reporting unit. 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, and 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, and the cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies method based on earnings multiple data. The Company also performs a reconciliation between market capitalization and the estimated aggregate fair value of the reporting units, including consideration of a control premium.
Acquired finite-lived intangible assets principally consist of certain trademarks and trade names, reacquired franchise rights, 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 values, which are determined using assumptions from the perspective of a market participant and generally an income approach. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Valvoline evaluates 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 assets not expected to be recovered through undiscounted future net cash flows are written down to current fair value.
Pension and other postretirement benefit plans
Valvoline sponsors defined benefit pension and other postretirement plans in the U.S. The Company's U.S. pension plans are closed to new participants and the accrual of pension benefits has been frozen since September 30, 2016. Valvoline also sponsors retiree healthcare and life insurance plans for certain qualifying participants with amendments effective in fiscal 2017 to limit annual per capita costs.
Valvoline recognizes the funded status of each applicable plan within the Consolidated Balance Sheets whereby each unfunded plan is recognized as a liability and each funded plan is recognized as either an asset or liability based on its funded status. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation. Changes in the fair value of plan assets and net actuarial gains or losses are recognized upon remeasurement as of September 30, the annual measurement date, and whenever a remeasurement is triggered. The remaining components of pension and other postretirement benefits income or expense are recorded ratably throughout the year.
The fair value of plan assets represents the current market value of assets held by irrevocable trust funds for the sole benefit of participants, and the benefit obligation is the actuarial present value of the benefits expected to be paid upon retirement, death, or other distributable event based on estimates. 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, rate of compensation increases, interest rates and mortality rates. Actuarial gains and losses may be related to actual results that differ from assumptions as well as changes in assumptions, which may occur each year. All components of net periodic benefit income or costs are recognized below operating income within Net pension and other postretirement plan (income) expenses in the Consolidated Statements of Comprehensive Income.
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 expenses in the Consolidated Statements of Comprehensive Income.
Revenue recognition
Revenue is recognized for the amount that reflects the consideration the Company is expected to be entitled to receive based on when control of the promised good or service is transferred to the customer. Revenue recognition is evaluated through the following five steps: (i) identification of the contract(s) with a customer; (ii) identification of the performance obligation(s) in the contract(s); (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligation(s) in the contract(s); and (v) recognition of revenue when or as a performance obligation is satisfied.
Nature of services
Valvoline generates all revenues from contracts with customers, primarily as a result of delivery of automotive maintenance services through the following two principal activities: (i) company-operated service center operations and (ii) independent service center operations. Valvoline’s revenues from delivering preventive vehicle maintenance and related services are from end consumers, independent franchisees and operators, and other end customers, including fleet managers and others that require service solutions to address medium and heavy-duty vehicles.
Valvoline's net revenues are predominantly derived at a point in time with approximately 95% recognized either through services delivered at company-operated service centers or fees for arranging product supply to independent store operators. The remainder of the Company's sales generally relate to fees, including royalties, transferred over time. The following table summarizes Valvoline's sales by timing of revenue recognized for the fiscal years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Net revenues transferred at a point in time | | $ | 1,177.2 | | | $ | 986.8 | | | $ | 686.7 | |
Franchised revenues transferred over time | | 58.9 | | | 50.4 | | | 40.3 | |
Net revenues | | $ | 1,236.1 | | | $ | 1,037.2 | | | $ | 727.0 | |
Below is a summary of the key considerations for Valvoline's material revenue-generating activities:
Company-operated service center operations
Performance obligations related to company-operated service center operations primarily include the sale of engine and automotive maintenance products and related services. These performance obligations are distinct and are delivered simultaneously at a point in time. Accordingly, sales from company-operated service center operations is recognized when payment is tendered at the point of sale, which coincides with the completion of product and service delivery and the transfer of control and benefits from the performance obligations to the customer.
Non-company operated service center operations
The primary performance obligations related to independent service center operations include arrangement of product supply and the license of intellectual property, which provides access to the Valvoline brand and proprietary information to operate service center stores over the term of a franchise agreement. Other franchise performance obligations do not result in material revenue. Each performance obligation is distinct, and franchisees generally receive and consume the benefits provided by the Company’s performance over the course of the franchise agreement, which typically ranges from 10 to 15 years. Billings and payments occur monthly. Variable consideration is not disclosed as remaining performance obligations qualify for the sales-based royalty and usage-based exemptions.
In exchange for the license of Valvoline intellectual property, franchisees generally remit initial fees upon opening a service center store and royalties at a contractual rate of the applicable service center store sales over the term of the franchise agreement. The license provides access to the intellectual property over the term of the franchise agreement and is considered a right-to-access license of symbolic intellectual property as substantially all of its
utility is derived from association with the Company’s past and ongoing activities. The license granted to operate each franchised service center store is the predominant item to which the royalties relate and represents a distinct performance obligation which is recognized over time as the underlying sales occur, as this is the most appropriate measure of progress toward complete satisfaction of the performance obligation.
Valvoline is the agent in arranging product supply for its independent operators as the continuing operations has no control of the products prior to transfer to the customer. Accordingly, revenue is recognized on a net basis for the fees charged for this service. The Company determines the point in time at which service delivery occurs and the performance obligation is satisfied by considering when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the product, which generally coincides with the transfer of title and risk of loss from the supplier to the independent operators.
Customer payment terms vary by customer and are generally 30 to 60 days after service delivery. Valvoline does not provide extended payment terms greater than one year and therefore, does not adjust the promised amount of consideration for the effects of a significant financing component.
Revenue disaggregation
The following table summarizes net revenues by category for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
| | | | | | |
Oil changes and related fees | | $ | 906.7 | | | $ | 756.7 | | | $ | 527.0 | |
Non-oil changes and related fees | | 248.3 | | | 207.9 | | | 142.5 | |
| | | | | | |
Franchise fees and other | | 81.1 | | | 72.6 | | | 57.5 | |
Total | | $ | 1,236.1 | | | $ | 1,037.2 | | | $ | 727.0 | |
The following presents net revenues by geographic area where services are delivered for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
(In millions) | | 2022 | | 2021 | | 2020 | | | | |
United States | | $ | 1,191.8 | | | $ | 997.3 | | | $ | 698.7 | | | | | |
Non-U.S. | | 44.3 | | | 39.9 | | | 28.3 | | | | | |
Total | | $ | 1,236.1 | | | $ | 1,037.2 | | | $ | 727.0 | | | | | |
Valvoline did not have a single customer that represented 10% or more of consolidated net revenues in fiscal 2022, 2021 or 2020.
Variable consideration
The nature of Valvoline’s transactions with its customers often gives rise to variable consideration consisting of customer discounts, incentives or rebates. The Company determines transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including variable consideration to the extent it is probable that a significant future reversal will not occur. Variable consideration is recorded as a reduction of the transaction price at the time of sale and is primarily estimated utilizing the most likely amount method that is expected to be earned as the Company is able to estimate the anticipated discounts within a sufficiently narrow range of possible outcomes based on its extensive historical experience with certain customers and similar programs. Variable consideration is reassessed at each reporting date and adjustments are made, when necessary.
The reduction of revenues due to customer incentives was $176.5 million, $140.1 million, and $106.0 million in the Consolidated Statements of Comprehensive Income for the years ended September 30, 2022, 2021, and 2020, respectively. Reserves for these customer programs and incentives were $2.8 million and $2.4 million as of September 30, 2022 and 2021, respectively, and are recorded within Accrued expenses and other liabilities in the Consolidated Balance Sheets.
Allocation of transaction price
In each contract with multiple performance obligations, Valvoline allocates the transaction price, including variable consideration, to each performance obligation on a relative standalone selling price basis, which is generally determined based on the directly observable data of the Company’s standalone sales of the performance obligations in similar circumstances to similar customers. The amount allocated to each performance obligation is recognized as revenue commensurate with the transfer of control to the customer.
The Company excludes taxes collected from customers from sales, which are reflected in accrued expenses until remitted to the appropriate governmental authority. Incremental direct costs of obtaining a contract, primarily sales commissions, are expensed when incurred due to the short-term nature of individual contracts, which would result in amortization periods of one year or less. These costs are not material and are recorded within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.
Expense recognition
Cost of sales are expensed as incurred and include product, labor and benefits, store operating and occupancy, and depreciation expenses. Selling, general and administrative expenses are recognized as incurred and include sales and marketing costs, advertising, customer support, and other corporate and administrative costs. Advertising costs were $54.8 million in fiscal 2022, $48.1 million in fiscal 2021 and $35.2 million in fiscal 2020.
Stock-based compensation
The Company recognizes expense related to stock-based compensation, net of actual forfeitures, over the requisite vesting period based on the grant date fair value of new or modified awards. Substantially all of the awards granted by the Company are routine annual grants. Management evaluates its award grants and modifications and will adjust the fair value if any are determined to be spring-loaded.
Income taxes
Income tax expense is provided based on income before income taxes. The Company estimates its tax expense based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about the recognition and realization of deferred tax assets and liabilities resulting from the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax laws or rates occur, deferred tax assets and liabilities are adjusted in the period changes are enacted through income tax expense. 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 unrecognized tax benefits 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. Interest and penalties were not material to any of the periods presented herein.
Once the consolidated income tax provision is computed, the tax effect of pre-tax income from continuing operations is determined without consideration of the current year pre-tax income or loss from other financial statement components, including discontinued operations. The portion of total income tax that remains after the attribution of tax to continuing operations is allocated to the remaining components.
Derivatives
Valvoline’s derivative instruments consist of currency exchange and interest rate swap agreements, each of which is described further below.
Currency derivatives
The Company's currency exchange contracts are used to manage non-functional currency denominated balance sheet exposures and exchange on currency for another at a fixed rate on a future date of generally a month or less. These contracts are not designated as hedging instruments and are accounted for as either assets or liabilities in the Consolidated Balance Sheets at fair value with the resulting gains or losses recognized as adjustments to earnings within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income. Gains and losses are recognized as exchange rates change the fair value of these instruments and upon settlement to offset the remeasurement gain or loss on the related currency-denominated exposures in the same period. The Company classifies its cash flows related to currency exchange contracts as investing activities in the Consolidated Statements of Cash Flows.
Interest rate swap agreements
The Company's interest rate swap agreements effectively modify its exposure to interest rate risk by converting floating rate debt to a fixed rate for the term of the swap agreements, reducing the impact of interest rate changes on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount.
Valvoline's interest rate swap agreements are designated as cash flow hedges with effectiveness of the hedges assessed at inception and quarterly thereafter. To the extent the hedging relationship is highly effective, the unrealized gains or losses on the swaps are recorded in Accumulated other comprehensive (loss) income and reclassified into earnings within Net interest and other financing expenses when the payments occur. The Company classifies its cash flows related to interest rate swap agreements as operating activities in the Consolidated Statements of Cash Flows.
The fair values of the interest rate swaps are reflected as an asset or liability in the Consolidated Balance Sheets and the change in fair value is reported in Accumulated other comprehensive (loss) income. The fair values of the interest rate swaps are estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date. The Company does not offset fair value amounts recognized in its Consolidated Balance Sheets for presentation purposes.
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 accounting guidance prioritizes the inputs used to measure fair value into the following three-tier fair value hierarchy for which an instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement:
•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 in 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 the Valvoline's 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 the Company'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.
Certain investments which measure fair value using the net asset value (“NAV”) per share practical expedient are not classified within the fair value hierarchy and are separately disclosed.
Valvoline measures its financial assets and financial liabilities at fair value based on one or more of the following three valuation techniques:
•Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities
•Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost)
•Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option pricing and excess earnings models)
The Company generally uses a market approach, when practicable, in valuing financial instruments. In certain instances, when observable market data is lacking, the Company uses valuation techniques consistent with the income approach whereby future cash flows are converted to a single discounted amount. The Company uses multiple sources of pricing as well as trading and other market data in its process of reporting fair values.
The fair values of accounts receivables and accounts payable approximate their carrying values due to the relatively short-term nature of the instruments. Valvoline's notes receivable primarily consist of variable-rate interest term loans extended to franchisees to provide financial assistance as a response to the COVID-19 pandemic. These notes bear interest comparable with the market rates within Valvoline's variable rate borrowings, and accordingly, their carrying amounts approximate fair value.
The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Currency translation
Operations outside the United States are measured generally 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) income and are included in net earnings only upon sale or substantial liquidation of the underlying non-U.S. subsidiary or affiliated company.
Earnings per share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted-average number of common shares outstanding during the reported period. Diluted EPS is calculated similar to basic EPS, except that the weighted-average number of shares outstanding includes the number of shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock appreciation rights and nonvested stock-based awards. Nonvested market and performance-based share awards are included in the weighted-average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.
Share repurchases
Shares that are repurchased are retired and returned to the status of authorized, unissued shares. The excess of the repurchase price over the par value of shares acquired is recognized in Retained earnings.
Recent accounting pronouncements
The following standards relevant to Valvoline were either issued or are expected to have a meaningful impact on Valvoline in future periods.
Issued but not yet adopted
In March 2020, the FASB issued guidance related to reference rate reform that simplifies the accounting for contract modifications and hedging arrangements as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference rates to alternative reference rates. The Company has interest rate swap hedging arrangements and variable rate long-term debt for which existing payments are based on LIBOR tenors expected to cease in June 2023. As of September 30, 2022, 34% of Valvoline’s outstanding total long-term debt and interest rate swap agreements with a total notional amount of $275 million are under existing arrangements that mature following LIBOR cessation and do not contain fallback provisions to alternative reference rates. The Company expects to adopt this guidance to the extent there are qualifying contractual modifications prior to the end of calendar 2022 and does not expect application of this guidance to have a material impact on its condensed consolidated financial statements.
The FASB issued other accounting guidance during the period that is not currently applicable or not expected to have a material impact on Valvoline’s financial statements, and therefore, is not described above.
NOTE 3 – DISCONTINUED OPERATIONS
The following table summarizes Income from discontinued operations, net of tax included in the Consolidated Statements of Comprehensive Income for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
| | |
(In millions) | | 2022 | | 2021 | | 2020 |
Net revenues | | $ | 2,695.2 | | | $ | 2,086.7 | | | $ | 1,728.8 | |
Cost of sales | | 2,134.7 | | | 1,540.9 | | | 1,167.6 | |
Gross profit | 560.5 | | | 545.8 | | | 561.2 | |
| | | | | | |
Selling, general and administrative expenses | | 304.3 | | | 294.7 | | | 264.2 | |
Legacy and separation-related expenses | | 7.0 | | | — | | | — | |
Equity and other income, net | | (33.4) | | | (36.3) | | | (27.7) | |
Operating income from discontinued operations | 282.6 | | | 287.4 | | | 324.7 | |
Net pension and other postretirement plan (income) expense | | (3.4) | | | 1.9 | | | (3.9) | |
Net interest and other financing expenses | | 4.6 | | | 2.5 | | | 1.1 | |
Income from discontinued operations before income taxes | 281.4 | | | 283.0 | | | 327.5 | |
Income tax (benefit) expense | | (33.5) | | | 62.8 | | | 80.5 | |
Net income from discontinued operations | $ | 314.9 | | | $ | 220.2 | | | $ | 247.0 | |
The products used in Valvoline’s service delivery are sourced from Global Products. Valvoline will continue this arrangement following the sale of Global Products through a long-term supply agreement whereby Valvoline will purchase substantially all lubricant and certain ancillary products for its stores from Global Products. Net revenues within the results of Global Products above include product sales to the Company's continuing operations which are considered to be effectively settled at the time of the transaction and have not been eliminated. These transactions total the following for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
| | |
(In millions) | | 2022 | | 2021 | | 2020 |
Net revenues | | $ | 218.1 | | | $ | 143.1 | | | $ | 102.9 | |
Additionally, certain transition services are expected between the businesses following the close of the sale, which are not expected to be material to the consolidated financial statements.
A summary of the held for sale assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:
| | | | | | | | | | | | | | |
| | |
(In millions) | | 2022 | | 2021 |
Current assets | | | | |
Cash and cash equivalents | | $ | 59.0 | | | $ | 107.4 | |
Receivables, net | | 524.3 | | | 430.8 | |
Inventories, net | | 290.1 | | | 230.2 | |
Prepaid expenses and other current assets | | 35.0 | | | 26.1 | |
Current assets held for sale (a) | | 908.4 | | | 794.5 | |
| | | | |
Noncurrent assets | | | | |
Property, plant and equipment, net | | 257.4 | | | 257.1 | |
Goodwill and intangibles, net | | 139.8 | | | 132.4 | |
Other noncurrent assets | | 158.6 | | | 173.2 | |
Noncurrent assets held for sale (a) | | 555.8 | | | 562.7 | |
Total assets held for sale | | $ | 1,464.2 | | | $ | 1,357.2 | |
| | | | |
Current liabilities | | | | |
Trade and other payables | | $ | 264.9 | | | $ | 206.8 | |
Accrued expenses and other liabilities | | 166.9 | | | 169.1 | |
Current liabilities held for sale (a) | | 431.8 | | | 375.9 | |
| | | | |
Noncurrent liabilities | | | | |
Long-term debt | | 30.7 | | | 37.6 | |
Other noncurrent liabilities | | 76.8 | | | 94.9 | |
Noncurrent liabilities held for sale (a) | | 107.5 | | | 132.5 | |
Total liabilities held for sale | | $ | 539.3 | | | $ | 508.4 | |
| | | | |
(a)Assets and liabilities of Global Products are presented as current in the Consolidated Balance Sheet at September 30, 2022, as the Company expects to complete the disposition within one year.
Equity method investments
Summarized financial information for the equity method investments of the Global Products business follows as of and for the years ended September 30:
| | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | |
Financial position | | | | | | |
Current assets | | $ | 153.4 | | | $ | 161.7 | | | |
Current liabilities | | (84.4) | | | (89.4) | | | |
Working capital | | 69.0 | | | 72.3 | | | |
Noncurrent assets | | 24.2 | | | 24.9 | | | |
Noncurrent liabilities | | (1.8) | | | (4.6) | | | |
Stockholders’ equity | | $ | 91.4 | | | $ | 92.6 | | | |
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Results of operations (a) | | | | | | |
Sales | | $ | 399.1 | | | $ | 375.2 | | | $ | 272.9 | |
Income from operations | | $ | 59.4 | | | $ | 60.4 | | | $ | 50.2 | |
Net income | | $ | 30.9 | | | $ | 31.3 | | | $ | 24.6 | |
| | | | | | |
(a)Includes the results of equity method investments during the Company's period of ownership.
NOTE 4 – FAIR VALUE MEASUREMENTS
Recurring fair value measurements
The Company’s financial assets and liabilities accounted for at fair value on a recurring basis are summarized below by level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 | | | | | | | | | | |
(In millions) | | Total | | Level 1 | | Level 2 | | Level 3 | | NAV (a) | | | | | | | | | | |
Cash and cash equivalents | | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 0.4 | | | $ | 0.4 | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | |
Time deposits | | 13.3 | | | — | | | 13.3 | | | — | | | — | | | | | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | | | | | | | | | | | |
Currency derivatives | | 6.0 | | | — | | | 6.0 | | | — | | | — | | | | | | | | | | | |
Interest rate swap agreements | | 5.2 | | | — | | | 5.2 | | | — | | | — | | | | | | | | | | | |
Other noncurrent assets | | | | | | | | | | | | | | | | | | | | |
Non-qualified trust funds | | 6.4 | | | — | | | — | | | — | | | 6.4 | | | | | | | | | | | |
Interest rate swap agreements | | 12.6 | | | | | 12.6 | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 43.9 | | | $ | 0.4 | | | $ | 37.1 | | | $ | — | | | $ | 6.4 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Accrued expenses and other liabilities | | | | | | | | | | | | | | | | |
Currency derivatives | | $ | 5.2 | | | $ | — | | | $ | 5.2 | | | $ | — | | | $ | — | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Other noncurrent liabilities | | | | | | | | | | | | | | | | | | | | |
Deferred compensation obligations | | 19.6 | | | — | | | — | | | — | | | 19.6 | | | | | | | | | | | |
Total liabilities at fair value | | $ | 24.8 | | | $ | — | | | $ | 5.2 | | | $ | — | | | $ | 19.6 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2021 | | | | | | | | | | |
(In millions) | | Total | | Level 1 | | Level 2 | | Level 3 | | NAV (a) | | | | | | | | | | |
Cash and cash equivalents | | | | | | | | | | | | | | | | | | | | |
Money market funds | | $ | 12.8 | | | $ | 12.8 | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | |
Time deposits | | 86.1 | | | — | | | 86.1 | | | — | | | — | | | | | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | | | | | | | | | | | |
Currency derivatives | | 2.7 | | | — | | | 2.7 | | | — | | | — | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Other noncurrent assets | | | | | | | | | | | | | | | | | | | | |
Non-qualified trust funds | | 11.0 | | | — | | | 4.0 | | | — | | | 7.0 | | | | | | | | | | | |
Interest rate swap agreements | | 1.6 | | | — | | | 1.6 | | | — | | | — | | | | | | | | | | | |
Total assets at fair value | | $ | 114.2 | | | $ | 12.8 | | | $ | 94.4 | | | $ | — | | | $ | 7.0 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Accrued expenses and other liabilities | | | | | | | | | | | | | | | | | | |
Currency derivatives | | $ | 3.3 | | | $ | — | | | $ | 3.3 | | | $ | — | | | $ | — | | | | | | | | | | | |
Interest rate swap agreements | | 0.6 | | | — | | | 0.6 | | | — | | | — | | | | | | | | | | | |
Other noncurrent liabilities | | | | | | | | | | | | | | | | | | | | |
Deferred compensation obligations | | 22.7 | | | — | | | — | | | — | | | 22.7 | | | | | | | | | | | |
Total liabilities at fair value | | $ | 26.6 | | | $ | — | | | $ | 3.9 | | | $ | — | | | $ | 22.7 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(a)Funds measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy.
Money market funds
Money market funds trade in an active market and are valued using quoted market prices, which are Level 1 inputs.
Time deposits
Time deposits are balances held with financial institutions at face value plus accrued interest, which approximates fair value and are categorized as Level 2.
Currency derivatives
The Company had outstanding currency forward contracts with notional values of $150.5 million and $136.7 million as of September 30, 2022 and 2021, respectively. The fair value of these outstanding contracts are recorded as assets and liabilities on a gross basis measured using readily observable market inputs to estimate the fair value for similar derivative instruments and are classified as Level 2. Gains and losses recognized related to these instruments were not material in any period presented herein.
Non-qualified trust funds
The Company maintains a non-qualified trust that is utilized to fund benefit payments for certain of its U.S. non-qualified pension plans. This trust is primarily invested in fixed income U.S. government bonds and mutual funds that are measured at fair value based upon Level 2 inputs corroborated by observable market data and using the NAV per share practical expedient. There were no significant redemption restrictions or unfunded commitments on these mutual fund investments as of September 30, 2022. Gains and losses related to these investments are immediately recognized within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income and were not material in any period presented herein.
Interest rate swap agreements
The Company is party to four interest rate swap agreements with three to four year maturities to exchange interest rate payments on $350.0 million of variable rate term loan borrowings to fixed interest rates. The Company expects these hedges to be highly effective and based on interest rates as of September 30, 2022 and current circumstances, estimates that there will not be material reclassifications into earnings over the next twelve months.
The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. The Company utilizes Level 2 observable inputs such as interest rate yield curves to estimate fair value for the interest rate swap agreements.
Deferred compensation obligations
The Company has an unfunded deferred compensation plan that is valued based on the underlying participant-directed investments. The fair value of underlying investments in collective trust funds is determined using the NAV provided by the administrator of the fund as a practical expedient. The NAV is determined by each fund’s trustee based upon the fair value of the underlying assets owned by the fund, less its liabilities, divided by outstanding units. There were no significant redemption restrictions or unfunded commitments on these investments as of September 30, 2022. Changes in the fair values are recognized in the Consolidated Statements of Comprehensive Income within Selling, general and administrative expenses and were not material for the periods presented herein.
Fair value of long-term debt
Long-term debt is reported in the Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the disclosure above of financial assets and liabilities measured at fair value within the consolidated financial statements on a recurring basis. The fair values of the Company's outstanding fixed rate senior notes shown in the table below are based on recent trading values, which are considered Level 2 inputs within the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | September 30, 2021 |
(In millions) | | Fair value | | Carrying value (a) | | Unamortized discounts and issuance costs | | Fair value | | Carrying value (a) | | Unamortized discounts and issuance costs |
2030 Notes | | $ | 568.5 | | | $ | 593.7 | | | $ | (6.3) | | | $ | 622.4 | | | $ | 593.0 | | | $ | (7.0) | |
2031 Notes | | 400.5 | | | 529.2 | | | (5.8) | | | 531.3 | | | 528.6 | | | (6.4) | |
Total | | $ | 969.0 | | | $ | 1,122.9 | | | $ | (12.1) | | | $ | 1,153.7 | | | $ | 1,121.6 | | | $ | (13.4) | |
| | | | | | | | | | | | |
(a)Carrying values shown are net of unamortized discounts and issuance costs.
Refer to Note 8 for details of these notes as well as Valvoline's other debt instruments that have variable interest rates with carrying amounts that approximate fair value.
NOTE 5 – BUSINESS COMBINATIONS
Fiscal 2022
The Company acquired 37 service center stores in single and multi-store transactions, including four former franchise locations and five former Express Care locations converted to company-operated service center stores, for an aggregate purchase price of $50.7 million during the twelve months ended September 30, 2022. These acquisitions contribute to Valvoline's retail presence in key North American markets and increase Valvoline’s retail footprint to over 1,700 system-wide service center stores.
Fiscal 2021
During fiscal 2021, Valvoline acquired 134 service center stores in single and multi-store transactions, including 50 former franchise locations converted to company-operated service centers stores and 12 franchise-operated service center stores, for an aggregate purchase price of $281.7 million. These acquisitions provided an opportunity to expand Valvoline's system of service center stores within key markets and included:
•Fourteen company-operated service center stores in Texas acquired from Kent Lubrication Centers Ltd. (doing business as Avis Lube) on October 1, 2020;
•Twenty-one former franchise locations converted to company-operated service center stores in Kansas and Missouri acquired from Westco Lube, Inc. on October 15, 2020;
•Twelve company-operated service center stores in Idaho acquired from L&F Enterprises (doing business as Einstein's Oilery) on October 30, 2020;
•Twenty-seven Mister Oil Change Express® locations (15 company-operated and 12 franchise-operated) across seven states acquired from Car Wash Partners, Inc. on December 11, 2020;
•Sixteen former franchise locations converted to company-operated service center stores in Texas acquired from AWC Premium Automotive Service Ltd. on April 30, 2021;
•Thirteen former franchise and fourteen former joint venture locations converted to company-operated service center stores acquired in single and multi-store transactions; and
•Eleven company-operated service center stores and six former Express Care locations acquired in single and multi-store transactions.
Fiscal 2020
During fiscal 2020, Valvoline acquired 35 service center stores in single and multi-store transactions, including 23 former franchise locations converted to company-operated service centers stores, for an aggregate purchase price of $40.1 million. These acquisitions provide an opportunity to expand Valvoline’s system within key markets.
Summary
The following table summarizes the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
| | | | | | |
| | | | | | |
Inventories | | $ | — | | | $ | 2.8 | | | $ | 0.8 | |
Other current assets | | 0.2 | | | 0.1 | | | — | |
Property, plant and equipment (a) | | 10.0 | | | 98.6 | | | 6.4 | |
Operating lease assets | | 9.6 | | | 36.4 | | | 0.6 | |
| | | | | | |
Goodwill (b) | | 39.1 | | | 204.4 | | | 17.2 | |
Intangible assets (c) | | | | | | |
Reacquired franchise rights (d) | | 2.8 | | | 58.6 | | | 20.4 | |
Customer relationships | | — | | | 0.1 | | | — | |
| | | | | | |
Other | | 0.4 | | | 3.1 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
Other current liabilities | | (0.8) | | | (8.3) | | | (0.7) | |
Operating lease liabilities | | (8.9) | | | (33.5) | | | — | |
Other noncurrent liabilities (a) | | (1.7) | | | (80.6) | | | (4.6) | |
Total net assets acquired | | $ | 50.7 | | | $ | 281.7 | | | $ | 40.1 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
(a)Includes finance lease assets in property, plant and equipment and finance lease liabilities in other current and noncurrent liabilities. During the years ended September 30, 2022, 2021 and 2020, finance lease assets acquired were $1.8 million, $84.3 million and $4.1 million, respectively; finance lease liabilities in other current liabilities were $0.1 million, $3.7 million and $0.1 million, respectively; and finance lease liabilities in other noncurrent liabilities were $1.7 million, $80.6 million and $4.0 million, respectively.
(b)Goodwill is generally expected to be deductible for income tax purposes and is primarily attributed to the operational synergies and potential growth expected to result in economic benefits in the respective markets of the acquisitions.
(c)Weighted average amortization period of intangible assets acquired is 9 years for fiscal 2022 and 10 years for fiscal 2021 and 2020.
(d)Prior to the acquisition of former franchise service center stores, Valvoline licensed the right to operate franchised service centers, including use of the Company’s trademarks and trade name. In connection with these acquisitions, Valvoline reacquired those rights and recognized separate definite-lived reacquired franchise rights intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately 10 years for the rights reacquired in each period presented above. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market.
The fair values above are preliminary for up to one year from the date of acquisition as they are subject to measurement period adjustments as new information is obtained about facts and circumstances that existed as of the acquisition date. The Company did not record any material measurement period adjustments and does not expect any material changes to the preliminary purchase price allocations summarized above for acquisitions completed during the last twelve months.
NOTE 6 – LEASE COMMITMENTS
The following table presents the Company's lease balances as of September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | Location in Consolidated Balance Sheets | | 2022 | | 2021 |
Assets | | | | | | |
Operating lease assets | | Operating lease assets | | $ | 248.1 | | | $ | 226.1 | |
Finance lease assets | | Property, plant and equipment, net | | 217.1 | | | 195.4 | |
Amortization of finance lease assets | | Property, plant and equipment, net | | (34.2) | | | (20.1) | |
Total leased assets | | | | $ | 431.0 | | | $ | 401.4 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating lease liabilities | | Accrued expenses and other liabilities | | $ | 26.8 | | | $ | 24.5 | |
Finance lease liabilities | | Accrued expenses and other liabilities | | 10.6 | | | 8.8 | |
Noncurrent | | | | | | |
Operating lease liabilities | | Operating lease liabilities | | 229.2 | | | 208.0 | |
Finance lease liabilities | | Other noncurrent liabilities | | 189.8 | | | 177.4 | |
Total lease liabilities | | | | $ | 456.4 | | | $ | 418.7 | |
The following table presents the components of total lease costs for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | Location in Consolidated Statements of Comprehensive Income | | 2022 | | 2021 |
Operating lease cost | | Cost of sales and Selling, general and administrative expenses | | $ | 36.8 | | | $ | 33.6 | |
Finance lease costs | | | | | | |
Amortization of lease assets | | Cost of sales | | 14.1 | | | 11.2 | |
Interest on lease liabilities | | Net interest and other financing expenses | | 9.3 | | | 8.1 | |
Variable lease cost | | Cost of sales and Selling, general and administrative expenses | | 2.4 | | | 2.3 | |
| | | | | | |
Sublease income | | Equity and other income, net | | (5.9) | | | (5.3) | |
Total lease cost | | | | $ | 56.7 | | | $ | 49.9 | |
Other information related to the Company's leases follows for the years ended September 30:
| | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases (a) | | $ | 34.9 | | | $ | 32.2 | |
Operating cash flows from finance leases | | $ | 9.3 | | | $ | 8.1 | |
Financing cash flows from finance leases | | $ | 8.8 | | | $ | 6.2 | |
Lease assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 46.8 | | | $ | 63.0 | |
Finance leases | | $ | 18.6 | | | $ | 118.6 | |
| | | | |
(a)Included within the change in Other assets and liabilities within the Consolidated Statements of Cash Flows offset by noncash operating lease asset amortization and liability accretion.
The following table reconciles the undiscounted cash flows for the next five fiscal years ended September 30 and thereafter to the operating and finance lease liabilities recorded within the Consolidated Balance Sheet as of September 30, 2022:
| | | | | | | | | | | | | | |
(In millions) | | Operating leases | | Finance leases |
2023 | | $ | 36.8 | | | $ | 20.1 | |
2024 | | 35.1 | | | 20.3 | |
2025 | | 33.1 | | | 20.4 | |
2026 | | 31.6 | | | 21.0 | |
2027 | | 29.2 | | | 21.1 | |
Thereafter | | 150.0 | | | 168.0 | |
Total future lease payments | | 315.8 | | | 270.9 | |
Imputed interest | | 59.8 | | | 70.5 | |
Present value of lease liabilities | | $ | 256.0 | | | $ | 200.4 | |
As of September 30, 2022, Valvoline has additional leases primarily related to its retail service center stores that have not yet commenced with approximately $32.2 million in undiscounted future lease payments that are not included in the table above. These leases are expected to commence over the next twelve months and generally have lease terms of 15 years.
The weighted average remaining lease terms and interest rates as of September 30, 2022 were:
| | | | | | | | | | | | | | |
| | Operating leases | | Finance leases |
Weighted average remaining lease term (in years) | | 9.9 | | 12.9 |
Weighted average discount rate | | 4.2 | % | | 5.2 | % |
NOTE 7 – INTANGIBLE ASSETS
Goodwill
The following summarizes the changes in the carrying amount of goodwill during fiscal 2022 and 2021:
| | | | | | | | | | | | |
(In millions) | | | | | | |
Balance at September 30, 2020 | | $ | 316.1 | | | | | |
Acquisitions | | 204.4 | | | | | |
Currency translation | | 2.2 | | | | | |
Dispositions (a) | | (9.9) | | | | | |
Balance at September 30, 2021 | | 512.8 | | | | | |
Acquisitions | | 39.1 | | | | | |
Currency translation | | (3.7) | | | | | |
| | | | | | |
Balance at September 30, 2022 | | $ | 548.2 | | | | | |
| | | | | | |
(a)Derecognition of goodwill as a result of the sale of service center stores to franchisees, which included 12 company-owned, franchise-operated locations in fiscal 2021.
Other intangible assets
Valvoline’s purchased intangible assets were specifically identified when acquired, have finite lives, and are reported in Goodwill and intangibles, net within 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) | | 2022 | | 2021 |
| Gross carrying amount | | Accumulated amortization | | Net carrying amount | | Gross carrying amount | | Accumulated amortization | | Net carrying amount |
Definite-lived intangible assets | | | | | | | | |
Trademarks and trade names | | $ | 29.6 | | | $ | (9.2) | | | $ | 20.4 | | | $ | 30.3 | | | $ | (7.9) | | | $ | 22.4 | |
Reacquired franchise rights | | 118.0 | | | (36.5) | | | 81.5 | | | 115.2 | | | (24.1) | | | 91.1 | |
Customer relationships | | 16.6 | | | (6.9) | | | 9.7 | | | 17.5 | | | (5.7) | | | 11.8 | |
Other intangible assets | | 6.7 | | | (3.4) | | | 3.3 | | | 6.4 | | | (2.2) | | | 4.2 | |
Total definite-lived intangible assets | | $ | 170.9 | | | $ | (56.0) | | | $ | 114.9 | | | $ | 169.4 | | | $ | (39.9) | | | $ | 129.5 | |
The table that follows summarizes amortization expense (actual and estimated) for the Company's current intangible assets for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Actual | | Estimated |
| 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
Amortization expense | | $ | 16.6 | | | $ | 16.4 | | | $ | 15.9 | | | $ | 13.9 | | | $ | 10.8 | | | $ | 10.3 | |
NOTE 8 – DEBT
The following table summarizes Valvoline’s debt as of September 30:
| | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
2031 Notes | | $ | 535.0 | | | $ | 535.0 | |
2030 Notes | | 600.0 | | | 600.0 | |
| | | | |
Term Loan | | 460.0 | | | 475.0 | |
| | | | |
Trade Receivables Facility | | 105.0 | | | 58.5 | |
| | | | |
| | | | |
Debt issuance costs and discounts | | (12.4) | | | (13.8) | |
Total debt | | 1,687.6 | | | 1,654.7 | |
| | | | |
Current portion of long-term debt | | 162.5 | | | 15.0 | |
Long-term debt | | $ | 1,525.1 | | | $ | 1,639.7 | |
| | | | |
Senior Notes
The Company's outstanding fixed rate senior notes as of September 30, 2022 consist of 3.625% senior unsecured notes due 2031 with an aggregate principal amount of $535.0 million (the “2031 Notes”) and 4.250% senior unsecured notes due 2030 with an aggregate principal amount of $600.0 million (the “2030 Notes” and collectively with the 2031 Notes, the “Senior Notes”). The Senior Notes are subject to customary events of default for similar debt securities, which if triggered may accelerate payment of principal, premium, if any, and accrued but unpaid interest. If a change of control repurchase event occurs, Valvoline may be required to offer to purchase the Senior Notes from the holders thereof. The Senior 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 maturity in the manner specified in the governing indentures.
2031 Notes
In January 2021, Valvoline issued the 2031 Notes in a private offering for net proceeds of $527.5 million (after deducting initial purchasers’ discounts and debt issuance costs). The net proceeds, along with cash and cash equivalents on hand, were used to redeem in full Valvoline's 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $800.0 million (the “2025 Notes”), including an early redemption premium of $26.3
million, accrued and unpaid interest, as well as related fees and expenses for an aggregate redemption price of approximately $840.7 million. A loss on extinguishment of the 2025 Notes of $36.4 million was recognized in Net interest and other financing expenses in the Consolidated Statements of Comprehensive Income during the year ended September 30, 2021, comprised of the early redemption premium and the write-off of related unamortized debt issuance costs and discounts.
2030 Notes
In February 2020, Valvoline issued the 2030 Notes in a private offering for net proceeds of $592.1 million (after deducting initial purchasers’ discounts and debt issuance costs). A portion of the net proceeds were used to redeem in full Valvoline's 5.500% senior unsecured notes due 2024 at the aggregate principal amount of $375.0 million (the “2024 Notes”), plus an early redemption premium of $15.5 million, accrued and unpaid interest, as well as related fees and expenses for an aggregate redemption price of $393.7 million. A loss on extinguishment of the 2024 Notes of $19.4 million was recognized in Net interest and other financing expenses in the Consolidated Statements of Comprehensive Income during the year ended September 30, 2020, comprised of the early redemption premium and the write-off of related unamortized debt issuance costs and discounts.
A portion of the net proceeds from the offering of the 2030 Notes were also utilized to prepay $100.0 million of indebtedness from the Company's term loan facility under the Senior Credit Agreement, with the remainder of the net proceeds used for general corporate purposes. In response to the COVID-19 pandemic, the Company preserved the remaining proceeds during fiscal 2020 to maintain its liquidity.
Senior Credit Agreement
Key terms and conditions
The Senior Credit Agreement provides an aggregate principal amount of $1,050.0 million in senior secured credit facilities, comprised of (i) a five-year $575.0 million term loan facility (the “Term Loan”) and (ii) a 5-year $475.0 million revolving credit facility (the “Revolver”), including a $100.0 million letter of credit sublimit.
The outstanding principal balance of the Term Loan is required to be repaid in quarterly installments, with the balance due at maturity in April 2024, and prepayment of the net cash proceeds due from certain events. Amounts outstanding under the Senior Credit Agreement may be prepaid at any time, and from time to time, in whole or part, without premium or penalty. At Valvoline’s option, amounts outstanding under the 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 1.375% per year and LIBOR plus 2.000% per year (or between the alternate base rate plus 0.375% per year and the alternate base rate plus 1.000% per year), based upon Valvoline’s corporate credit ratings or its consolidated net leverage ratio, whichever yields the lowest rate.
Summary of activity
As of September 30, 2022 and 2021, the Term Loan had an outstanding balance of $460.0 million and $475.0 million, respectively, and there were no amounts outstanding under the Revolver. During fiscal 2022, Valvoline made payments on the Term Loan of $15.0 million with approximately $14.4 million due each quarter remaining through maturity. The total borrowing capacity remaining under the Revolver was $470.0 million as of September 30, 2022, due to a reduction of $5.0 million for letters of credit outstanding.
Trade Receivables Facility
Key terms and conditions
In April 2021, Valvoline amended its $175.0 million trade receivables securitization facility (the “Trade Receivables Facility”), to extend its maturity to April 2024 and modify the eligibility requirements for certain receivables. The amendment also reduced the minimum required borrowing to the lesser of (i) 33 percent of the total facility limit or (ii) the borrowing base from the availability of eligible receivables, in addition to permitting up to a 30 consecutive day annual exemption from this requirement. The Trade Receivables Facility is subject to customary default and termination provisions.
Under the Trade Receivables Facility, Valvoline sells and/or transfers a majority of its U.S. trade receivables to a wholly-owned, bankruptcy-remote subsidiary as they are originated. Advances by the lenders to that subsidiary (in the form of cash or letters of credit) are secured by its trade receivables. The assets of this financing subsidiary are restricted as collateral for the payment of its obligations under the Trade Receivables Facility, and its assets and credit are not available to satisfy the debts and obligations owed to the Company's other creditors. The Company includes the assets, liabilities and results of operations of this financing subsidiary in its consolidated financial statements.
The financing subsidiary pays customary fees to the lenders, and advances by a lender under the Trade Receivables Facility accrue interest for which the weighted average interest rates were 1.9% and 1.0% for the years ended September 30, 2022 and 2021, respectively.
Summary of activity
The financing subsidiary owned $387.9 million and $300.9 million of outstanding accounts receivable as of September 30, 2022 and 2021, respectively. These outstanding accounts receivable substantially relate to the Global Products business and were reported in Current assets held for sale, with a smaller portion reported within Receivables, net in the Company’s Consolidated Balance Sheets. The Trade Receivables Facility had an outstanding balance of $105.0 million and $58.5 million as of September 30, 2022 and 2021, respectively, with $70.0 million of borrowing capacity remaining as of September 30, 2022. The outstanding obligation under the Trade Receivables Facility is classified within Current portion of long-term debt within the Consolidated Balance Sheet as of September 30, 2022 due to the payment requirement in connection with the sale of Global Products.
Covenants and guarantees
The Company is required to satisfy certain covenants pursuant to its long-term borrowings. These covenants contain customary limitations, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, and affiliate transactions. The maintenance of financial covenants as of the end of each fiscal quarter is required, as defined in the Senior Credit Agreement, including: i) a maximum net leverage ratio of 4.5, which is calculated as net debt divided by Adjusted EBITDA and ii) a minimum interest coverage ratio of 3.0, which is calculated as Adjusted EBITDA divided by net interest expense. Cross-default provisions also exist between certain debt instruments. As of September 30, 2022 and 2021, the Company was in compliance with all debt covenants.
Valvoline’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, non-U.S. subsidiaries and certain other subsidiaries) guarantee obligations under the Senior Credit Agreement, which is also 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 non-U.S. subsidiaries, and in certain cases, a portion of the equity interests of other non-U.S. subsidiaries. Valvoline's subsidiaries that guarantee obligations under its Senior Credit Agreement also guarantee the Senior Notes, which have not been and are not expected to be registered in exchange offers as debt securities.
Long-term debt maturities
The future maturities of debt outstanding as of September 30, 2022, excluding debt issuance costs and discounts, are as follows:
| | | | | | | | |
(In millions) | | |
Years ending September 30 | | |
2023 | | $ | 162.5 | |
2024 | | 402.5 | |
2025 | | — | |
2026 | | — | |
2027 | | — | |
Thereafter (a) | | 1,135.0 | |
Total | | $ | 1,700.0 | |
| | |
(a)In connection with the sale of the Global Products business, a portion of the net proceeds may be utilized to reduce debt that is classified in the table above based on its current contractual maturity.
NOTE 9 – INCOME TAXES
Components of income tax expense
Income tax expense consisted of the following for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Current | | | | | | |
Federal | | $ | 9.4 | | | $ | (0.9) | | | $ | (14.4) | |
State | | 4.3 | | | 2.1 | | | (2.6) | |
Non-U.S. | | 3.0 | | | 1.8 | | | 1.7 | |
| | 16.7 | | | 3.0 | | | (15.3) | |
Deferred | | | | | | |
Federal | | 16.2 | | | 47.7 | | | 43.8 | |
State | | 1.3 | | | 9.0 | | | 24.8 | |
Non-U.S. | | 0.5 | | | 0.2 | | | 0.1 | |
| | 18.0 | | | 56.9 | | | 68.7 | |
Income tax expense | | $ | 34.7 | | | $ | 59.9 | | | $ | 53.4 | |
The following presents pre-tax income and the principal components of the reconciliation between the effective tax rate and the U.S. federal statutory income tax rate in effect for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Income before income taxes | | | | | | |
United States | | $ | 119.1 | | | $ | 250.8 | | | $ | 115.6 | |
Non-U.S. | | 25.0 | | | 9.2 | | | 7.4 | |
Total income before income taxes | | $ | 144.1 | | | $ | 260.0 | | | $ | 123.0 | |
| | | | | | |
U.S. statutory tax rate | | 21 | % | | 21 | % | | 21 | % |
Income taxes computed at U.S. statutory tax rate | | $ | 30.3 | | | $ | 54.6 | | | $ | 25.8 | |
(Decrease) increase in amount computed resulting from: | | | | | | |
Unrecognized tax benefits | | 0.1 | | | 0.8 | | | 0.6 | |
State taxes, net of federal benefit | | 5.2 | | | 9.3 | | | 3.7 | |
International rate differential | | (0.4) | | | — | | | 0.2 | |
Permanent items | | (1.0) | | | 0.5 | | | 0.4 | |
Remeasurement of net deferred taxes | | (0.5) | | | 0.1 | | | 1.0 | |
Return-to-provision adjustments | | (0.4) | | | 0.6 | | | (0.8) | |
| | | | | | |
Change in valuation allowances | | 1.8 | | | — | | | 28.7 | |
Tax Matters Agreement activity | | — | | | (5.6) | | | (6.4) | |
Other | | (0.4) | | | (0.4) | | | 0.2 | |
Income tax expense | | $ | 34.7 | | | $ | 59.9 | | | $ | 53.4 | |
Effective tax rate | | 24.1 | % | | 23.0 | % | | 43.4 | % |
The higher effective tax rate in fiscal 2022 from the prior year was principally driven by tax benefits recognized during the prior year period as a result audit settlements. Lower pre-tax income in fiscal 2022 resulted in lower current year tax expense over the prior year.
The lower year-over-year effective tax rate in fiscal 2021 was primarily driven by increased expense recognized in fiscal 2020 to establish a $28.5 million valuation allowance on certain legacy tax attributes, which did not recur in fiscal 2021. Additionally, increased pre-tax income in fiscal 2021 resulted in higher tax expense over fiscal 2020.
Deferred taxes
A summary of the deferred tax assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:
| | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
Deferred tax assets | | | | |
Non-U.S. net operating loss carryforwards (a) | | $ | 0.7 | | | $ | 0.6 | |
State net operating loss carryforwards (b) | | 17.5 | | | 17.6 | |
Employee benefit obligations | | 43.6 | | | 45.5 | |
Compensation accruals | | 22.8 | | | 25.0 | |
Credit carryforwards (c) | | 12.3 | | | 12.4 | |
Operating lease liabilities | | 99.6 | | | 90.9 | |
Outside basis difference (d) | | 99.1 | | | — | |
Other | | 23.0 | | | 18.7 | |
Valuation allowances (e) | | (33.3) | | | (31.8) | |
Net deferred tax assets | | 285.3 | | | 178.9 | |
Deferred tax liabilities | | | | |
Goodwill and other intangibles | | 18.7 | | | 18.1 | |
Property, plant and equipment | | 131.6 | | | 111.5 | |
Operating lease assets | | 74.5 | | | 70.5 | |
| | | | |
Total deferred tax liabilities | | 224.8 | | | 200.1 | |
Total net deferred tax assets (liabilities) (f) | | $ | 60.5 | | | $ | (21.2) | |
| | | | |
(a)Gross non-U.S. net operating loss carryforwards of $2.4 million expire in fiscal years 2039 to 2042.
(b)Apportioned gross state net operating loss carryforwards of $361.3 million expire in fiscal years 2023 through 2034.
(c)Credit carryforwards consist primarily of U.S. tax credits that generally expire in fiscal years 2025 through 2036.
(d)Outside tax over GAAP basis difference recorded through discontinued operations.
(e)Valuation allowances at September 30, 2022 primarily relate to state net operating loss carryforwards and certain other federal legacy tax attributes that are not expected to be realized or realizable.
(f)Balances are presented in the Consolidated Balance Sheets based on the net position of each tax jurisdiction.
Tax Matters Agreement
Background
Prior to its initial public offering (the "IPO") in September 2016, the Valvoline business operated as a wholly-owned subsidiary of Ashland Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). In advance of the IPO, the Valvoline business and certain other legacy Ashland assets and liabilities were transferred from Ashland to Valvoline as a reorganization of entities under common Ashland control (the "Contribution"). In connection with the IPO, Ashland retained 83% of the total outstanding shares of Valvoline's common stock. On May 12, 2017, Ashland distributed its interest in Valvoline to Ashland stockholders through a pro rata dividend on shares of Ashland common stock outstanding (the "Distribution"), which marked the completion of Valvoline's separation from Ashland.
For the periods prior to the Distribution, Valvoline was included in Ashland’s consolidated U.S. and state income tax returns and in the income tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). For the taxable periods that began on and after the Distribution, Valvoline files tax returns that include only Valvoline and its subsidiaries.
Key terms and conditions
An agreement (the "Tax Matters Agreement") was entered into in September 2016 between Valvoline and Ashland, that generally provides that Valvoline indemnify Ashland for the following items:
•The utilization of certain legacy tax attributes transferred from Ashland as the result of the Contribution;
•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 that arise on audit or examination and are not directly attributable to either the Valvoline business or the Ashland chemicals business;
•Taxes of Valvoline for the period between the IPO and Distribution that are not attributable to Ashland Group Returns (as defined above);
•Taxes of Valvoline for all taxable periods that begin on or after the day after the date of the Distribution; and
•Certain taxes and expenses resulting from the failure of the Contribution or Distribution to qualify for the intended tax-free treatment.
Summary of activity
Adjustments to the net obligations to Ashland under the Tax Matters Agreement are recorded within Net legacy and separation-related expenses (income), with any resulting impacts to Valvoline's stand-alone income tax provision recorded in Income tax expense within the Consolidated Statements of Comprehensive Income. Amounts recognized in the current period are not material.
During fiscal 2021, the Company reduced its indemnity obligations to Ashland by $33.0 million, principally due to settlement for fiscal 2014 to 2016 federal audit examinations. This reduction resulted in pre-tax income of $26.8 million and an income tax benefit of $5.8 million attributable to the Valvoline stand-alone business.
During fiscal 2020, the Company determined it did not expect to utilize certain tax attributes that were transferred from Ashland as a result of the Contribution. Accordingly, the Company recognized income tax expense of $28.5 million to establish a valuation allowance for these tax attributes with an offsetting reduction in its indemnity obligation, the combined effects of which had no impact on net income in the fiscal year ended September 30, 2020.
Total liabilities related to obligations owed to Ashland under the Tax Matters Agreement are primarily recorded in Other noncurrent liabilities in the Consolidated Balance Sheets and were $0.6 million and $1.3 million as of September 30, 2022 and 2021, respectively. Given the indemnification of Ashland for periods in which Valvoline was included in Ashland Group Returns, a portion of the Company's liability for unrecognized tax benefits is included in the Tax Matters Agreement obligation. The periods under indemnity that currently remain open to examination include certain U.S. state jurisdictions from fiscal 2011.
Unrecognized tax benefits
The aggregate changes in the balance of gross unrecognized tax benefits were as follows for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Gross unrecognized tax benefits as of October 1 | | $ | 8.7 | | | $ | 13.4 | | | $ | 12.4 | |
Increases related to tax positions from prior years | | 0.1 | | | 1.5 | | | 0.5 | |
Decreases related to tax positions from prior years | | (0.6) | | | (1.3) | | | — | |
Increases related to tax positions taken during the current year | | 0.8 | | | 0.7 | | | 0.9 | |
Settlements with tax authorities | | — | | | (4.2) | | | — | |
Lapses of statutes of limitation | | (0.8) | | | (1.4) | | | (0.4) | |
Gross unrecognized tax benefits as of September 30 (a) | | $ | 8.2 | | | $ | 8.7 | | | $ | 13.4 | |
| | | | | | |
(a)These unrecognized tax benefits would favorably impact the continuing operations and discontinued operations effective income tax rates, if recognized. Accruals for interest and penalties were $1.2 million as of September 30, 2022 and $1.1 million as of September 30, 2021.
The Company's U.S. federal income tax returns and Canada remain open to examination from fiscal 2018 forward. Fiscal years including and after 2017 remain open to examination by certain U.S. state jurisdictions.
Because Valvoline is routinely under examination by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during fiscal 2023. Due to the complexity and number of open years, it is not practical to estimate the amount or range of such change at this time. Based on current information available, management does not expect a material change to the Company's gross unrecognized tax benefits within fiscal 2023.
NOTE 10 – EMPLOYEE BENEFIT PLANS
Pension and other postretirement plans
The components of pension and other postretirement plans net periodic benefit costs (income) and the assumptions used in this determination are summarized below for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Pension benefits | | Other postretirement benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Net periodic benefit costs (income) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest cost | | $ | 43.0 | | | $ | 41.2 | | | $ | 59.6 | | | $ | 0.7 | | | $ | 0.7 | | | $ | 1.1 | |
Expected return on plan assets | | (78.6) | | | (84.0) | | | (85.3) | | | — | | | — | | | — | |
Amortization of prior service cost (credit) | | 0.1 | | | 0.1 | | | 0.1 | | | (2.2) | | | (11.9) | | | (11.8) | |
Actuarial loss (gain) | | 49.5 | | | (75.1) | | | (21.6) | | | (5.6) | | | 0.8 | | | 3.0 | |
Net periodic benefit costs (income) | | $ | 14.0 | | | $ | (117.8) | | | $ | (47.2) | | | $ | (7.1) | | | $ | (10.4) | | | $ | (7.7) | |
Weighted-average plan assumptions | | | | | | | | | | |
| | | | | | | | | | | | |
Discount rate for interest cost | | 2.10 | % | | 1.91 | % | | 2.80 | % | | 1.92 | % | | 1.76 | % | | 2.68 | % |
| | | | | | | | | | | | |
Expected long-term rate of return on plan assets | | 4.10 | % | | 4.40 | % | | 4.70 | % | | — | | | — | | | — | |
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 remeasurement. These gains and losses are reported within Net pension and other postretirement plan income in the Consolidated Statements of Comprehensive Income and included a loss of $43.9 million for the year ended September 30, 2022 and gains of $74.3 million and $18.6 million for the years ended September 30, 2021 and 2020, respectively.
This fiscal 2022 loss was primarily attributed to lower-than-expected returns on plan assets, partially offset by higher discount rates. The fiscal 2021 gain was primarily attributed to higher-than-expected returns on plan assets and an increase in discount rates. The fiscal 2020 gain was primarily attributed to higher-than-expected returns on plan assets and favorable changes in mortality assumptions, which more than offset the impacts of lower discount rates.
The following table summarizes the net periodic benefit income and the amortization of prior service credits recognized during the years ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Pension benefits | | Other postretirement benefits |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Amortization of prior service credits recognized in Accumulated other comprehensive income | | $ | (0.1) | | | $ | (0.1) | | | $ | (0.1) | | | $ | 2.2 | | | $ | 11.9 | | | $ | 11.8 | |
Net periodic benefit loss (income) | | 14.0 | | | (117.8) | | | (47.2) | | | (7.1) | | | (10.4) | | | (7.7) | |
Total pre-tax amount recognized in comprehensive loss (income) | | $ | 13.9 | | | $ | (117.9) | | | $ | (47.3) | | | $ | (4.9) | | | $ | 1.5 | | | $ | 4.1 | |
Obligations and funded status
Changes in benefit obligations and the fair value of plan assets, as well as key assumptions used to determine the benefit obligations, and the amounts in the Consolidated Balance Sheets for the Company’s pension and other postretirement benefit plans are summarized below as of September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Pension benefits | | Other postretirement benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
Change in benefit obligations | | | | | | | | |
Benefit obligations as of October 1 | | $ | 2,132.9 | | | $ | 2,251.7 | | | $ | 38.9 | | | $ | 41.6 | |
| | | | | | | | |
| | | | | | | | |
Interest cost | | 43.0 | | | 41.2 | | | 0.7 | | | 0.7 | |
| | | | | | | | |
Benefits paid | | (128.0) | | | (130.3) | | | (3.3) | | | (4.1) | |
Actuarial (gain) loss | | (458.3) | | | (31.7) | | | (5.6) | | | 0.7 | |
| | | | | | | | |
Transfers in | | 0.5 | | | 3.2 | | | — | | | — | |
Settlements | | (4.9) | | | (1.2) | | | — | | | — | |
Benefit obligations as of September 30 | | $ | 1,585.2 | | | $ | 2,132.9 | | | $ | 30.7 | | | $ | 38.9 | |
Change in plan assets | | | | | | | | |
Fair value of plan assets as of October 1 | | $ | 1,987.0 | | | $ | 1,977.9 | | | $ | — | | | $ | — | |
| | | | | | | | |
Actual return on plan assets | | (429.5) | | | 127.7 | | | — | | | — | |
Employer contributions | | 13.0 | | | 9.7 | | | 3.3 | | | 4.1 | |
| | | | | | | | |
Benefits paid | | (128.0) | | | (130.3) | | | (3.3) | | | (4.1) | |
| | | | | | | | |
Settlements | | (4.9) | | | (1.2) | | | — | | | — | |
Transfers in | | 0.5 | | | 3.2 | | | — | | | — | |
Fair value of plan assets as of September 30 | | $ | 1,438.1 | | | $ | 1,987.0 | | | $ | — | | | $ | — | |
| | | | | | | | |
Unfunded status of the plans as of September 30 | | $ | 147.1 | | | $ | 145.9 | | | $ | 30.7 | | | $ | 38.9 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Pension benefits | | Other postretirement benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
Amounts in the Consolidated Balance Sheets | | | | | | |
Noncurrent benefit assets (a) | | $ | 33.7 | | | $ | 71.5 | | | $ | — | | | $ | — | |
| | | | | | | | |
Current benefit liabilities (b) | | 9.1 | | | 9.3 | | | 4.4 | | | 4.2 | |
Noncurrent benefit liabilities (c) | | 171.7 | | | 208.1 | | | 26.3 | | | 34.7 | |
Total benefit liabilities | | 180.8 | | | 217.4 | | | 30.7 | | | 38.9 | |
| | | | | | | | |
Net liabilities recognized | | $ | 147.1 | | | $ | 145.9 | | | $ | 30.7 | | | $ | 38.9 | |
| | | | | | | | |
Balance in Accumulated other comprehensive loss | | | | |
Prior service cost (credit) | | $ | 1.2 | | | $ | 1.3 | | | $ | (18.9) | | | $ | (21.1) | |
| | | | | | | | |
| | | | | | | | |
Weighted-average plan assumptions | | | | | | | | |
Discount rate | | 5.58 | % | | 2.70 | % | | 5.56 | % | | 2.53 | % |
| | | | | | | | |
Healthcare cost trend rate (d) | | — | | | — | | | 5.6 | % | | 5.7 | % |
| | | | | | | | |
(a)Noncurrent benefit assets are recorded in Other noncurrent assets within the Consolidated Balance Sheets,
(b)Current benefit liabilities are recorded in Accrued expenses and other liabilities within the Consolidated Balance Sheets.
(c)Noncurrent benefit liabilities are recorded in Employee benefit obligations within the Consolidated Balance Sheets.
(d)The assumed pre-65 health care cost trend rate continues to be reduced to 4.0% in 2040 and thereafter.
Accumulated benefit obligation
The accumulated benefit obligation for all pension plans was $1.6 billion and $2.1 billion as of September 30, 2022 and 2021, respectively. Pension plans with projected and accumulated benefit obligations in excess of the fair value of plan assets follows for the Company’s plans as of September 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
| Benefit obligation | | Plan assets | | Benefit obligation | | Plan assets |
Plans with projected and accumulated benefit obligations in excess of plan assets | | $ | 1,177.7 | | | $ | 996.9 | | | $ | 1,591.5 | | | $ | 1,374.0 | |
| | | | | | | | |
Plan assets
Pension plan asset investments and their level within the fair value hierarchy is summarized below as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | September 30, 2022 | | |
| Total fair value | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV | | |
Cash and cash equivalents | | $ | 56.9 | | | $ | 56.9 | | | $ | — | | | $ | — | | | $ | — | | | |
U.S. government securities and futures | | 73.8 | | | — | | | 73.8 | | | — | | | — | | | |
Other government securities | | 36.1 | | | — | | | 36.1 | | | — | | | — | | | |
Corporate debt instruments | | 1,066.9 | | | — | | | 1,066.9 | | | — | | | — | | | |
| | | | | | | | | | | | |
Private equity and hedge funds | | 13.3 | | | — | | | — | | | — | | | 13.3 | | | |
Collective trust funds | | 190.3 | | | — | | | — | | | — | | | 190.3 | | | |
Other investments | | 0.8 | | | — | | | 0.8 | | | — | | | — | | | |
Total assets at fair value | | $ | 1,438.1 | | | $ | 56.9 | | | $ | 1,177.6 | | | $ | — | | | $ | 203.6 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | September 30, 2021 |
| Total fair value | | Level 1 | | Level 2 | | Level 3 | | Assets measured at NAV |
Cash and cash equivalents | | $ | 134.4 | | | $ | 134.4 | | | $ | — | | | $ | — | | | $ | — | |
U.S. government securities and futures | | 95.5 | | | — | | | 95.5 | | | — | | | — | |
Other government securities | | 58.3 | | | — | | | 58.3 | | | — | | | — | |
Corporate debt instruments | | 1,370.7 | | | — | | | 1,370.7 | | | — | | | — | |
| | | | | | | | | | |
Private equity and hedge funds | | 10.9 | | | — | | | — | | | — | | | 10.9 | |
Collective trust funds | | 308.1 | | | — | | | — | | | — | | | 308.1 | |
Other investments | | 9.1 | | | — | | | 9.1 | | | — | | | — | |
Total assets at fair value | | $ | 1,987.0 | | | $ | 134.4 | | | $ | 1,533.6 | | | $ | — | | | $ | 319.0 | |
Cash and cash equivalents
The carrying value of cash and cash equivalents approximates fair value.
Government securities
Government securities are valued based on Level 2 inputs, which include yields available for comparable securities of issuers with similar credit ratings.
Corporate debt instruments
Corporate debt instruments are valued based on Level 2 inputs that are observable in the market or may be derived principally from, or corroborated by, recently executed transactions, observable market data such as pricing for similar securities, cash flow models with yield curves, counterparty credit ratings, and credit spreads applied using the maturity and coupon interest rate terms of the debt instrument.
Private equity and hedge funds
Private equity and hedge funds primarily represent alternative investments not traded on an active market which are valued at the NAV per share determined by the manager of the fund based on the fair value of the underlying net assets owned by the fund divided by the number of shares or units outstanding.
Collective trust funds
Collective trust funds are comprised of a diversified portfolio of investments across various asset classes, including U.S. and international equities, fixed-income securities, commodities and currencies. The collective trust funds are valued using a NAV provided by the manager of each fund, which is based on the underlying net assets owned by the fund, divided by the number of shares outstanding.
The following summarizes investments for which fair value is measured using the NAV per share practical expedient as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Fair value at NAV | | Unfunded commitments | | Redemption frequency (if currently eligible) | | Redemption notice period |
Long/short hedge funds | | $ | 4.4 | | | $ | — | | | None (a) | | None (a) |
Relative value hedge funds | | 3.1 | | | — | | | None (b) | | None (b) |
| | | | | | | | |
Event driven hedge funds | | 0.4 | | | — | | | None (b) | | None (b) |
Collective trust funds | | 190.3 | | | — | | | Daily | | Up to 3 days |
| | | | | | | | |
| | | | | | | | |
Private equity | | 5.4 | | | 1.6 | | | None (c) | | None (c) |
| | $ | 203.6 | | | $ | 1.6 | | | | | |
| | | | | | | | |
(a)These hedge funds are in the process of liquidation over the next year.
(b)These hedge funds are in the process of liquidation and the timing is unknown.
(c)These private equity instruments are estimated to be liquidated over the next 1 to 5 years.
Investments and strategy
In developing an investment strategy for its defined benefit plans, Valvoline considered the following factors: the nature of the liabilities of the plans; the allocation of liabilities between active, deferred and retired plan participants; the funded status of the plans; the applicable investment horizon; the respective size of the plans; and historical and expected investment returns. Valvoline’s pension plan assets are managed by outside investment managers,
which are monitored against investment benchmark returns 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 optimize returns and maintain an appropriate asset mix and diversification of investments.
The current target asset allocation for the plans is 90% fixed income securities and 10% equity-based securities. Fixed income securities are liability matching assets that primarily include long duration, high grade corporate debt obligations. Equity-based securities are return-seeking assets that include both traditional equities as well as a mix of non-traditional assets such as hedge and commingled funds and private equity. Investment managers may employ a limited use of futures or other derivatives to manage risk within the portfolio through efficient exposure to markets. Valvoline’s pension plans hold a variety of investments designed to diversify risk and achieve an adequate net investment return to provide for future benefit payments to its participants.
The weighted-average asset allocations for Valvoline’s plans by asset category follow as of September 30:
| | | | | | | | | | | | | | | | | | | | |
| | Target | | 2022 | | 2021 |
Plan assets allocation | | | | | | |
Equity securities | | 3-10% | | 7 | % | | 11 | % |
Debt securities | | 80-100% | | 92 | % | | 88 | % |
Other | | 0-10% | | 1 | % | | 1 | % |
Total | | | | 100 | % | | 100 | % |
The basis for determining the expected long-term rate of return is a combination of future return assumptions for the various asset classes in Valvoline’s investment portfolio based on active management, historical analysis of previous returns, market indices, and a projection of inflation, net of plan expenses.
Funding and benefit payments
Valvoline contributed $13.0 million and $9.7 million to its pension plans during fiscal 2022 and 2021, respectively. Valvoline does not plan to contribute to its qualified pension plans in fiscal 2023 and expects to contribute approximately $9.0 million to its non-qualified pension plans.
The following benefit payments, which reflect future service expectations, are projected to be paid in each of the next five fiscal years ended September 30 and the five fiscal years thereafter in aggregate:
| | | | | | | | | | | | | | |
(In millions) | | Pension benefits | | Other postretirement benefits |
2023 | | $ | 141.9 | | | $ | 4.3 | |
2024 | | 137.7 | | | 3.6 | |
2025 | | 136.4 | | | 3.2 | |
2026 | | 135.1 | | | 2.8 | |
2027 | | 133.2 | | | 2.6 | |
2028 - 2032 | | 622.5 | | | 11.0 | |
Total | | $ | 1,306.8 | | | $ | 27.5 | |
Other plans
Defined contribution and other defined benefit plans
Valvoline sponsors certain defined contribution savings plans that provide matching contributions. Expense associated with these plans was $15.9 million in fiscal 2022, $6.0 million in fiscal 2021 and $5.2 million in fiscal 2020.
Valvoline also sponsors a long-term disability benefit plan. Total liabilities associated with this plan were $1.9 million and $2.6 million as of September 30, 2022 and 2021, respectively.
Multiemployer pension plans
Valvoline participates in two multiemployer pension plans that provide pension benefits to certain union-represented employees under the terms of collective bargaining agreements. Valvoline assumed responsibility for contributions to these plans in connection with the separation from its former parent company. Contributions to these plans were not material for any period presented herein.
Incentive plans
Reserves for incentive plans were $13.6 million and $18.4 million as of September 30, 2022 and 2021, respectively.
NOTE 11 – LITIGATION, CLAIMS AND CONTINGENCIES
From time to time, Valvoline is party to lawsuits, claims and other legal proceedings that arise in the ordinary course of business. The Company establishes liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable. Where appropriate, the Company has recorded liabilities with respect to these matters, which were not material for the periods presented as reflected in the consolidated financial statements herein. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. In addition, there are currently no matters for which management believes a material loss is at least reasonably possible.
In all instances, management has assessed each matter based on current information available and made a judgment concerning its potential outcome, giving due consideration to the amount and nature of the claim and the probability of success. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable.
Although the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy liabilities from these matters will not exceed the amounts reflected in the consolidated financial statements, based on information available at this time, it is the opinion of management that such pending claims or proceedings will not have a material adverse effect on its consolidated financial statements.
NOTE 12 – STOCK-BASED COMPENSATION PLANS
Valvoline has approved stock-based incentive plans that authorize 21.0 million shares of common stock to be issued, with approximately 10.5 million shares of common stock remaining available for issuance as of September 30, 2022. The Valvoline stock-based incentive plans authorize the grant of stock options, stock appreciation rights (“SARs”), and nonvested stock awards, principally in the form of restricted stock, restricted stock units, and performance share units. The following summarizes stock-based compensation expense recognized by the Company during the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Stock appreciation rights | | $ | 1.5 | | | $ | 1.3 | | | $ | 1.2 | |
Nonvested stock awards | | 8.4 | | | 7.9 | | | 7.5 | |
| | | | | | |
Total stock-based compensation expense, pre-tax | | 9.9 | | | 9.2 | | | 8.7 | |
Tax benefit | | (2.5) | | | (2.3) | | | (2.2) | |
Total stock-based compensation expense, net of tax | | $ | 7.4 | | | $ | 6.9 | | | $ | 6.5 | |
Stock appreciation rights
SARs are granted to certain Valvoline employees to provide vested award holders with the ability to profit from the appreciation in value of a set number of shares of common stock over a period of time by receiving the differential between the value of the Company's common stock price at the grant and exercise dates. SARs typically vest and become exercisable over a period of one to three years and are subject to pre-vesting forfeiture upon service termination. Unexercised SARs generally lapse ten years after the grant date. Stock-based compensation expense for SARs is determined using the Black-Scholes option-pricing model to estimate the grant date fair value of new or modified awards.
Nonvested stock awards
Nonvested stock awards in the form of Restricted Stock Awards ("RSAs") and Restricted Stock Units ("RSUs") are granted to certain Valvoline employees and directors. These awards can have service-based or both service and performance-based vesting conditions. Nonvested stock awards generally vest over a one to three-year period and are subject to forfeiture upon termination of service prior to vesting. Nonvested stock awards are primarily granted as RSUs that settle in shares upon vesting, while RSAs result in share issuance at grant, which entitles award holders to voting rights that are restricted until vesting. Nonvested stock awards with service-only vesting conditions receive dividend equivalents in the form of additional units or shares, which are subject to vesting and forfeiture provisions.
Nonvested stock awards with both service and performance conditions vest through continued employee service and upon the achievement of specific financial targets subject to adjustment relative to performance among selected industry peer groups. These awards are granted annually and subject to a three-year performance and vesting period. Each performance share unit is convertible to one share of common stock, the actual number of which is dependent upon performance compared to financial and market performance targets at the end of each performance period. Compensation cost for performance-based nonvested stock awards is recognized at fair value over the requisite service period based on the probable achievement of the financial performance conditions.
The following summarizes nonvested stock award activity during the year ended September 30, 2022:
| | | | | | | | | | | | | | |
| | Number of shares (in thousands) | | Weighted average grant date fair value per share |
Unvested shares as of September 30, 2021 | | 1,968.1 | | | $ | 21.50 | |
Granted | | 421.9 | | | $ | 35.32 | |
Performance adjustments (a) | | 25.0 | | | $ | 25.71 | |
Vested | | (517.8) | | | $ | 22.44 | |
Forfeited | | (79.9) | | | $ | 25.46 | |
Unvested shares as of September 30, 2022 | | 1,817.3 | | | $ | 25.53 | |
| | | | |
(a)Adjustments based on current attainment expectations of performance targets.
The fair value of new or modified nonvested stock awards with service-only conditions was determined based on the closing market price of Valvoline common stock on the grant date, and the fair value of performance-based nonvested stock awards that include both financial and market performance conditions was determined using a Monte Carlo simulation valuation model with the following key assumptions:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Weighted average grant date fair value per share | | $ | 33.98 | | | $ | 21.81 | | | $ | 23.21 | |
Assumptions (weighted average) | | | | | | |
Risk-free interest rates (a) | | 1.6 | % | | 0.2 | % | | 1.6 | % |
Expected dividend yield | | 1.8 | % | | 2.3 | % | | 2.1 | % |
Expected volatility (b) | | 41.5 | % | | 42.0 | % | | 26.0 | % |
Expected term (in years) | | 3.0 | | 3.0 | | 3.0 |
| | | | | | |
(a)Based on the U.S. Treasury yield curve in effect at the time of grant or modification for the expected term of the award. The range of risk-free interest rates used for performance awards was 1.14% to 1.88% in fiscal 2022, 0.13% to 0.23% in fiscal 2021, and 1.55% to 1.59% in fiscal 2020.
(b)Expected volatility is based on historical volatilities over periods commensurate with the expected term. In recent years, Valvoline utilized its historical daily closing price over this period.
The total grant date fair value of nonvested stock awards vested and the weighted average grant date fair value of nonvested stock awards granted follows for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
| | |
| | |
(In millions, except weighted average) | | 2022 | | 2021 | | 2020 |
Total grant date fair value of shares vested | | $ | 11.2 | | | $ | 6.5 | | | $ | 4.6 | |
Weighted average grant date fair value | | $ | 35.32 | | | $ | 22.33 | | | $ | 22.17 | |
As of September 30, 2022, there was $11.3 million of total unrecognized compensation costs related to nonvested stock awards, which is expected to be recognized over a weighted average period of 1.8 years. The aggregate intrinsic value of nonvested stock awards as of September 30, 2022 is $46.0 million.
NOTE 13 - EARNINGS PER SHARE
The following summarizes basic and diluted EPS for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions, except per share data) | | 2022 | | 2021 | | 2020 |
Numerator | | | | | | |
Income from continuing operations | | $ | 109.4 | | | $ | 200.1 | | | $ | 69.6 | |
Income from discontinued operations, net of tax | | 314.9 | | | 220.2 | | | 247.0 | |
Net income | | $ | 424.3 | | | $ | 420.3 | | | $ | 316.6 | |
Denominator | | | | | | |
Weighted average common shares outstanding | | 179.1 | | | 182.5 | | | 187.0 | |
Effect of potentially dilutive securities (a) | | 1.3 | | | 1.0 | | | 0.5 | |
Weighted average diluted shares outstanding | | 180.4 | | | 183.5 | | | 187.5 | |
| | | | | | |
| | | | | | |
Basic earnings per share | | | | | | |
Continuing operations | | $ | 0.61 | | | $ | 1.10 | | | $ | 0.38 | |
Discontinued operations | | 1.76 | | | 1.20 | | | 1.32 | |
Basic earnings per share | | $ | 2.37 | | | $ | 2.30 | | | $ | 1.70 | |
| | | | | | |
Diluted earnings per share | | | | | | |
Continuing operations | | $ | 0.61 | | | $ | 1.09 | | | $ | 0.37 | |
Discontinued operations | | 1.74 | | | 1.20 | | | 1.32 | |
Diluted earnings per share | | $ | 2.35 | | | $ | 2.29 | | | $ | 1.69 | |
| | | | | | |
(a)There were approximately 1.0 million outstanding securities, primarily SARs, not included in the computation of diluted earnings per share in the year ended September 30, 2020 because the effect would have been antidilutive.
NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in Accumulated other comprehensive income (loss) by component for fiscal years 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Unamortized benefit plan credits | | Currency translation adjustments | | Changes in fair value of cash flow hedges | | Total |
Balance as of September 30, 2020 | | $ | 25.8 | | | $ | (16.7) | | | $ | (0.9) | | | $ | 8.2 | |
Other comprehensive income (loss) before reclassification | | — | | | 6.8 | | | 2.9 | | | 9.7 | |
Gains reclassified out of accumulated other comprehensive income | | (11.8) | | | — | | | (0.7) | | | (12.5) | |
Tax benefit (expense) | | 2.8 | | | (0.2) | | | (0.5) | | | 2.1 | |
Balance as of September 30, 2021 | | 16.8 | | | (10.1) | | | 0.8 | | | 7.5 | |
Other comprehensive income (loss) before reclassification | | — | | | (40.0) | | | 15.4 | | | (24.6) | |
Gains reclassified out of accumulated other comprehensive income | | (2.2) | | | — | | | 1.4 | | | (0.8) | |
Tax benefit (expense) | | 0.5 | | | 0.4 | | | (4.3) | | | (3.4) | |
Balance as of September 30, 2022 | | $ | 15.1 | | | $ | (49.7) | | | $ | 13.3 | | | $ | (21.3) | |
Amounts reclassified from Accumulated other comprehensive income (loss) follow for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | 2022 | | 2021 | | 2020 |
Amortization of pension and other postretirement plan prior service credits (a) | | $ | (2.2) | | | $ | (11.8) | | | $ | (11.8) | |
Loss on liquidation of subsidiaries (b) | | — | | | — | | | 0.6 | |
Loss (gain) on cash flow hedges (c) | | 1.4 | | | (0.7) | | | — | |
Tax effect of reclassifications | | (3.4) | | | 2.1 | | | 3.0 | |
| | | | | | |
| | | | | | |
Total amounts reclassified, net of tax | | $ | (4.2) | | | $ | (10.4) | | | $ | (8.2) | |
| | | | | | |
(a)Amortization of unrecognized prior service credits included in net periodic benefit income for pension and other postretirement plans was reported in Net pension and other postretirement plan (income) expenses within the Consolidated Statements of Comprehensive Income. The Company releases the income tax effects from Accumulated other comprehensive income as benefit plan credits are amortized into earnings.
(b)Represents the realization of cumulative translation adjustments in Equity and other income, net within the Consolidated Statements of Comprehensive Income as a result of the liquidation of certain non-U.S. subsidiaries.
(c)Represents the realization of gains from cash flow hedges reported in Net interest and other financing expenses within the Consolidated Statements of Comprehensive Income.
NOTE 15 – SUPPLEMENTAL BALANCE SHEET INFORMATION
Cash and cash equivalents
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the totals shown within the Consolidated Statements of Cash Flows for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Cash and cash equivalents - continuing operations | | $ | 23.4 | | | $ | 122.6 | | | $ | 639.7 | |
Cash and cash equivalents - discontinued operations | | 59.0 | | | 107.4 | | | 119.9 | |
Restricted cash - continuing operations (a) | | — | | | — | | | 0.3 | |
Restricted cash - discontinued operations (b) | | 1.5 | | | 1.4 | | | 0.6 | |
Total cash, cash equivalents and restricted cash | | $ | 83.9 | | | $ | 231.4 | | | $ | 760.5 | |
| | | | | | |
(a)Included in Prepaid expenses and other current assets within the Consolidated Balance Sheets.
(b)Included in Current assets held for sale with the Consolidated Balance Sheets.
Accounts and other receivables
The following summarizes Valvoline’s accounts and other receivables in the Consolidated Balance Sheets as of September 30:
| | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
Current | | | | |
Trade | | $ | 56.2 | | | $ | 50.0 | |
Other | | 14.3 | | | 5.4 | |
Notes receivable from franchisees | | 0.2 | | | 10.2 | |
Receivables, gross | | 70.7 | | | 65.6 | |
Allowance for credit losses | | (4.6) | | | (0.3) | |
Receivables, net | | $ | 66.1 | | | $ | 65.3 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
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) | | 2022 | | 2021 |
Land | | $ | 134.7 | | | $ | 119.3 | |
Buildings | | 562.8 | | | 471.2 | |
Machinery and equipment | | 236.0 | | | 211.6 | |
Construction in progress | | 82.4 | | | 53.5 | |
Total property, plant and equipment | | 1,015.9 | | | 855.6 | |
Accumulated depreciation | | (347.3) | | | (295.8) | |
Net property, plant and equipment | | $ | 668.6 | | | $ | 559.8 | |
The following table summarizes finance lease assets included in net property, plant and equipment as of September 30:
| | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
Land | | $ | 75.3 | | | $ | 63.9 | |
Buildings | | 141.8 | | | 131.5 | |
Total finance lease assets | | 217.1 | | | 195.4 | |
Accumulated depreciation | | (34.2) | | | (20.1) | |
Net finance lease assets | | $ | 182.9 | | | $ | 175.3 | |
Non-cash transactions, including finance leases, recognized within total property, plant and equipment were $23.2 million and $126.3 million during the years ended September 30, 2022 and 2021, respectively.
The following summarizes expense associated with property, plant and equipment recognized within the Consolidated Statements of Comprehensive Income for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Depreciation (includes finance leases) | | $ | 54.7 | | | $ | 46.8 | | | $ | 31.2 | |
Long-lived assets
The following presents long-lived assets comprised of net property, plant and equipment and operating lease assets by geographic area in which the assets physically reside for the years ended September 30:
| | | | | | | | | | | | | | | | | | | | | | | |
| Property, plant and equipment, net | | Operating lease assets |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
United States | $ | 647.7 | | | $ | 550.8 | | | $ | 229.0 | | | $ | 208.1 | |
Non-U.S. | 20.9 | | | 9.0 | | | 19.1 | | | 18.0 | |
Total | $ | 668.6 | | | $ | 559.8 | | | $ | 248.1 | | | $ | 226.1 | |
NOTE 16 – 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) | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net revenues | | $ | 287.3 | | | $ | 215.5 | | | $ | 296.0 | | | $ | 244.9 | | | $ | 317.4 | | | $ | 281.6 | | | $ | 335.4 | | | $ | 295.2 | |
Gross profit | | $ | 112.2 | | | $ | 81.4 | | | $ | 107.3 | | | $ | 105.5 | | | $ | 127.8 | | | $ | 126.0 | | | $ | 129.1 | | | $ | 119.4 | |
Operating income | | $ | 52.0 | | | $ | 31.9 | | | $ | 40.0 | | | $ | 51.2 | | | $ | 61.1 | | | $ | 69.3 | | | $ | 67.2 | | | $ | 87.7 | |
Income before income taxes | | $ | 44.3 | | | $ | 24.7 | | | $ | 32.3 | | | $ | 10.8 | | | $ | 53.0 | | | $ | 66.3 | | | $ | 14.5 | | | $ | 158.2 | |
Income from continuing operations | | $ | 34.2 | | | $ | 18.1 | | | $ | 23.0 | | | $ | 8.3 | | | $ | 39.8 | | | $ | 49.0 | | | $ | 12.4 | | | $ | 124.7 | |
Income from discontinued operations, net of tax | | $ | 52.8 | | | $ | 68.6 | | | $ | 58.4 | | | $ | 59.5 | | | $ | 58.4 | | | $ | 47.9 | | | $ | 145.3 | | | $ | 44.2 | |
Net income | | $ | 87.0 | | | $ | 86.7 | | | $ | 81.4 | | | $ | 67.8 | | | $ | 98.2 | | | $ | 96.9 | | | $ | 157.7 | | | $ | 168.9 | |
| | | | | | | | | | | | | | | | |
Net earnings per share | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.19 | | | $ | 0.10 | | | $ | 0.13 | | | $ | 0.05 | | | $ | 0.22 | | | $ | 0.27 | | | $ | 0.07 | | | $ | 0.69 | |
Discontinued operations | | 0.29 | | | 0.37 | | | 0.32 | | | 0.32 | | | 0.33 | | | 0.26 | | | 0.82 | | | 0.24 | |
Basic earnings per share | | $ | 0.48 | | | $ | 0.47 | | | $ | 0.45 | | | $ | 0.37 | | | $ | 0.55 | | | $ | 0.53 | | | $ | 0.89 | | | $ | 0.93 | |
| | | | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | |
Continuing operations | | $ | 0.19 | | | $ | 0.10 | | | $ | 0.13 | | | $ | 0.05 | | | $ | 0.22 | | | $ | 0.27 | | | $ | 0.07 | | | $ | 0.68 | |
Discontinued operations | | 0.29 | | | 0.37 | | | 0.32 | | | 0.32 | | | 0.33 | | | 0.26 | | | 0.81 | | | 0.24 | |
Diluted earnings per share | | $ | 0.48 | | | $ | 0.47 | | | $ | 0.45 | | | $ | 0.37 | | | $ | 0.55 | | | $ | 0.53 | | | $ | 0.88 | | | $ | 0.92 | |
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NOTE 17 – SUBSEQUENT EVENTS
Dividend declaration
On November 21, 2022, the Board approved a quarterly cash dividend of $0.125 per share of common stock. The dividend is payable December 15, 2022 to shareholders of record on December 2, 2022.
Share repurchases
The Company repurchased approximately 1.8 million shares for an aggregate amount of $51.2 million from October 1, 2022 through November 18, 2022 pursuant to the May 17, 2021 Board authorization to repurchase up to $300.0 million of common stock through September 30, 2024 (the "2021 Share Repurchase Authorization").
The Company announced on November 15, 2022 that its Board approved a share repurchase authorization of $1.6 billion (the “2022 Share Repurchase Authorization”). The Board approved the 2022 Share Repurchase Authorization to effectuate a significant return of capital to shareholders of a substantial portion of the expected net proceeds from the sale of the Global Products business. The Company generally expects to repurchase shares of its common stock up to the full amount of the authorization within 18 months of the closing of the sale of Global Products. However, the timing and amount of any repurchases of common stock will be solely at the discretion of the Company and subject to general business and market conditions, including closing the sale of Global Products, as well as other factors, including legal and regulatory restrictions. The 2022 Share Repurchase Authorization is in addition to the 2021 Share Repurchase Authorization of which $79.2 million remained as of November 18, 2022.