Notes to Consolidated Financial Statements
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of business
Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide marketer and supplier of engine and automotive maintenance products and services. Valvoline is one of the most recognized premium consumer brands in the global automotive lubricant and preventative maintenance industry, known for its high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed name recognition across multiple product and service channels.
Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and U.S. Securities and Exchange Commission (“SEC”) regulations. The financial statements are presented on a consolidated basis for all periods presented and include the operations of the Company and its majority-owned and controlled subsidiaries. All intercompany transactions and balances within Valvoline have been eliminated in consolidation.
Certain prior period amounts have been reclassified in the accompanying consolidated financial statements and notes thereto to conform to the current period presentation.
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. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including intangible assets and goodwill), customer incentives, employee benefit obligations and income taxes. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
In late December 2019, coronavirus ("COVID-19") was identified in Wuhan, China and since that time it has continued to spread, including to the United States, leading the World Health Organization to declare a global pandemic and recommend containment and mitigation actions worldwide in March 2020. The Company has substantially maintained its operations during the pandemic to-date, and precautionary measures have been taken to protect the Company's employees and customers, maintain liquidity, support its franchisees, and manage through currently known impacts of the pandemic. 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 duration and severity of the pandemic.
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 doubtful accounts
Valvoline invoices customers once or as performance obligations are satisfied, at which point payment becomes unconditional. 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. The Company recognizes a
receivable on its Consolidated Balance Sheets when the Company performs a service or transfers a product in advance of receiving consideration and its right to consideration is unconditional and only the passage of time is required before payment of that consideration is due.
Receivables are recorded at net realizable value, and Valvoline records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses. Valvoline estimates the allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, the financial health of its customers, macroeconomic conditions, past transaction history with the customer, and changes in customer payment terms. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible receivables against the allowance when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.
Inventories
Inventories are primarily carried at the lower of cost or net realizable value using the weighted average cost method. In addition, certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method to provide matching of revenues with current costs. Costs include materials, labor and manufacturing overhead related to the purchase and production of inventories. 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 forecasted usage, product demand and life cycle, as well as 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 are depreciated principally over 10 to 25 years and machinery and equipment is generally depreciated over 5 to 30 years. 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. 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 Equity and other income, net.
Property, plant and equipment carrying values are evaluated for recoverability when impairment indicators are present and are conducted at the lowest level of identifiable cash flows. Such indicators could include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of property, plant and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).
Leases
Lessee arrangements
Certain of the properties Valvoline utilizes, including quick-lube service center stores, offices, blending and warehouse facilities, in addition to certain equipment, are leased. 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 on the Consolidated Balance Sheet as either operating or finance leases at the commencement date.
The lease liability is measured at the present value of future lease payments over the lease term, and the right-of-use asset is measured at the lease liability amount, adjusted for prepaid lease payments, lease incentives, and the lessee's initial direct costs (e.g., commissions). Valvoline includes leases with an initial term of 12 months or less in the measurement of its right-of-use asset and lease liability balances, which generally have terms ranging from less than one year to more than 20 years. The lease term includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
Fixed payments, including variable payments based on a rate or index, are included in the determination of the lease liability, while other variable payments are recognized in the Consolidated Statements of Comprehensive Income in the period in which the obligation for those payments is incurred. Many leases contain lease components requiring rental payments and other components that require payment for 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 lease component. Otherwise, these other components are expensed as incurred and comprise the majority of Valvoline's variable lease costs.
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.
Lessor arrangements
Valvoline is the lessor in arrangements to sublease and lease certain properties and equipment. Activity associated with these leases is not material.
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 tests goodwill for impairment annually as of July 1 or when events and circumstances indicate an impairment may have occurred. This annual assessment consists of Valvoline determining each reporting unit’s current fair value compared to its current carrying value. Valvoline’s reporting units are Quick Lubes, Core North America, and International.
In evaluating goodwill for impairment, Valvoline has the option to first perform a qualitative "step zero" assessment to determine whether further impairment testing is necessary or to perform a quantitative "step one" assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance, among others.
Under the step one assessment, if the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured under "step two" of the impairment analysis. In step two of the analysis, an impairment loss will be recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate, weighted average cost of capital, terminal
values and working capital changes. Several of these assumptions vary among reporting units, and the cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies method which is based on earnings multiple data. The Company also performs a reconciliation between market capitalization and the estimate of the aggregate fair value of the reporting units, including consideration of a control premium.
Valvoline elected to perform a qualitative assessment during fiscal 2020 and determined that it is not more likely than not that the fair values of Valvoline’s reporting units are less than carrying amounts.
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.
Equity method investments
Investments in companies, including joint ventures, where Valvoline has the ability to exert significant influence over, but not control, operating and financial policies of the investee are accounted for using the equity method of accounting. Judgment regarding the level of influence over each investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, and participation in policy-making decisions. The Company’s proportionate share of the net income or loss of these companies is included within Equity and other income, net in the Consolidated Statements of Comprehensive Income.
The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time and extent to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.
Pension and other postretirement benefit plans
Valvoline sponsors defined benefit pension and other postretirement plans in the U.S and in certain countries outside the U.S. Valvoline recognizes the funded status of each applicable plan on the Consolidated Balance Sheets whereby each underfunded plan is recognized as a liability. 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 expense / income are recorded ratably on a quarterly basis. 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.
Due to the freeze of U.S. pension benefits effective September 30, 2016, continuing service costs are limited to certain international pension plans, and are reported in the same caption of the Consolidated Statements of Comprehensive Income as the related employee payroll expenses. All components of net periodic benefit cost / income other than service cost are recognized below operating income within Net pension and other postretirement plan expense / income 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 goods and services
Valvoline generates all revenues from contracts with customers, primarily as a result of the sale and service delivery of engine and automotive maintenance products to customers. Valvoline derives its sales from its broad line of products and complementary services through the following three principal activities managed across its three reportable segments: (i) engine and automotive maintenance products, (ii) company-owned quick-lube operations, and (iii) franchised quick-lube operations. Valvoline’s sales are generally to retail, installer, industrial, distributor, franchise, and end consumers to facilitate vehicle and equipment service and maintenance.
Valvoline's sales are predominantly comprised of products and services sold at a point in time with approximately 98% recognized either through ship-and-bill performance obligations or company-owned quick-lube operations. The remainder of the Company's sales generally relate to franchise fees transferred over time. The following table summarizes Valvoline's sales by timing of revenue recognized for the fiscal years ended September 30:
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(In millions)
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2020
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2019
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2018
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Sales at a point in time
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$
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2,313
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$
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2,346
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$
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2,256
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Franchised revenues transferred over time
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40
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44
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29
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Total consolidated sales
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$
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2,353
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$
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2,390
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$
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2,285
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Below is a summary of the key considerations for Valvoline's material revenue-generating activities:
Engine and automotive maintenance products
Engine and automotive maintenance products primarily include lubricants, antifreeze, chemicals, filters, and other complementary products for use across a wide array of vehicles and engines. The Company’s customers typically enter into a sales agreement which outlines a framework of terms and conditions that apply to all current and future purchase orders for the customer submitted under such sales agreement. In these situations, the Company’s contract with the customer is the sales agreement combined with the customer purchase order as specific products and quantities are not indicated until a purchase order is submitted. As the Company’s contract with the customer is typically for a single purchase order under the supply agreement to be delivered at a point in time, the duration of the contract is almost always one year or less. The Company’s products are distinct and separately identifiable on customer purchase orders, with each product sale representing a separate performance obligation that is generally delivered simultaneously. Valvoline is the principal to these contracts as the Company has control of the products prior to transfer to the customer. Accordingly, revenue is recognized on a gross basis.
The Company determines the point in time at which control is transferred 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 to the customer and is typically determined based on delivery terms within the underlying contract.
Customer payment terms vary by region and customer and are generally 30 to 60 days after delivery. Valvoline does not provide extended payment terms greater than one year.
Company-owned quick-lube operations
Performance obligations related to company-owned quick-lube 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, revenue from company-owned quick-lube 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.
Franchised quick-lube operations
The primary performance obligations related to franchised quick-lube operations include product sales as described above 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.
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.
Variable consideration
The Company only offers an assurance-type warranty with regard to the intended functionality of products sold, which does not represent a distinct performance obligation within the context of the contract. Product returns and refunds are generally not material and are not accepted unless the item is defective as manufactured. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which Valvoline expects to receive.
The nature of Valvoline’s contracts with customers often give rise to variable consideration consisting primarily of promotional rebates and customer pricing discounts based on achieving certain levels of sales activity that generally decrease the transaction price. The Company determines the transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration, or amounts payable to the customer when there is a basis to reasonably estimate the amount and it is probable there will not be a significant reversal. 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, similar programs and management’s judgment with respect to estimating customer participation and performance levels. Variable consideration is reassessed at each reporting date and adjustments are made, when necessary.
The reduction of transaction price due to customer incentives was $332 million, $346 million, and $357 million in the Consolidated Statements of Comprehensive Income for the years ended September 30, 2020, 2019, and 2018, respectively. Reserves for these customer programs and incentives were $64 million and $72 million as of September 30, 2020 and 2019, 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. In the absence of directly observable standalone prices, the Company may utilize prices charged by competitors selling similar products or use an expected cost-plus margin approach. The amount allocated to each performance obligation is recognized as revenue as control is transferred to the customer.
Policy elections
•Sales and use-based taxes - The Company excludes taxes collected from customers from sales. These amounts are, however, reflected in accrued expenses until remitted to the appropriate governmental authority.
•Shipping and handling costs - Valvoline elected to account for shipping and handling activities that occur after the customer has obtained control as fulfillment activities (i.e., an expense) rather than as a performance obligation. Accordingly, amounts billed for shipping and handling are a component of the transaction price included in net sales, while costs incurred are included in cost of sales. Shipping and handling costs recorded in sales were $9 million in fiscal 2020 and $10 million both fiscal 2019 and 2018.
•Significant financing component - Valvoline does not adjust the promised amount of consideration for the effects of a significant financing component as the period between transfer of a promised product or service to a customer and when the customer pays for that product or service is expected to be one year or less.
•Remaining performance obligations - The Company elected to omit disclosures of remaining performance obligations for contracts which have an initial expected term of one year or less. In addition, the Company has elected to not disclose remaining performance obligations for its franchise agreements with variable consideration based on service center store sales.
•Incremental costs of obtaining a contract - The Company expenses incremental direct costs of obtaining a contract, primarily sales commissions, 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 in Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income.
Expense recognition
Cost of sales are expensed as incurred and include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving, inspection, warehousing, and all other distribution network costs. Selling, general and administrative expenses are expensed as incurred and include sales and marketing costs, research and development costs, advertising, customer support, and administrative costs. Advertising costs were $72 million in fiscal 2020, $73 million in fiscal 2019 and $63 million in fiscal 2018, and research and development costs were $13 million in both fiscal 2020 and 2019 and $14 million in fiscal 2018.
Stock-based compensation
Stock-based compensation expense is recognized within Selling, general and administrative expense in the Consolidated Statements of Comprehensive Income and is principally based on the grant date fair value of new or modified awards over the requisite vesting period. The Company’s outstanding stock-based compensation awards are primarily classified as equity, with certain liability-classified awards based on award terms and conditions. Valvoline accounts for forfeitures when they occur.
Restructuring
The timing of recognition and related measurement of an employee termination benefit liability associated with a non-recurring benefit arrangement depends on whether employees are required to render service beyond a minimum retention period until they are terminated in order to receive the termination benefits. For employees who are not required to render service until they are terminated or provide service beyond the minimum retention period in order to receive the termination benefits, the Company records a liability for the termination benefits at the communication date. If employees are required to render service beyond the minimum retention period until they are terminated in order to receive the termination benefits, the Company measures the liability for termination benefits at the communication date and recognizes the expense and liability ratably over the future service period.
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.
Derivatives
Valvoline’s derivative instruments consist of currency exchange and interest rate swap agreements. The Company's currency exchange 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. The Company classifies its cash flows related to currency exchange contracts as investing activities in the Consolidated Statements of Cash Flows.
Valvoline's interest rate swap agreements qualify and are designated as cash flow hedges. To the extent the hedging relationship is highly effective, the gain or loss on the swap is recorded in the Consolidated Statements of Comprehensive Income in Other comprehensive income and reclassified into Interest expense in the same period during which the hedged transactions affect earnings. Effectiveness of the cash flow hedges is assessed at inception and quarterly thereafter. 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 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 for derivative instruments in its balance sheet for presentation purposes.
The interest rate swap agreements effectively modify the Company’s exposure to interest rate risk by converting the Company’s floating rate debt to a fixed rate basis for the term of the swap agreements, thus 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.
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 primarily using the local currency as the functional currency. Upon consolidation, the results of operations of the subsidiaries and affiliates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates for the year while assets and liabilities are translated at year-end exchange rates. Adjustments to translate assets and liabilities into U.S. dollars are recorded in the stockholders’ equity section of the Consolidated Balance Sheets as a component of Accumulated other comprehensive 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.
Recent accounting pronouncements
The following standards relevant to Valvoline were either issued or adopted in the current year, or are expected to have a meaningful impact on Valvoline in future periods.
Recently adopted
During fiscal 2020, Valvoline adopted the following:
•In February 2016, the Financial Accounting Standards Board ("FASB") issued accounting guidance, which outlined a comprehensive lease accounting model that requires lessees to recognize a right-of-use asset and a corresponding lease liability on the balance sheet and superseded previous lease accounting guidance. Valvoline adopted this new lease accounting guidance on October 1, 2019 using the optional transition approach. Under this approach, the new lease accounting guidance has been applied prospectively from the date of adoption, while prior period financial statements continue to be reported in accordance with the previous guidance. Lease expense is recognized similar to prior accounting guidance with operating leases resulting in straight-line expense and finance leases resulting in accelerated expense recognition similar to the prior accounting for capital leases. The accounting for lessor arrangements is not significantly changed by the new guidance.
Valvoline elected certain practical expedients permitted by the new guidance, including the package of practical expedients that allows for previous accounting conclusions regarding lease identification and classification to be carried forward for leases which commenced prior to adoption. The Company did not elect the hindsight practical or short-term lease practical expedients.
As a result of adoption, the Company recognized operating lease assets and liabilities inclusive of a reclassified build-to-suit arrangement, derecognized assets and liabilities related to the build-to-suit arrangement, and carried forward existing capital leases as finance lease assets and liabilities. This resulted in a material impact on the Consolidated Balance Sheet and the recognition of total incremental lease assets, inclusive of prepaid lease balances and deferred rent liabilities, of $219 million and incremental lease liabilities of $214 million, with an immaterial cumulative effect adjustment to reduce Retained deficit as a result of the build-to-suit lease transition requirements. The impact of adoption was not material to the Consolidated Statements of Comprehensive Income, Cash Flows, or Stockholders’ Deficit, and did not impact the Company's compliance with any of its existing debt covenants. Refer to Note 3 for additional information regarding Valvoline's adoption of this new guidance.
•In August 2017, the FASB issued accounting guidance, which reduced the complexity of and simplified the application of hedge accounting. The guidance refines and expands hedge accounting for both financial and nonfinancial risk components, eliminates the need to separately measure and report hedge ineffectiveness,
and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also eases documentation and assessment requirements and modifies certain disclosure requirements. This guidance did not have a material impact on the Company’s consolidated financial statements in the twelve months ended September 30, 2020 as Valvoline did not have any existing hedging relationships at adoption on October 1, 2019. Refer to Note 4 for additional information regarding the interest rate swap agreements the Company entered into during the third and fourth quarters of fiscal 2020.
•In March 2020, the SEC adopted amendments that reduce and simplify the financial disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well for affiliates whose securities collateralize a registrant’s securities. The amendments allow for abbreviated financial and non-financial disclosures subject to meeting certain criteria, and reduce the burden of providing consolidating financial information that includes separate columnar information about the issuers and guarantors, including other subsidiaries of the parent company on a consolidated basis, consolidating adjustments and the total consolidated amounts. Valvoline adopted this guidance in the fourth quarter of fiscal 2020 and accordingly, condensed consolidating financial statements are no longer required to be disclosed.
Issued but not yet adopted
•In June 2016, the FASB issued updated guidance that introduces a forward-looking approach based on expected losses, rather than incurred loses, to estimate credit losses on certain types of financial instruments including trade and other receivables. The new guidance requires entities to incorporate historical, current, and forecasted information into their estimates of expected credit losses. This guidance also includes expanded disclosure requirements about significant estimates and credit quality and became effective for Valvoline on October 1, 2020. The Company has substantially completed its assessment and implementation efforts, including developing models to estimate expected credit losses, assessing appropriate assumptions, designing changes to its related processes, and evaluating the effects on the consolidated financial statements, which have been determined to not be material. The Company evaluates creditworthiness when negotiating contracts, and as the Company's receivables are generally short-term in nature, the timing and amount of credit loss recognized under existing guidance and the new guidance does not differ materially.
•In March 2020, the FASB issued guidance regarding the effects of reference rate reform on financial reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance for certain contract modifications and hedging arrangements to ease financial reporting burdens as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference rates to alternative reference rates. The guidance is available for prospective application upon its issuance and can generally be applied to contract modifications and hedging relationships entered into through December 31, 2022. The Company has interest rate swap hedging arrangements and long-term debt as described in Notes 4 and 9 to the Consolidated Financial Statements, respectively, for which existing payments are based on LIBOR. The Company anticipates that it will utilize amendments to its existing debt and interest rate swap agreements that will allow modification of the reference rates without the application of contract modification accounting guidance. The Company will adopt the guidance when LIBOR is discontinued or earlier depending on when amendments to its current agreements are initiated. Currently, the Company does not expect the adoption of this guidance to have material impact on its 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 – LEASE COMMITMENTS
As described in Note 2, Valvoline adopted new lease accounting guidance effective October 1, 2019 and changed its policy for lease accounting prospectively for lease agreements entered into or reassessed from the date of adoption as described herein.
The following table presents the Company's lease balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Location in Consolidated Balance Sheets
|
|
September 30, 2020
|
Assets
|
|
|
|
|
Operating lease assets
|
|
Operating lease assets
|
|
$
|
261
|
|
Finance lease assets
|
|
Property, plant and equipment, net
|
|
77
|
|
Amortization of finance lease assets
|
|
Property, plant and equipment, net
|
|
(10)
|
|
Total leased assets
|
|
|
|
$
|
328
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current:
|
|
|
|
|
Operating lease liabilities
|
|
Accrued expenses and other liabilities
|
|
$
|
33
|
|
Finance lease liabilities
|
|
Accrued expenses and other liabilities
|
|
3
|
|
Noncurrent:
|
|
|
|
|
Operating lease liabilities
|
|
Operating lease liabilities
|
|
231
|
|
Finance lease liabilities
|
|
Other noncurrent liabilities
|
|
70
|
|
Total lease liabilities
|
|
|
|
$
|
337
|
|
The following table presents the components of total lease costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Location in Consolidated Statements of Comprehensive Income
|
|
Year ended September 30, 2020
|
Operating lease cost
|
|
Cost of sales and Selling, general and administrative expenses (a)
|
|
$
|
45
|
|
Finance lease costs
|
|
|
|
|
Amortization of lease assets
|
|
Cost of sales (a)
|
|
4
|
|
Interest on lease liabilities
|
|
Net interest and other financing expenses
|
|
3
|
|
Variable lease cost
|
|
Cost of sales and Selling, general and administrative expenses (a)
|
|
6
|
|
|
|
|
|
|
Sublease income
|
|
Equity and other income, net
|
|
(6)
|
|
Total lease cost
|
|
|
|
$
|
52
|
|
|
|
|
|
|
(a) Supply chain and retail-related amounts are included in Cost of sales.
Other information related to the Company's leases follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Year ended September 30, 2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases (a)
|
|
$
|
43
|
|
Operating cash flows from finance leases
|
|
$
|
4
|
|
Financing cash flows from finance leases
|
|
$
|
1
|
|
Lease assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
|
$
|
49
|
|
Finance leases
|
|
$
|
49
|
|
|
|
|
(a) Included within the change in Other assets and liabilities within the Consolidated Statement 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, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Operating leases
|
|
Finance leases
|
2021
|
|
$
|
43
|
|
|
$
|
8
|
|
2022
|
|
40
|
|
|
8
|
|
2023
|
|
37
|
|
|
8
|
|
2024
|
|
32
|
|
|
8
|
|
2025
|
|
29
|
|
|
8
|
|
Thereafter
|
|
142
|
|
|
68
|
|
Total future lease payments
|
|
323
|
|
|
108
|
|
Imputed interest
|
|
59
|
|
|
35
|
|
Present value of lease liabilities
|
|
$
|
264
|
|
|
$
|
73
|
|
|
|
|
|
|
As of September 30, 2020, Valvoline has additional leases primarily related to its quick lube service center stores that have not yet commenced with approximately $59 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.
In accordance with the previous lease accounting guidance, Valvoline's lease arrangements were previously classified as either capital, operating, or financing obligations. Previously classified capital leases are now considered finance leases under the new lease accounting guidance, while previous financing obligations have been derecognized and reclassified as operating leases. The classification of operating leases remains substantially unchanged under the new lease accounting guidance.
The future minimum lease payments by fiscal year as determined prior to the adoption of the new lease accounting guidance under the previously designated capital, financing and operating leases as of the fiscal year ended September 30, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Operating leases
|
|
Capital leases and financing obligations
|
2020
|
|
$
|
36
|
|
|
$
|
6
|
|
2021
|
|
32
|
|
|
7
|
|
2022
|
|
29
|
|
|
7
|
|
2023
|
|
27
|
|
|
7
|
|
2024
|
|
23
|
|
|
7
|
|
Thereafter
|
|
120
|
|
|
50
|
|
Total future minimum lease payments (a)
|
|
$
|
267
|
|
|
84
|
|
Imputed interest
|
|
|
|
29
|
|
Present value of minimum lease payments
|
|
|
|
$
|
55
|
|
|
|
|
|
|
(a) Future lease payments do not include fixed payments for executory costs, such as taxes, insurance, maintenance and operating expenses.
The following table presents the weighted average remaining lease term and interest rate as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Finance leases
|
Weighted average remaining lease term (in years)
|
|
9.5 years
|
|
13.3 years
|
Weighted average discount rate
|
|
4.08
|
%
|
|
6.99
|
%
|
NOTE 4 – FAIR VALUE MEASUREMENTS
Recurring fair value measurements
The following table sets forth the Company’s financial assets and liabilities accounted for at fair value on a recurring basis by level within the fair value hierarchy as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Fair value hierarchy
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
|
|
|
|
|
|
Money market funds
|
|
Level 1
|
|
$
|
296
|
|
|
$
|
—
|
|
Time deposits
|
|
Level 2
|
|
139
|
|
|
59
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
Currency derivatives
|
|
Level 2
|
|
3
|
|
|
—
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
|
|
|
|
|
|
Non-qualified trust funds
|
|
Level 2
|
|
8
|
|
|
16
|
|
Non-qualified trust funds
|
|
NAV (a)
|
|
8
|
|
|
4
|
|
Total assets at fair value
|
|
|
|
$
|
454
|
|
|
$
|
79
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
|
|
|
|
Currency derivatives
|
|
Level 2
|
|
$
|
2
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
Level 2
|
|
1
|
|
|
—
|
|
Other noncurrent liabilities
|
|
|
|
|
|
|
Deferred compensation obligations
|
|
NAV (a)
|
|
25
|
|
|
20
|
|
Total liabilities at fair value
|
|
|
|
$
|
28
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
(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 uses derivatives not designated as hedging instruments consisting of forward contracts to manage non-U.S. currency denominated balance sheet exposures and exchange one currency for another at a fixed rate on a future date of one year or less. The Company had outstanding contracts with notional values of $149 million and $111 million as of September 30, 2020 and 2019, 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. Valvoline has entered into arrangements to mitigate losses in the event of nonperformance by counterparties that allow settlement on a net basis, the effect of which was not material to the recorded assets and liabilities as of September 30, 2020 or 2019.
Gains and losses on these instruments are recognized in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income 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. 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 restricted 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, respectively. There were no significant redemption restrictions or unfunded commitments on these mutual fund investments as of September 30, 2020. 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
In the third and fourth quarters of fiscal 2020, the Company entered into four interest rate swap agreements with three to four year maturities to exchange interest rate payments on $350 million of variable rate term loan borrowings to fixed interest rates. The interest rate swap agreements had fair values of zero at inception and have been designated as cash flow hedges with the unrealized gains or losses recorded in Accumulated other comprehensive income and reclassified into earnings within Net interest and other financing expenses as the underlying payments occur. The Company expects these hedges to be highly effective and based on interest rates as of September 30, 2020, 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, 2020. 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
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. Long-term debt is included in the Consolidated Balance Sheets at carrying value, rather than fair value, and is therefore excluded from the fair value table above. Carrying values shown in the following table are net of unamortized discounts and issuance costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
September 30, 2019
|
(In millions)
|
|
Fair value
|
|
Carrying value
|
|
Unamortized discount and issuance costs
|
|
Fair value
|
|
Carrying value
|
|
Unamortized discount and issuance costs
|
2024 Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
390
|
|
|
$
|
371
|
|
|
$
|
(4)
|
|
2025 Notes
|
|
827
|
|
|
790
|
|
|
(10)
|
|
|
407
|
|
|
395
|
|
|
(5)
|
|
2030 Notes
|
|
613
|
|
|
592
|
|
|
(8)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,440
|
|
|
$
|
1,382
|
|
|
$
|
(18)
|
|
|
$
|
797
|
|
|
$
|
766
|
|
|
$
|
(9)
|
|
Refer to Note 9 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 – ACQUISITIONS AND DIVESTITURES
Acquisitions
Fiscal 2020 acquisitions
During fiscal 2020, Valvoline acquired 35 service center stores in single and multi-store transactions, including 23 former franchise service centers stores, for an aggregate purchase price of $40 million within the Quick Lubes reportable segment. These acquisitions provide an opportunity to expand Valvoline's Quick Lubes system within key markets.
Fiscal 2019 acquisitions
Valvoline acquired 60 service center stores and a lubricant production company during fiscal 2019 for an aggregate purchase price of $78 million. These acquisitions included 31 franchise service center stores in Canada acquired from Oil Changers Inc. on October 31, 2018, five former franchise service centers stores, and 24 service center stores acquired in single and multi-store transactions within the Quick Lubes reportable segment. The Company also acquired an Eastern European lubricant production company, including its manufacturing facility, within the International reportable segment. These acquisitions provided an opportunity to grow Valvoline's Quick Lubes system within key markets and expand Valvoline’s presence in Eastern Europe, including the Company’s regional supply chain capabilities.
Fiscal 2018 acquisitions
During fiscal 2018, the Company acquired 136 service center stores for an aggregate purchase price of $125 million within the Quick Lubes reportable segment. These acquisitions included 56 former franchise service center stores acquired from Henley Bluewater LLC for $60 million on October 2, 2017 and 73 franchise service center stores acquired from Great Canadian Oil Change Ltd. for $53 million on July 13, 2018. Fiscal 2018 acquisitions also included four former franchise service center stores and three service center stores acquired in single and multi-store transactions.
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)
|
|
2020
|
|
2019
|
|
2018
|
Inventories
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Other current assets
|
|
—
|
|
|
—
|
|
|
1
|
|
Property, plant and equipment
|
|
6
|
|
|
19
|
|
|
2
|
|
Operating lease assets
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Goodwill (a)
|
|
17
|
|
|
50
|
|
|
58
|
|
Intangible assets (b)
|
|
|
|
|
|
|
Reacquired franchise rights (a) (c)
|
|
20
|
|
|
5
|
|
|
26
|
|
Customer relationships
|
|
—
|
|
|
6
|
|
|
9
|
|
Trademarks and trade names
|
|
—
|
|
|
1
|
|
|
27
|
|
Other
|
|
—
|
|
|
2
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
(4)
|
|
|
(1)
|
|
|
—
|
|
Net assets acquired
|
|
40
|
|
|
82
|
|
|
125
|
|
Bargain purchase gain (d)
|
|
—
|
|
|
(4)
|
|
|
—
|
|
Consideration transferred
|
|
$
|
40
|
|
|
$
|
78
|
|
|
$
|
125
|
|
|
|
|
|
|
|
|
(a)Goodwill is generally expected to be deductible for income tax purposes.
(b)Weighted average amortization period of intangible assets acquired in fiscal 2020 is 10 years.
(c)Prior to the acquisition of former franchise service center stores, Valvoline licensed the right to operate franchised quick lube 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 fiscal 2020. The effective settlement of these arrangements resulted in no settlement gain or loss as the contractual terms were at market.
(d)Recorded in Equity and other income, net within the Consolidated Statement of Comprehensive Income.
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 does not expect any material changes to the preliminary purchase price allocations summarized above for acquisitions completed during the last twelve months.
Dispositions
Valvoline sold six service center stores to a franchisee within the Quick Lubes reportable segment and completed the liquidation of certain subsidiaries during fiscal 2020. Valvoline liquidated one of its subsidiaries in fiscal 2019, and in fiscal 2018, sold two service center stores to a franchisee within the Quick Lubes reportable segment and completed the liquidation of a subsidiary within the International reportable segment. These transactions resulted in a $1 million loss in fiscal 2020, a $1 million gain in fiscal 2019, and a $2 million net gain in fiscal 2018, each of which were reported in Equity and other income, net in the Consolidated Statements of Comprehensive Income.
Remaining ownership interest in subsidiary
During fiscal 2018, Valvoline purchased the remaining 30% interest in its Thailand subsidiary for total consideration of approximately $16 million. This purchase eliminated the immaterial noncontrolling interest and made the subsidiary wholly-owned.
NOTE 6 – EQUITY METHOD INVESTMENTS
Valvoline has a strategic relationship with Cummins, Inc. (“Cummins”), a leading supplier of engines and related component products, which includes co-branding products for heavy duty consumers and a 50% interest in joint ventures in India, China, and Argentina. Valvoline also has joint ventures with other partners in Latin America, China and the U.S. Valvoline’s investments in these unconsolidated affiliates were $44 million and $34 million as of September 30, 2020 and 2019, respectively.
Valvoline’s stockholders’ deficit included $39 million and $32 million of undistributed earnings from affiliates accounted for under the equity method as of September 30, 2020 and 2019, respectively. Summarized financial information for Valvoline’s equity method investments follows as of and for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
|
Financial position
|
|
|
|
|
|
|
Current assets
|
|
$
|
143
|
|
|
$
|
123
|
|
|
|
Current liabilities
|
|
(75)
|
|
|
(77)
|
|
|
|
Working capital
|
|
68
|
|
|
46
|
|
|
|
Noncurrent assets
|
|
26
|
|
|
23
|
|
|
|
Noncurrent liabilities
|
|
(8)
|
|
|
(2)
|
|
|
|
Stockholders’ equity
|
|
$
|
86
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2018
|
Results of operations
|
|
|
|
|
|
|
Sales
|
|
$
|
273
|
|
|
$
|
309
|
|
|
$
|
313
|
|
Income from operations
|
|
$
|
50
|
|
|
$
|
59
|
|
|
$
|
62
|
|
Net income
|
|
$
|
25
|
|
|
$
|
24
|
|
|
$
|
27
|
|
The Company’s transactions with affiliate companies accounted for under the equity method were as follows for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2018
|
Equity income (a)
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
14
|
|
Distributions received
|
|
$
|
5
|
|
|
$
|
9
|
|
|
$
|
10
|
|
Royalty income (a)
|
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
8
|
|
Sales to
|
|
$
|
7
|
|
|
$
|
12
|
|
|
$
|
12
|
|
Purchases from
|
|
$
|
7
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
(a)Equity and royalty income from affiliates accounted for under the equity method of accounting are recognized in Equity and other income, net in the Consolidated Statements of Comprehensive Income and are primarily related to the International reportable segment.
Transactions with affiliate companies accounted for under the equity method resulted in the following balances on the Consolidated Balance Sheets as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
Accounts receivable (a)
|
|
$
|
4
|
|
|
$
|
6
|
|
Notes receivable (b)
|
|
$
|
5
|
|
|
$
|
2
|
|
Trade and other payables
|
|
$
|
1
|
|
|
$
|
—
|
|
|
|
|
|
|
(a)Included in Receivables, net within the Consolidated Balance Sheets.
(b)Included in Other noncurrent assets within the Consolidated Balance Sheets.
NOTE 7 – INTANGIBLE ASSETS
Goodwill
The following summarizes the changes in the carrying amount of goodwill for each reportable segment and in total during fiscal 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Quick Lubes
|
|
Core North America
|
|
International
|
|
Total
|
Balance at September 30, 2018
|
|
$
|
252
|
|
|
$
|
89
|
|
|
$
|
40
|
|
|
$
|
381
|
|
Acquisitions
|
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Currency translation
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
Balance at September 30, 2019
|
|
301
|
|
|
89
|
|
|
40
|
|
|
430
|
|
Acquisitions
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Currency translation
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Dispositions (a)
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
Balance at September 30, 2020
|
|
$
|
316
|
|
|
$
|
89
|
|
|
$
|
40
|
|
|
$
|
445
|
|
|
|
|
|
|
|
|
|
|
(a)Activity associated with the derecognition of goodwill as the result of the sale and disposal of six service center stores. Refer to Note 5 for details regarding the disposition.
Other intangible assets
Valvoline’s purchased intangible assets were specifically identified when acquired, have finite lives, and are reported in Goodwill and intangibles, net on 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)
|
|
2020
|
|
2019
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Net carrying amount
|
Definite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
$
|
30
|
|
|
$
|
(6)
|
|
|
$
|
24
|
|
|
$
|
30
|
|
|
$
|
(4)
|
|
|
$
|
26
|
|
Reacquired franchise rights
|
|
57
|
|
|
(14)
|
|
|
43
|
|
|
37
|
|
|
(8)
|
|
|
29
|
|
Customer relationships
|
|
22
|
|
|
(7)
|
|
|
15
|
|
|
22
|
|
|
(5)
|
|
|
17
|
|
Other intangible assets
|
|
3
|
|
|
(1)
|
|
|
2
|
|
|
3
|
|
|
(1)
|
|
|
2
|
|
Total definite-lived intangible assets
|
|
$
|
112
|
|
|
$
|
(28)
|
|
|
$
|
84
|
|
|
$
|
92
|
|
|
$
|
(18)
|
|
|
$
|
74
|
|
The table that follows summarizes amortization expense (actual and estimated) for intangible assets, assuming no additional amortizable intangible assets, for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Estimated
|
(In millions)
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
Amortization expense
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
$
|
7
|
|
NOTE 8 - RESTRUCTURING ACTIVITIES
During the second fiscal quarter of 2019, Valvoline outlined a broad-based restructuring and cost-savings program to reduce costs, simplify processes and focus the organization’s structure and resources on key growth initiatives. Part of this program included employee separation actions, which were generally completed during fiscal 2019, with the associated termination benefits substantially paid by the end of fiscal 2020.
Since program inception, Valvoline has recognized cumulative costs of $12 million that were primarily recognized during the year ended September 30, 2019. These costs were for employee termination benefits, which included severance and other benefits provided to employees pursuant to the restructuring program. These expenses were recognized in Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income. The Company does not expect to incur significant remaining costs from these actions.
The results by segment, as disclosed in Note 16, do not include these restructuring expenses, which is consistent with the manner by which management assesses the performance and evaluates the results of each segment. Accordingly, these expenses are included in Unallocated and other.
Activity related to this program is reported primarily within Accrued expenses and other liabilities in the Consolidated Balance Sheets and is summarized as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Employee Termination Benefits
|
Balance at September 30, 2018
|
|
$
|
—
|
|
Expenses recognized during the period
|
|
13
|
|
Payments
|
|
(3)
|
|
Changes in estimates (a)
|
|
(1)
|
|
Balance at September 30, 2019
|
|
9
|
|
Expenses recognized during the period
|
|
1
|
|
Payments
|
|
(8)
|
|
Changes in estimates (a)
|
|
(1)
|
|
Balance at September 30, 2020
|
|
$
|
1
|
|
|
|
|
(a)Changes in estimate of previously-recognized expenses relate to lower-than-expected termination benefit costs.
NOTE 9 – DEBT
The following table summarizes Valvoline’s debt as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
2030 Notes
|
|
$
|
600
|
|
|
$
|
—
|
|
2025 Notes
|
|
800
|
|
|
400
|
|
2024 Notes
|
|
—
|
|
|
375
|
|
Term Loan
|
|
475
|
|
|
575
|
|
|
|
|
|
|
Trade Receivables Facility
|
|
88
|
|
|
—
|
|
China Credit Facility
|
|
18
|
|
|
—
|
|
Other (a)
|
|
—
|
|
|
1
|
|
Debt issuance costs and discounts
|
|
(19)
|
|
|
(9)
|
|
Total debt
|
|
$
|
1,962
|
|
|
$
|
1,342
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
—
|
|
|
15
|
|
Long-term debt
|
|
$
|
1,962
|
|
|
$
|
1,327
|
|
|
|
|
|
|
(a)Other includes debt acquired through acquisitions.
Senior Notes
The Company's outstanding fixed rate senior notes as of September 30, 2020 consist of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $800 million (the “2025 Notes") and 4.250% senior unsecured notes due 2030 with an aggregate principal amount of $600 million (the "2030 Notes," and collectively with the 2025 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. Such events of default include non-payment of principal and interest, non-performance of covenants and obligations, default on other material debt, and bankruptcy or insolvency. If a change of control repurchase event occurs, Valvoline may be required to offer to purchase the 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. The Senior Notes are guaranteed by each of Valvoline's subsidiaries that guarantee obligations under its Senior Credit Agreement.
2025 Notes
The 2025 Notes are comprised of two issuances of 4.375% senior unsecured notes due 2025 each with an aggregate principal amount of $400 million, one issuance that was completed in August 2017 (the "Existing 2025 Notes") and the other that was completed in May 2020 (the "Additional 2025 Notes"). The net proceeds from the issuance of the Existing 2025 Notes were $394 million (after deducting initial purchasers' discounts and debt issuance costs) and were used to make a voluntary contribution to the Company's qualified U.S. pension plan. The Additional 2025 Notes were issued in a private offering at 99.5% of their principal amount, resulting in an original issue discount of $2 million. The net proceeds from the offering of $393 million (after deducting initial purchasers' discounts and debt issuance costs), together with cash and cash equivalents on hand, were used to repay $450 million in borrowings from the revolving credit facility under the Senior Credit Agreement.
The 2025 Notes were registered in exchange offers in which no additional proceeds were received. The exchange offer for the Existing 2025 Notes was completed in December 2017, and the exchange offer for the Additional 2025 Notes was completed in August 2020. The 2025 Notes have substantially similar terms, except for certain transfer restrictions, registration rights and additional interest provisions that apply to the Additional 2025 Notes do not apply to the Existing 2025 Notes.
2030 and 2024 Notes
In February 2020, Valvoline issued the 2030 Notes in a private offering for net proceeds of $592 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 million (the "2024 Notes"), plus an early redemption premium of $15 million, accrued and unpaid interest, as well as related fees and expenses for an aggregate redemption price of $394 million. A loss on extinguishment of the 2024 Notes of $19 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 million of indebtedness from the Company's term loan facility under the Senior Credit Agreement, with the remainder of the net proceeds to be used for general corporate purposes, which may include acquisitions, repayment of indebtedness, working capital, and capital expenditures. In response to the COVID-19 pandemic, the Company has utilized the remaining net proceeds in fiscal 2020 to preserve cash and cash equivalents and maintain liquidity.
Senior Credit Agreement
Key terms and conditions
The Senior Credit Agreement, as amended in fiscal 2019, provides an aggregate principal amount of $1,050 million in senior secured credit facilities, comprised of (i) a five-year $575 million term loan facility (the “Term Loan”) and (ii) a five-year $475 million revolving credit facility (the “Revolver”), including a $100 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 on April 12, 2024, and prepayment due in the amount of the net cash proceeds 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 annum and LIBOR plus 2.000% per annum (or between the alternate base rate plus 0.375% per annum and the alternate base rate plus 1.000% per annum), based upon Valvoline’s corporate credit ratings or its consolidated net leverage ratio, whichever yields the lowest rate.
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 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.
The Senior Credit Agreement contains usual and customary representations, warranties, events of default, and affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as the maintenance of financial covenants as of the end of each fiscal quarter, including a maximum consolidated net leverage ratio of 4.5 and a minimum consolidated interest coverage ratio of 3.0. As of September 30, 2020, Valvoline was in compliance with all covenants under the Senior Credit Agreement.
Summary of activity
During fiscal 2020, the Company made a principal prepayment of $100 million on its Term Loan using a portion of the net proceeds from the offering of the 2030 Notes, resulting in an outstanding principal balance of $475 million as of September 30, 2020 from the $575 million outstanding as of September 30, 2019. Quarterly principal payments will resume with $1 million due on June 30, 2022 and $14 million due each quarter beginning with September 30, 2022 through maturity.
During the year ended September 30, 2020, the Company borrowed and repaid $450 million from its Revolver. These borrowings under the Revolver were a precautionary measure to further strengthen the Company's liquidity position and provide additional financial flexibility in response to the COVID-19 pandemic and were subsequently repaid using proceeds provided by the offering of the Additional 2025 Notes and cash and cash equivalents that were on hand. As of September 30, 2020 and September 30, 2019 there were no amounts outstanding under the Revolver, and the borrowing capacity remaining as of September 30, 2020 was $469 million due to a reduction of $6 million for letters of credit outstanding.
Trade Receivables Facility
Key terms and conditions
In January 2020, the Company amended its $175 million trade receivables securitization facility (the “Trade Receivables Facility”), which extended the maturity to November 2021. In April 2020, Valvoline further amended the Trade Receivables Facility to modify the eligibility requirements for certain receivables, which had the effect of increasing the Company’s remaining eligible borrowing capacity. This amendment also requires the Company to maintain an amount outstanding equal to the lesser of 50 percent of the unchanged total borrowing capacity and the borrowing base from the availability of eligible receivables. Other relevant terms and conditions of Trade Receivables Facility were substantially unchanged under these amendments.
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, and advances by the lenders to that subsidiary (in the form of cash or letters of credit) are secured by those trade receivables. Accordingly, the Company accounts for borrowings under the Trade Receivables Facility as secured borrowings. 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 creditors of the Company. 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 1.4% and 3.4% for the years ended September 30, 2020 and 2019, respectively. The Trade Receivables Facility contains various customary affirmative and negative covenants and default and termination provisions, which provide for acceleration of amounts owed under the Trade Receivables Facility in circumstances including, but not limited to, the failure to pay interest or other amounts when due, defaults on certain other indebtedness, certain insolvency events, and breach of representation.
Summary of activity
During fiscal 2020, Valvoline borrowed $90 million under the Trade Receivables Facility to proactively increase its cash position and enhance financial agility in light of the uncertainty resulting from the COVID-19 pandemic. As of September 30, 2020, $88 million remained outstanding and no amounts were outstanding as of September 30, 2019.
Based on the availability of eligible receivables, the remaining borrowing capacity of the Trade Receivables Facility at September 30, 2020 was $79 million. The financing subsidiary owned $267 million and $259 million of outstanding accounts receivable as of September 30, 2020 and 2019, respectively, and these amounts are included in Receivables, net in the Company’s Consolidated Balance Sheets.
China Credit Facility
In May 2020, the Company entered into a five-year credit agreement (the “China Credit Facility”) for approximately $40 million to finance the completion of construction and preparation of the blending and packaging plant in China for production. Borrowings will bear interest at the local prime rate less the applicable interest rate margin, which was 4.35% for the year ended September 30, 2020. The proceeds from the China Credit Facility are restricted for capital expenditures directly related to the construction of and preparation for production of the blending and packaging plant in China, and borrowings are secured by the assets underlying the project. The outstanding balance is required to be repaid in semiannual installments, which total approximately $2 million in fiscal 2022, $4 million in fiscal 2023, and $7 million in fiscal 2024, with the remaining balance due in fiscal 2025. As of September 30, 2020, there was $18 million outstanding on the China Credit Facility, which had remaining borrowing capacity of approximately $22 million.
Long-term debt maturities
The future maturities of debt outstanding as of September 30, 2020, excluding debt issuance costs and discounts, are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Years ending September 30
|
|
|
2021
|
|
$
|
—
|
|
2022
|
|
104
|
|
2023
|
|
61
|
|
2024
|
|
410
|
|
2025
|
|
806
|
|
Thereafter
|
|
600
|
|
Total
|
|
$
|
1,981
|
|
NOTE 10 – INCOME TAXES
Components of income tax expense
Income tax expense consisted of the following for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2018
|
Current
|
|
|
|
|
|
|
Federal (a)
|
|
$
|
16
|
|
|
$
|
10
|
|
|
$
|
(2)
|
|
State
|
|
11
|
|
|
5
|
|
|
6
|
|
Non-U.S.
|
|
15
|
|
|
19
|
|
|
17
|
|
|
|
42
|
|
|
34
|
|
|
21
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
62
|
|
|
24
|
|
|
136
|
|
State
|
|
26
|
|
|
—
|
|
|
9
|
|
Non-U.S.
|
|
4
|
|
|
(1)
|
|
|
—
|
|
|
|
92
|
|
|
23
|
|
|
145
|
|
Income tax expense
|
|
$
|
134
|
|
|
$
|
57
|
|
|
$
|
166
|
|
|
|
|
|
|
|
|
(a)Benefit from favorable settlement with tax authorities in fiscal 2018.
The following table 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)
|
|
2020
|
|
2019
|
|
2018
|
Income before income taxes
|
|
|
|
|
|
|
United States
|
|
$
|
399
|
|
|
$
|
212
|
|
|
$
|
282
|
|
Non-U.S.
|
|
52
|
|
|
53
|
|
|
50
|
|
Total income before income taxes
|
|
$
|
451
|
|
|
$
|
265
|
|
|
$
|
332
|
|
|
|
|
|
|
|
|
U.S. statutory tax rate (a)
|
|
21.0
|
%
|
|
21.0
|
%
|
|
24.5
|
%
|
Income taxes computed at U.S. statutory tax rate
|
|
$
|
95
|
|
|
$
|
56
|
|
|
$
|
81
|
|
Increase (decrease) in amount computed resulting from:
|
|
|
|
|
|
|
Unrecognized tax benefits
|
|
1
|
|
|
5
|
|
|
—
|
|
State taxes, net of federal benefit
|
|
16
|
|
|
9
|
|
|
14
|
|
International rate differential
|
|
2
|
|
|
2
|
|
|
—
|
|
Permanent items
|
|
(4)
|
|
|
(3)
|
|
|
(3)
|
|
Remeasurement of net deferred taxes (b)
|
|
1
|
|
|
(4)
|
|
|
73
|
|
Return-to-provision adjustments
|
|
(2)
|
|
|
(6)
|
|
|
—
|
|
Deemed repatriation (c)
|
|
—
|
|
|
—
|
|
|
4
|
|
Change in valuation allowance
|
|
29
|
|
|
(4)
|
|
|
1
|
|
Tax Matters Agreement activity
|
|
(6)
|
|
|
1
|
|
|
(2)
|
|
Other
|
|
2
|
|
|
1
|
|
|
(2)
|
|
Income tax expense
|
|
$
|
134
|
|
|
$
|
57
|
|
|
$
|
166
|
|
Effective tax rate
|
|
29.7
|
%
|
|
21.5
|
%
|
|
50.0
|
%
|
|
|
|
|
|
|
|
(a)As a result of U.S. tax reform legislation which generally became effective January 1, 2018, the federal corporate income tax rate was lowered from 35% to 21%. Based on the effective date of the rate reduction, the Company's federal corporate statutory income tax rate was a blended rate of 24.5% for fiscal 2018.
(b)The remeasurement of net deferred taxes relates to the enactment and clarification of tax reform legislation. During fiscal 2018, Valvoline recognized $71 million of income tax expense to remeasure net deferred tax assets at the lower enacted corporate tax rates due to U.S. and Kentucky tax reform legislation.
(c)Income tax expense recognized related to the deemed repatriation tax on undistributed non-U.S. earnings and profits in connection with the enactment of U.S. tax reform.
Higher income tax expense in fiscal 2020 from the prior year was principally driven by higher pre-tax earnings and income tax expense recognized during the year to establish a $30 million valuation allowance on certain legacy tax attributes. This increase in expense coupled with prior year benefits from the release of a valuation allowance and the clarification of certain provisions of Kentucky tax reform legislation led to a higher effective tax rate in fiscal 2020.
Deferred taxes
Deferred income taxes are provided for income and expense items recognized in different years for tax and financial reporting purposes. A summary of the deferred tax assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
Deferred tax assets
|
|
|
|
|
Non-U.S. net operating loss carryforwards (a)
|
|
$
|
2
|
|
|
$
|
2
|
|
State net operating loss carryforwards (b)
|
|
18
|
|
|
19
|
|
Employee benefit obligations
|
|
79
|
|
|
98
|
|
Compensation accruals
|
|
26
|
|
|
21
|
|
Credit carryforwards (c)
|
|
11
|
|
|
19
|
|
Operating lease liabilities
|
|
69
|
|
|
—
|
|
Other
|
|
17
|
|
|
23
|
|
Valuation allowances (d)
|
|
(30)
|
|
|
(2)
|
|
Net deferred tax assets
|
|
192
|
|
|
180
|
|
Deferred tax liabilities
|
|
|
|
|
Goodwill and other intangibles
|
|
11
|
|
|
9
|
|
Property, plant and equipment
|
|
75
|
|
|
47
|
|
Operating lease assets
|
|
67
|
|
|
—
|
|
Undistributed earnings
|
|
6
|
|
|
2
|
|
Total deferred tax liabilities
|
|
159
|
|
|
58
|
|
Total net deferred tax assets (e)
|
|
$
|
33
|
|
|
$
|
122
|
|
|
|
|
|
|
(a)Gross non-U.S. net operating loss carryforwards of $5 million expire in fiscal years 2023 to 2040.
(b)Apportioned gross state net operating loss carryforwards of $365 million expire in fiscal years 2023 through 2037.
(c)Credit carryforwards consist primarily of U.S. tax credits that generally expire in fiscal years 2025 through 2036.
(d)Valuation allowances at September 30, 2020 primarily relate to state net operating loss carryforwards and certain other federal legacy tax attributes that are no longer expected to be realized or realizable.
(e)Due to netting of deferred tax assets and liabilities by jurisdiction, a $1 million net deferred tax liability is included within Other noncurrent liabilities in the Consolidated Balance Sheets as of September 30, 2020 and 2019.
Undistributed earnings
Prior to U.S. tax reform, the Company had not provided for U.S. income taxes on undistributed earnings and other outside basis differences of its non-U.S. subsidiaries as it was the Company’s intention for these tax basis differences to remain indefinitely reinvested. Valvoline began to record estimated incremental withholding taxes during fiscal 2018 and account for certain of its non-U.S. subsidiaries as being immediately subject to tax, while certain other outside basis differences restricted by regulations, operational or investing needs for non-U.S. subsidiaries remained indefinitely reinvested. If these outside basis differences were no longer to be indefinitely reinvested in the future, the Company may be subject to additional income and withholding taxes, which are not practicable to estimate.
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 Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). Valvoline was incorporated in May 2016 and 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 and Valvoline was no longer a controlled and consolidated subsidiary of Ashland.
Key terms and conditions
An agreement (the "Tax Matters Agreement") was entered into on September 22, 2016 between Valvoline and Ashland, that generally provides that Valvoline is required to 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 below);
•Taxes of Valvoline for all taxable periods that begin on or after the day after the date of the Distribution; and
•Taxes and expenses resulting from the failure of the Contribution or Distribution to qualify for their intended tax-free treatment.
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 is not included in the Ashland Group Returns and files tax returns that include only Valvoline and/or its subsidiaries, as appropriate.
Valvoline has joint and several liability with Ashland to the U.S. Internal Revenue Service for the consolidated U.S. federal income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland Group Returns. Valvoline has joint control with Ashland, over any audit or examination related to taxes for which Valvoline is required to indemnify Ashland. Accordingly, these portions of the Tax Matters Agreement will be settled as examinations of the pre-Distribution periods are completed.
Summary of activity
Adjustments to the net obligations to Ashland under the Tax Matters Agreement are recorded within Net legacy and separation-related (income) expenses, with any resulting impacts to Valvoline's stand-alone income tax provision recorded in Income tax expense within the Consolidated Statements of Comprehensive Income.
In connection with filing the Company's fiscal 2019 income tax returns in the fourth quarter of fiscal 2020, management determined it is no longer more likely than not to realize certain tax attributes which were transferred from Ashland as a result of the Contribution. Accordingly, the Company recognized income tax expense of $30 million to establish a valuation allowance for these tax attributes with an offsetting impact to reduce the estimated indemnity obligation, the combined effects of which have no impact to 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 $34 million and $66 million as of September 30, 2020 and 2019, respectively.
Based on information available at this time, the Company has established adequate accruals for its obligations under the Tax Matters Agreement. In certain circumstances, the actual amounts ultimately required to satisfy these obligations could significantly exceed those currently reflected in the consolidated financial statements. Such estimates cannot currently be made given the uncertainty with regard to the nature and extent of items that could arise upon examination of the pre-Distribution periods, which include the Contribution and Distribution transactions. For example, if the tax-free nature of the Contribution and/or Distribution transactions is not sustained, if certain reorganization transactions undertaken in connection with the separation and the Distribution are determined to be taxable, or if additional matters arise upon examination of the pre-Distribution periods, Valvoline could have a substantial indemnification obligation to Ashland in excess of those currently provided.
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)
|
|
2020
|
|
2019
|
|
2018
|
Gross unrecognized tax benefits as of October 1
|
|
$
|
14
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Increases related to tax positions from prior years
|
|
1
|
|
|
5
|
|
|
2
|
|
Increases related to tax positions taken during the current year
|
|
1
|
|
|
—
|
|
|
1
|
|
Settlements with tax authorities
|
|
—
|
|
|
—
|
|
|
(2)
|
|
Lapses of statutes of limitation
|
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
Gross unrecognized tax benefits as of September 30 (a)
|
|
$
|
15
|
|
|
$
|
14
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
(a)These unrecognized tax benefits would favorably impact the effective income tax rate if recognized. Accruals for interest and penalties were $2 million as of September 30, 2020 and 2019.
The Company's U.S. federal income tax returns and certain U.S. state jurisdictions remain open to examination from fiscal 2017 forward. With certain exceptions, years beginning on or after fiscal 2008 generally remain open to examination by certain non-U.S. taxing authorities. Given the indemnification of Ashland for periods in which Valvoline was included in Ashland Group Returns and the years that remain open to examination, a significant portion of the Company's liability for unrecognized tax benefits is included in the Tax Matters Agreement obligation summarized above. These periods that remain open to examination include federal income tax returns from fiscal 2014 and certain U.S. state jurisdictions from fiscal 2011.
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 2021. 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 2021.
NOTE 11 – EMPLOYEE BENEFIT PLANS
Pension and other postretirement plans
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. In addition, most international pension plans are closed to new participants while those that remain open relate to areas where local laws require plans to operate within the applicable country. Valvoline also sponsors healthcare and life insurance plans for certain qualifying retired or disabled employees that were amended to reduce retiree life and medical benefits effective in early fiscal 2017 and limit annual per capita costs.
Components of net periodic benefit costs / income
The following table summarizes the components of pension and other postretirement plans net periodic benefit costs / income and the assumptions used in this determination for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension benefits
|
|
Other postretirement benefits
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Net periodic benefit costs (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
61
|
|
|
81
|
|
|
75
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Expected return on plan assets
|
|
(87)
|
|
|
(80)
|
|
|
(103)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit (a)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12)
|
|
|
(12)
|
|
|
(12)
|
|
Actuarial (gain) loss
|
|
(24)
|
|
|
61
|
|
|
38
|
|
|
2
|
|
|
8
|
|
|
—
|
|
Net periodic benefit (income) costs
|
|
$
|
(47)
|
|
|
$
|
64
|
|
|
$
|
12
|
|
|
$
|
(9)
|
|
|
$
|
(2)
|
|
|
$
|
(10)
|
|
Weighted-average plan assumptions (b)
|
|
|
|
|
|
|
|
|
|
|
Discount rate for service cost
|
|
1.49
|
%
|
|
2.92
|
%
|
|
2.94
|
%
|
|
3.12
|
%
|
|
3.98
|
%
|
|
4.05
|
%
|
Discount rate for interest cost
|
|
2.79
|
%
|
|
4.00
|
%
|
|
3.23
|
%
|
|
2.69
|
%
|
|
3.83
|
%
|
|
3.11
|
%
|
Rate of compensation increase
|
|
3.04
|
%
|
|
3.06
|
%
|
|
3.05
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
Expected long-term rate of return on plan assets
|
|
4.64
|
%
|
|
4.66
|
%
|
|
5.17
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Other postretirement plan amendments noted above resulted in negative plan amendments that are amortized within this caption during all periods presented.
(b)The plan assumptions are a blended weighted-average rate for Valvoline’s U.S. and non-U.S. plans. The U.S. pension plans represented approximately 97% of the total pension projected benefit obligation as of September 30, 2020. Other postretirement benefit plans consist of U.S. and Canada, with the U.S. plan representing approximately 79% of the total other postretirement projected benefit obligation as of September 30, 2020. Non-U.S. plans use assumptions generally consistent with those of U.S. plans.
The following table summarizes the net periodic benefit costs / income and the amortization of prior service credit recognized in Accumulated other comprehensive income during the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement benefits
|
(In millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit recognized in Accumulated other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (income) costs
|
|
(47)
|
|
|
64
|
|
|
(9)
|
|
|
(2)
|
|
Total amount recognized in net periodic benefit (income) costs and Accumulated other comprehensive income
|
|
$
|
(47)
|
|
|
$
|
64
|
|
|
$
|
3
|
|
|
$
|
10
|
|
Obligations and funded status
The following table summarizes the 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 recognized in the Consolidated Balance Sheets for the Company’s pension and other postretirement benefit plans as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension benefits
|
|
Other postretirement benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
Benefit obligations as of October 1
|
|
$
|
2,287
|
|
|
$
|
2,087
|
|
|
$
|
55
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
3
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Interest cost
|
|
61
|
|
|
81
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
(132)
|
|
|
(140)
|
|
|
(6)
|
|
|
(6)
|
|
Actuarial loss
|
|
107
|
|
|
253
|
|
|
2
|
|
|
8
|
|
Currency exchange rate changes
|
|
1
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
Transfers in
|
|
3
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
(9)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefit obligations as of September 30
|
|
$
|
2,321
|
|
|
$
|
2,287
|
|
|
$
|
52
|
|
|
$
|
55
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets as of October 1
|
|
$
|
1,943
|
|
|
$
|
1,792
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
218
|
|
|
273
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
|
22
|
|
|
14
|
|
|
6
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
(133)
|
|
|
(140)
|
|
|
(6)
|
|
|
(6)
|
|
Currency exchange rate changes
|
|
1
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
(9)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers in
|
|
3
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets as of September 30
|
|
$
|
2,045
|
|
|
$
|
1,943
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Unfunded status of the plans as of September 30
|
|
$
|
276
|
|
|
$
|
344
|
|
|
$
|
52
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets
|
|
|
|
|
|
|
Noncurrent benefit asset
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Current benefit liabilities
|
|
10
|
|
|
9
|
|
|
5
|
|
|
6
|
|
Noncurrent benefit liabilities
|
|
267
|
|
|
335
|
|
|
47
|
|
|
49
|
|
Total benefit liabilities
|
|
277
|
|
|
344
|
|
|
52
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Net liabilities recognized
|
|
$
|
276
|
|
|
$
|
344
|
|
|
$
|
52
|
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated other comprehensive loss (income)
|
|
|
|
|
Prior service cost (credit)
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
(33)
|
|
|
$
|
(45)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average plan assumptions
|
|
|
|
|
|
|
|
|
Discount rate
|
|
2.59
|
%
|
|
3.10
|
%
|
|
2.39
|
%
|
|
2.95
|
%
|
Rate of compensation increase
|
|
3.00
|
%
|
|
3.06
|
%
|
|
—
|
|
|
—
|
|
Healthcare cost trend rate (a)
|
|
—
|
|
|
—
|
|
|
6.7
|
%
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
(a)The assumed pre-65 health care cost trend rate continues to be reduced to 4.2% in 2037 and thereafter.
Valvoline recognizes the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement. Such gains and losses are reported within Net pension and other postretirement plan expense in the Consolidated Statements of Comprehensive Income and included a gain of $22 million and a loss of $69 million for the years ended September 30, 2020 and 2019, respectively.
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 fiscal 2019 loss was primarily attributed to decreases in discount rates, which were partially offset by higher than expected returns on plan assets and favorable changes in mortality assumptions.
Accumulated benefit obligation
The accumulated benefit obligation for all pension plans was $2.3 billion as of September 30, 2020 and 2019, respectively. Information for pension plans with a benefit obligation in excess of the fair value of plan assets follows for the Company’s plans as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
Benefit obligation
|
|
Plan assets
|
|
Benefit obligation
|
|
Plan assets
|
Plans with projected benefit obligation in excess of plan assets
|
|
$
|
2,275
|
|
|
$
|
1,998
|
|
|
$
|
2,242
|
|
|
$
|
1,898
|
|
Plans with accumulated benefit obligation in excess of plan assets
|
|
$
|
2,253
|
|
|
$
|
1,978
|
|
|
$
|
2,229
|
|
|
$
|
1,889
|
|
Plan assets
The following table summarizes the various investment categories that the pension plan assets are invested in and the applicable fair value hierarchy as described in Note 2 that the financial instruments are classified within these investment categories as of September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
(In millions)
|
|
Total fair value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets measured at NAV
|
|
|
Cash and cash equivalents
|
|
$
|
102
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
U.S. government securities and futures
|
|
172
|
|
|
—
|
|
|
172
|
|
|
—
|
|
|
—
|
|
|
|
Other government securities
|
|
47
|
|
|
—
|
|
|
47
|
|
|
—
|
|
|
—
|
|
|
|
Corporate debt instruments
|
|
1,201
|
|
|
—
|
|
|
1,201
|
|
|
—
|
|
|
—
|
|
|
|
Insurance contracts
|
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
|
Private equity and hedge funds
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
|
Common collective trusts
|
|
497
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
497
|
|
|
|
Other investments
|
|
1
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
—
|
|
|
—
|
|
|
|
Total assets at fair value
|
|
$
|
2,045
|
|
|
$
|
102
|
|
|
$
|
1,421
|
|
|
$
|
12
|
|
|
$
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
(In millions)
|
|
Total fair value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets measured at NAV
|
Cash and cash equivalents
|
|
$
|
166
|
|
|
$
|
166
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. government securities and futures
|
|
162
|
|
|
—
|
|
|
162
|
|
|
—
|
|
|
—
|
|
Other government securities
|
|
41
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
—
|
|
Corporate debt instruments
|
|
1,075
|
|
|
—
|
|
|
1,075
|
|
|
—
|
|
|
—
|
|
Insurance contracts
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Private equity and hedge funds
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Common collective trusts
|
|
474
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
474
|
|
Other investments
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Total assets at fair value
|
|
$
|
1,943
|
|
|
$
|
166
|
|
|
$
|
1,281
|
|
|
$
|
7
|
|
|
$
|
489
|
|
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 on 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 to the terms of the debt instrument (maturity and coupon interest rate).
Insurance contracts
Insurance contracts are arrangements with insurance companies that guarantee the payment of the pension entitlements and are valued based on Level 3 inputs, which are neither quoted prices nor observable inputs for pricing. Insurance contracts are valued at cash surrender value, which approximates fair value.
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.
Common collective trusts
Common collective trusts 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 table provides a reconciliation of the beginning and ending balances for Level 3 plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Total Level 3 assets
|
Balance at September 30, 2018
|
|
|
|
|
$
|
4
|
|
Purchases
|
|
|
|
|
1
|
|
|
|
|
|
|
|
Actual return on assets held at end of year
|
|
|
|
|
2
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
|
|
7
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
4
|
|
|
|
|
|
|
|
Actual return on assets held at end of year
|
|
|
|
|
1
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
|
|
|
$
|
12
|
|
The following table summarizes investments for which fair value is measured using the NAV per share practical expedient as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Fair value at NAV
|
|
Unfunded commitments
|
|
Redemption frequency (if currently eligible)
|
|
Redemption notice period
|
Long/short hedge funds
|
|
$
|
4
|
|
|
$
|
—
|
|
|
None (a)
|
|
None (a)
|
Relative value hedge funds
|
|
2
|
|
|
—
|
|
|
None (b)
|
|
None (b)
|
|
|
|
|
|
|
|
|
|
Event driven hedge funds
|
|
1
|
|
|
—
|
|
|
None (b)
|
|
None (b)
|
Common collective trusts
|
|
477
|
|
|
—
|
|
|
Daily
|
|
Up to 3 days
|
|
|
12
|
|
|
—
|
|
|
Monthly
|
|
5 days
|
|
|
8
|
|
|
—
|
|
|
N/A (c)
|
|
N/A (c)
|
Private equity
|
|
6
|
|
|
2
|
|
|
None (d)
|
|
None (d)
|
|
|
$
|
510
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 of such is unknown.
(c)These assets are held in investments in funds that include a diversified portfolio across various asset classes. The time period for redemption of these assets is not determinable.
(d)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 plans’ liabilities, 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 U.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 maintain an appropriate asset mix and diversification of investments and to optimize returns.
The current target asset allocation for the U.S. plans is 75% fixed income securities and 25% 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.
Valvoline’s investment strategy and management practices relative to non-U.S. plan assets are generally consistent with those for U.S. plans, except in those countries where the investment of plan assets is dictated by applicable
regulations. The weighted-average asset allocations for Valvoline’s plans by asset category follow as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
2020
|
|
2019
|
Plan assets allocation
|
|
|
|
|
|
|
Equity securities
|
|
15-25%
|
|
18
|
%
|
|
17
|
%
|
Debt securities
|
|
65-85%
|
|
80
|
%
|
|
81
|
%
|
Other
|
|
0-20%
|
|
2
|
%
|
|
2
|
%
|
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 $22 million and $14 million to its pension plans during fiscal 2020 and 2019, respectively. Valvoline does not plan to contribute to its U.S. qualified pension plans in fiscal 2021, but expects to contribute approximately $13 million to its U.S. non-qualified and non-U.S. pension plans.
The following benefit payments, which reflect future service expectations, are projected to be paid in each of the next five fiscal years and the five fiscal years thereafter in aggregate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Pension benefits
|
|
Other postretirement benefits
|
2021
|
|
$
|
143
|
|
|
$
|
5
|
|
2022
|
|
143
|
|
|
4
|
|
2023
|
|
143
|
|
|
4
|
|
2024
|
|
139
|
|
|
3
|
|
2025
|
|
139
|
|
|
3
|
|
2026 - 2030
|
|
671
|
|
|
14
|
|
Total
|
|
$
|
1,378
|
|
|
$
|
33
|
|
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 million in fiscal 2020 and $14 million in each of fiscal 2019 and 2018.
Valvoline also sponsors various other benefit plans, some of which are required by local laws within certain countries. Total liabilities associated with these plans were $3 million and $4 million as of September 30, 2020 and 2019, 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.
In April 2018, Valvoline received a demand for payment of a partial withdrawal liability assessment related to the sale of a business by its former parent company in fiscal 2011 and the associated reduction in contributions and the number of employees covered by one of the multiemployer pension plans. The Company vigorously contested the
assessment and the calculation method utilized and settled the matter in early fiscal 2020 consistent with its reserve at a cost that was not material to the consolidated financial statements.
Incentive plans
Reserves for incentive plans were $39 million and $25 million as of September 30, 2020 and 2019, respectively.
NOTE 12 – 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, Valvoline discloses 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 13 – STOCK-BASED COMPENSATION PLANS
Valvoline has approved stock-based incentive plans that authorize 21 million shares of common stock to be issued, with approximately 14 million shares of common stock remaining available for issuance as of September 30, 2020. The Valvoline stock-based incentive plans authorize the grant of stock options, stock appreciation rights (“SARs”), performance share units, and other nonvested stock awards, principally in the form of restricted stock and restricted stock units. The Compensation Committee of the Board of Directors administers the Valvoline stock-based incentive plans and has the authority to determine the individuals to whom awards will be made, the amount of those awards, and other terms and conditions of the awards.
The following is a summary of stock-based compensation expense recognized by the Company during the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2018
|
Stock appreciation rights
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Nonvested stock awards
|
|
6
|
|
|
8
|
|
|
9
|
|
Performance awards
|
|
5
|
|
|
1
|
|
|
1
|
|
Total stock-based compensation expense, pre-tax (a)
|
|
12
|
|
|
10
|
|
|
12
|
|
Tax benefit
|
|
(3)
|
|
|
(2)
|
|
|
(3)
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
(a)Includes approximately $1 million in each period presented related to certain awards that are cash-settled and liability-classified; therefore, fair value is remeasured at the end of each reporting period until settlement.
Stock appreciation rights
SARs were granted to certain Valvoline employees to provide award holders with the ability to profit from the appreciation in value of a set number of shares of common stock over a period of time by exercising their award and receiving the sum of the increase in shares. SARs were granted at a price equal to the fair market value of the stock on the date of grant and typically vest and become exercisable over a period of one to three years. Unexercised SARs generally lapse ten years after the grant date.
The following table summarizes the activity relative to SARs for the year ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
(in thousands)
|
|
Weighted average exercise price per share
|
|
Weighted average remaining term
(in years)
|
|
Aggregate intrinsic value
(in millions)
|
SARs outstanding as of September 30, 2019
|
|
1,815
|
|
|
$
|
18.88
|
|
|
6.2 years
|
|
$
|
6
|
|
Granted
|
|
265
|
|
|
$
|
23.01
|
|
|
|
|
|
Exercised
|
|
(166)
|
|
|
$
|
15.19
|
|
|
|
|
$
|
1
|
|
Forfeited
|
|
(31)
|
|
|
$
|
21.69
|
|
|
|
|
|
SARs outstanding as of September 30, 2020
|
|
1,883
|
|
|
$
|
19.75
|
|
|
5.8 years
|
|
$
|
2
|
|
SARs exercisable as of September 30, 2020
|
|
1,465
|
|
|
$
|
19.02
|
|
|
5.1 years
|
|
$
|
2
|
|
The aggregate intrinsic value of SARs exercised (the amount by which the market price of the stock on the date of exercise exceeded the exercise price of the SAR) was $1 million during fiscal 2020, $1 million during fiscal 2019, and $2 million during fiscal 2018. As of September 30, 2020, there was $1 million of total unrecognized compensation cost related to SARs, which is expected to be recognized over a weighted average period of 1.9 years.
Stock-based compensation expense for SARs was computed using the Black-Scholes option-pricing model to estimate the grant date fair value of new or modified awards with the following key assumptions for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Weighted average grant date fair value per share
|
|
$
|
5.14
|
|
|
$
|
5.36
|
|
|
$
|
5.56
|
|
Assumptions (weighted average)
|
|
|
|
|
|
|
Risk-free interest rate (a)
|
|
1.7
|
%
|
|
2.9
|
%
|
|
2.2
|
%
|
Expected dividend yield
|
|
2.0
|
%
|
|
1.5
|
%
|
|
0.9
|
%
|
Expected volatility (b)
|
|
27.1
|
%
|
|
26.8
|
%
|
|
23.3
|
%
|
Expected term (in years) (c)
|
|
5.88
|
|
5.88
|
|
5.88
|
|
|
|
|
|
|
|
(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.
(b)Due to the lack of historical data for Valvoline, expected volatility is based on the average of peer companies’ historical daily equity volatilities with look-back periods commensurate with the expected term.
(c)Due to the lack of historical data for Valvoline, the expected term is based on the mid-point between the vesting date and the end of the contractual term.
Nonvested stock awards
Nonvested stock awards in the form of Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”) were granted to certain Valvoline employees and directors. These awards were granted at a price equal to the fair market value of the underlying common stock on the grant date, generally vest over a one to three-year period, and are subject to forfeiture upon termination of service before the vesting periods end. These awards were 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. Dividends on nonvested stock awards are generally granted in the form of additional units or shares of nonvested stock awards, which are subject to vesting and forfeiture provisions.
The following table summarizes nonvested share activity for the year ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
(in thousands)
|
|
Weighted average grant date fair value per share
|
Unvested shares as of September 30, 2019
|
|
1,083
|
|
|
$
|
21.52
|
|
Granted
|
|
313
|
|
|
$
|
21.54
|
|
Vested
|
|
(296)
|
|
|
$
|
21.96
|
|
Forfeited
|
|
(40)
|
|
|
$
|
20.75
|
|
Unvested shares as of September 30, 2020
|
|
1,060
|
|
|
$
|
19.76
|
|
The total grant date fair value of shares vested was $4 million, $10 million and $6 million for the years ended September 30, 2020, 2019 and 2018, respectively. The weighted average grant date fair value for nonvested stock awards granted in fiscal 2020, 2019 and 2018 was $21.54, $20.41 and $23.17, respectively. As of September 30, 2020, there was $4 million of total unrecognized compensation costs related to nonvested stock awards, which is expected to be recognized over a weighted average period of 3.0 years. The aggregate intrinsic value of nonvested stock awards as of September 30, 2020 is $20 million.
Performance awards
Performance share units were awarded to certain key Valvoline employees that are aligned with overall financial performance relative to selected industry peer groups and/or internal targets. Awards are granted annually, with each award covering a three-year performance and vesting period. Each performance share unit is convertible to one share of common stock, and the actual number of shares issuable upon vesting is determined based upon performance compared to market and financial performance targets. Nonvested performance share units do not entitle employees to vote or to receive any dividends thereon.
The following table summarizes performance award activity for the year ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
(in thousands)
|
|
Weighted average grant date fair value per share
|
Unvested shares as of September 30, 2019
|
|
423
|
|
|
$
|
22.31
|
|
Granted
|
|
177
|
|
|
$
|
23.21
|
|
Expected performance adjustments (a)
|
|
47
|
|
|
$
|
22.73
|
|
Vested
|
|
(29)
|
|
|
$
|
23.01
|
|
Forfeited
|
|
(10)
|
|
|
$
|
22.12
|
|
Unvested shares as of September 30, 2020
|
|
608
|
|
|
$
|
22.70
|
|
|
|
|
|
|
(a)Adjustments relate to changes in estimate based on current expectations of the achievement of performance targets where performance awards can be issued within a range of 0 to 250%.
As of September 30, 2020, there was $7 million of unrecognized compensation costs related to nonvested performance share awards, which is expected to be recognized over a weighted average period of approximately 1.8 years. The aggregate intrinsic value of the performance-based nonvested stock awards as of September 30, 2020 is $12 million.
With regard to the performance conditions, the fair value of new or modified awards is equal to the grant date fair market value of Valvoline’s common stock, and compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied. For market conditions, compensation cost is
recognized regardless of whether the conditions are satisfied and based on the grant date fair value of new or modified awards using a Monte Carlo simulation valuation model using the following key assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Weighted average grant date fair value per share
|
|
$
|
23.21
|
|
|
$
|
21.22
|
|
|
$
|
23.82
|
|
Assumptions (weighted average)
|
|
|
|
|
|
|
Risk-free interest rates (a)
|
|
1.6
|
%
|
|
2.8
|
%
|
|
1.7
|
%
|
Expected dividend yield
|
|
2.1
|
%
|
|
1.3
|
%
|
|
1.0
|
%
|
Expected volatility (b)
|
|
26.0
|
%
|
|
26.8
|
%
|
|
24.2
|
%
|
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 1.55% to 1.59% in fiscal 2020, 2.66% to 2.82% in fiscal 2019, and 1.55% to 1.82% in fiscal 2018.
(b)Due to the lack of historical data for Valvoline, expected volatility is based on the average of peer companies’ historical volatilities with look-back periods commensurate with the expected term.
NOTE 14 - EARNINGS PER SHARE
The following is the summary of basic and diluted EPS for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
2020
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
|
|
|
Net income
|
|
$
|
317
|
|
|
$
|
208
|
|
|
$
|
166
|
|
Denominator
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
187
|
|
|
189
|
|
|
197
|
|
Effect of potentially dilutive securities
|
|
1
|
|
|
—
|
|
|
—
|
|
Weighted average diluted shares outstanding
|
|
188
|
|
|
189
|
|
|
197
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
Basic
|
|
$
|
1.70
|
|
|
$
|
1.10
|
|
|
$
|
0.84
|
|
Diluted
|
|
$
|
1.69
|
|
|
$
|
1.10
|
|
|
$
|
0.84
|
|
NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in Accumulated other comprehensive income by component for fiscal years 2020 and 2019 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, 2018
|
|
$
|
43
|
|
|
$
|
(11)
|
|
|
$
|
—
|
|
|
$
|
32
|
|
Other comprehensive loss before reclassification
|
|
—
|
|
|
(11)
|
|
|
—
|
|
|
(11)
|
|
Gains reclassified out of accumulated other comprehensive income
|
|
(12)
|
|
|
(1)
|
|
|
—
|
|
|
(13)
|
|
Tax expense
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Balance as of September 30, 2019
|
|
34
|
|
|
(23)
|
|
|
—
|
|
|
11
|
|
Other comprehensive income (loss) before reclassification
|
|
—
|
|
|
6
|
|
|
(1)
|
|
|
5
|
|
(Gain) loss reclassified out of accumulated other comprehensive income
|
|
(12)
|
|
|
1
|
|
|
—
|
|
|
(11)
|
|
Tax expense
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Balance as of September 30, 2020
|
|
$
|
25
|
|
|
$
|
(16)
|
|
|
$
|
(1)
|
|
|
$
|
8
|
|
Amounts reclassified from Accumulated other comprehensive income follow for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2020
|
|
2019
|
|
2018
|
Amortization of pension and other postretirement plan prior service credits (a)
|
|
$
|
(12)
|
|
|
$
|
(12)
|
|
|
$
|
(12)
|
|
Loss (gain) on liquidation of subsidiaries (b)
|
|
1
|
|
|
(1)
|
|
|
1
|
|
Tax effect of reclassifications
|
|
3
|
|
|
3
|
|
|
2
|
|
Net of tax
|
|
(8)
|
|
|
(10)
|
|
|
(9)
|
|
Reclassification of income tax effects of U.S. tax reform (c)
|
|
—
|
|
|
—
|
|
|
8
|
|
Total amounts reclassified, net of tax
|
|
$
|
(8)
|
|
|
$
|
(10)
|
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
(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 reclassification from Accumulated other comprehensive income to Retained deficit in the Consolidated Balance Sheet related to the stranded income tax effects of U.S. tax reform resulting from the change in the federal corporate tax rate.
NOTE 16 – REPORTABLE SEGMENT INFORMATION
Valvoline manages and reports within the following three segments:
•Quick Lubes - services the passenger car and light truck quick lube market through company-owned and independent franchised retail quick lube service center stores and independent Express Care stores that service vehicles with Valvoline products, as well as through investment in a joint venture in China to pilot expansion of retail quick lube service center stores outside of North America.
•Core North America - sells engine and automotive maintenance products in the United States and Canada to retailers, installers, and heavy-duty customers to service vehicles and equipment.
•International - sells engine and automotive products in more than 140 countries outside of the United States and Canada for the maintenance of consumer and commercial vehicles and equipment.
These segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in assessing segment performance and in allocating the Company’s resources. Sales and operating income are the primary U.S. GAAP measures evaluated in assessing each reportable segment’s financial performance. Operating income by segment includes the allocation of shared corporate costs, which are allocated consistently based on each segment’s proportional contribution to various financial measures. Intersegment sales are not material, and assets are not allocated and included in the assessment of segment performance; consequently, these items are not disclosed by segment herein.
To maintain operating focus on business performance, certain corporate and non-operational items, including restructuring and related expenses, as well as adjustments related to legacy businesses that no longer are attributed to Valvoline, are excluded from the segment operating results utilized by the chief operating decision maker in evaluating segment performance and are separately delineated within Unallocated and other to reconcile to total reported Operating income as shown in the table below.
Valvoline did not have a single customer that represented 10% or more of consolidated net sales in fiscal 2020, 2019 or 2018.
Reportable segment results
The following table presents sales, operating income, and depreciation and amortization by reportable segment for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2018
|
Sales
|
|
|
|
|
|
|
Quick Lubes
|
|
$
|
883
|
|
|
$
|
822
|
|
|
$
|
660
|
|
Core North America
|
|
945
|
|
|
994
|
|
|
1,035
|
|
International
|
|
525
|
|
|
574
|
|
|
590
|
|
Consolidated sales
|
|
$
|
2,353
|
|
|
$
|
2,390
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
Quick Lubes
|
|
$
|
169
|
|
|
$
|
178
|
|
|
$
|
153
|
|
Core North America
|
|
202
|
|
|
152
|
|
|
172
|
|
International
|
|
73
|
|
|
85
|
|
|
84
|
|
Total operating segments
|
|
444
|
|
|
415
|
|
|
409
|
|
Unallocated and other (a)
|
|
41
|
|
|
(17)
|
|
|
(14)
|
|
Consolidated operating income
|
|
$
|
485
|
|
|
$
|
398
|
|
|
$
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Quick Lubes
|
|
$
|
43
|
|
|
$
|
36
|
|
|
$
|
30
|
|
Core North America
|
|
16
|
|
|
18
|
|
|
18
|
|
International
|
|
7
|
|
|
7
|
|
|
6
|
|
Consolidated depreciation and amortization
|
|
$
|
66
|
|
|
$
|
61
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
(a)Unallocated and other includes net legacy and separation-related activity and certain other corporate matters not allocated to the reportable segments.
Disaggregation of revenue
The following table summarizes sales by category for each reportable segment for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by category
|
|
|
Quick Lubes
|
|
Core North America
|
|
International
|
|
|
2020
|
2019
|
2018
|
|
2020
|
2019
|
2018
|
|
2020
|
2019
|
2018
|
Lubricants
|
|
84
|
%
|
84
|
%
|
85
|
%
|
|
87
|
%
|
86
|
%
|
85
|
%
|
|
89
|
%
|
88
|
%
|
89
|
%
|
Antifreeze
|
|
1
|
%
|
1
|
%
|
1
|
%
|
|
8
|
%
|
9
|
%
|
8
|
%
|
|
5
|
%
|
5
|
%
|
5
|
%
|
Filters
|
|
8
|
%
|
8
|
%
|
8
|
%
|
|
1
|
%
|
1
|
%
|
3
|
%
|
|
1
|
%
|
1
|
%
|
3
|
%
|
Chemicals and other
|
|
2
|
%
|
2
|
%
|
2
|
%
|
|
4
|
%
|
4
|
%
|
4
|
%
|
|
5
|
%
|
6
|
%
|
3
|
%
|
Franchise fees
|
|
5
|
%
|
5
|
%
|
4
|
%
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
|
100
|
%
|
100
|
%
|
100
|
%
|
|
100
|
%
|
100
|
%
|
100
|
%
|
The following table summarizes sales by primary customer channel for the Company’s reportable segments for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
Quick Lubes
|
|
|
|
|
Company-owned operations
|
|
$
|
591
|
|
|
$
|
531
|
|
Non-company owned operations
|
|
292
|
|
|
291
|
|
Total Quick Lubes
|
|
883
|
|
|
822
|
|
|
|
|
|
|
Core North America
|
|
|
|
|
Retail
|
|
556
|
|
|
543
|
|
Installer and other
|
|
389
|
|
|
451
|
|
Total Core North America
|
|
945
|
|
|
994
|
|
|
|
|
|
|
International
|
|
525
|
|
|
574
|
|
|
|
|
|
|
Consolidated sales
|
|
$
|
2,353
|
|
|
$
|
2,390
|
|
Sales by reportable segment disaggregated by geographic market are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Quick Lubes
|
|
Core North America
|
|
International
|
|
Totals
|
Year ended September 30, 2020
|
|
|
|
|
|
|
|
|
North America (a)
|
|
$
|
883
|
|
|
$
|
945
|
|
|
$
|
—
|
|
|
$
|
1,828
|
|
Europe, Middle East and Africa ("EMEA")
|
|
—
|
|
|
—
|
|
|
169
|
|
|
169
|
|
Asia Pacific
|
|
—
|
|
|
—
|
|
|
273
|
|
|
273
|
|
Latin America (a)
|
|
—
|
|
|
—
|
|
|
83
|
|
|
83
|
|
Total
|
|
$
|
883
|
|
|
$
|
945
|
|
|
$
|
525
|
|
|
$
|
2,353
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2019
|
|
|
|
|
|
|
|
|
North America (a)
|
|
$
|
822
|
|
|
$
|
994
|
|
|
$
|
—
|
|
|
$
|
1,816
|
|
EMEA
|
|
—
|
|
—
|
|
181
|
|
181
|
Asia Pacific
|
|
—
|
|
—
|
|
285
|
|
285
|
Latin America (a)
|
|
—
|
|
—
|
|
108
|
|
108
|
Total
|
|
$
|
822
|
|
|
$
|
994
|
|
|
$
|
574
|
|
|
$
|
2,390
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30, 2018
|
|
|
|
|
|
|
|
|
North America (a)
|
|
$
|
660
|
|
|
$
|
1,035
|
|
|
$
|
—
|
|
|
$
|
1,695
|
|
EMEA
|
|
—
|
|
|
—
|
|
|
175
|
|
175
|
Asia Pacific
|
|
—
|
|
|
—
|
|
|
302
|
|
302
|
Latin America (a)
|
|
—
|
|
|
—
|
|
|
113
|
|
113
|
Total
|
|
$
|
660
|
|
|
$
|
1,035
|
|
|
$
|
590
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
|
|
(a)Valvoline includes the United States and Canada in its North America region. Mexico is included within the Latin America region.
Entity-wide disclosures
The following table presents sales and net property, plant and equipment by geographic area for the years ended and as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from external customers (a)
|
|
|
|
Property, plant and equipment, net (b)
|
(In millions)
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
2020
|
|
2019
|
United States
|
|
$
|
1,775
|
|
|
$
|
1,766
|
|
|
$
|
1,652
|
|
|
|
|
|
|
$
|
512
|
|
|
$
|
431
|
|
International
|
|
578
|
|
|
624
|
|
|
633
|
|
|
|
|
|
|
101
|
|
|
67
|
|
Total
|
|
$
|
2,353
|
|
|
$
|
2,390
|
|
|
$
|
2,285
|
|
|
|
|
|
|
$
|
613
|
|
|
$
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Sales are attributed to the geographic area where product and services are delivered.
(b)Property, plant and equipment, net is attributed to the geographic area in which assets physically reside.
NOTE 17 – SUPPLEMENTAL BALANCE SHEET INFORMATION
Cash, cash equivalents and restricted cash
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)
|
|
2020
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
|
$
|
760
|
|
|
$
|
159
|
|
|
$
|
96
|
|
Restricted cash (a)
|
|
1
|
|
|
—
|
|
|
—
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
761
|
|
|
$
|
159
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
(a)Included in Prepaid expenses and other current assets within 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)
|
|
2020
|
|
2019
|
Current
|
|
|
|
|
Trade
|
|
$
|
409
|
|
|
$
|
394
|
|
Other
|
|
14
|
|
|
10
|
|
Notes receivable from franchisees
|
|
13
|
|
|
—
|
|
Receivables, gross
|
|
436
|
|
|
404
|
|
Allowance for doubtful accounts
|
|
(3)
|
|
|
(3)
|
|
Receivables, net
|
|
$
|
433
|
|
|
$
|
401
|
|
|
|
|
|
|
Non-current (a)
|
|
|
|
|
Notes receivable from franchisees
|
|
$
|
13
|
|
|
$
|
—
|
|
Other notes receivable
|
|
8
|
|
|
5
|
Noncurrent notes receivable, gross
|
|
21
|
|
|
5
|
|
Allowance for losses
|
|
(4)
|
|
|
(2)
|
|
Noncurrent notes receivable, net
|
|
$
|
17
|
|
|
$
|
3
|
|
|
|
|
|
|
(a)Included in Other noncurrent assets within the Consolidated Balance Sheets.
Valvoline is party to an agreement to sell certain trade accounts receivable in the form of drafts or bills of exchange to a financial institution. Each draft constitutes an order to pay Valvoline for obligations of the customer arising from the sale of goods. The intention of the arrangement is to decrease the time accounts receivable is outstanding and increase cash flows. Valvoline sold $59 million and $75 million of accounts receivable to the financial institution during the years ended September 30, 2020 and 2019, respectively.
Inventories
Inventories are primarily carried at the lower of cost or net realizable value using the weighted average cost method. In addition, certain lubricants with a replacement cost of $99 million at September 30, 2020 and $107 million at September 30, 2019 are valued at the lower of cost or market using the LIFO method.
The following summarizes Valvoline’s inventories in the Consolidated Balance Sheets as of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2020
|
|
2019
|
Finished products
|
|
$
|
195
|
|
|
$
|
203
|
|
Raw materials, supplies and work in process
|
|
30
|
|
|
32
|
|
Reserve for LIFO cost valuation
|
|
(26)
|
|
|
(41)
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
199
|
|
|
$
|
194
|
|
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)
|
|
2020
|
|
2019
|
Land (a)
|
|
$
|
96
|
|
|
$
|
58
|
|
Buildings (b)
|
|
412
|
|
|
348
|
|
Machinery and equipment
|
|
494
|
|
|
475
|
|
Construction in progress
|
|
101
|
|
|
72
|
|
Total property, plant and equipment
|
|
1,103
|
|
|
953
|
|
Accumulated depreciation (c)
|
|
(490)
|
|
|
(455)
|
|
Net property, plant and equipment
|
|
$
|
613
|
|
|
$
|
498
|
|
|
|
|
|
|
(a) Includes $34 million of finance lease assets as of September 30, 2020.
(b) Includes $43 million of finance lease assets and $61 million of assets under capital leases and financing obligations as of September 30, 2020 and 2019, respectively.
(c) Includes $10 million for finance lease assets and $11 million for assets under capital leases and financing obligations as of September 30, 2020 and 2019, respectively.
Non-cash accruals included in total property, plant and equipment were $51 million and $10 million during the years ended September 30, 2020 and 2019, 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)
|
|
2020
|
|
2019
|
|
2018
|
Depreciation (includes capital and financing leases)
|
|
$
|
56
|
|
|
$
|
52
|
|
|
$
|
49
|
|
Transactions with Ashland
Valvoline had total net obligations due to Valvoline's former parent company of $48 million and $78 million as of September 30, 2020 and 2019, respectively, which were primarily recorded in Other noncurrent liabilities in the Consolidated Balance Sheets. These liabilities relate to net obligations due under the Tax Matters Agreement as well as reimbursements payable for certain other contractual obligations, including those intended to transfer to Valvoline as part of the Distribution. Refer to Note 10 for additional details regarding the Tax Matters Agreement and related obligations.
NOTE 18 – 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)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Sales
|
|
$
|
607
|
|
|
$
|
557
|
|
|
$
|
578
|
|
|
$
|
591
|
|
|
$
|
516
|
|
|
$
|
613
|
|
|
$
|
652
|
|
|
$
|
629
|
|
Gross profit (a)
|
|
$
|
211
|
|
|
$
|
183
|
|
|
$
|
207
|
|
|
$
|
203
|
|
|
$
|
187
|
|
|
$
|
207
|
|
|
$
|
258
|
|
|
$
|
217
|
|
Operating income (b)
|
|
$
|
104
|
|
|
$
|
87
|
|
|
$
|
117
|
|
|
$
|
96
|
|
|
$
|
88
|
|
|
$
|
102
|
|
|
$
|
176
|
|
|
$
|
113
|
|
Income before income taxes (b) (c)
|
|
$
|
97
|
|
|
$
|
72
|
|
|
$
|
88
|
|
|
$
|
80
|
|
|
$
|
78
|
|
|
$
|
85
|
|
|
$
|
188
|
|
|
$
|
28
|
|
Net income (d)
|
|
$
|
73
|
|
|
$
|
53
|
|
|
$
|
63
|
|
|
$
|
63
|
|
|
$
|
59
|
|
|
$
|
65
|
|
|
$
|
122
|
|
|
$
|
27
|
|
Net earnings per common share (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
0.66
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
0.39
|
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
$
|
0.32
|
|
|
$
|
0.34
|
|
|
$
|
0.66
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Included in gross profit is $5 million related to the compensated absences benefits change in the fourth fiscal quarter of 2020 and business interruption expenses of $1 million and $5 million in the second and third fiscal quarters of 2019, respectively.
(b)Operating and pre-tax income include the matters noted in (a), as well as adjustments associated with legacy and separation-related matters, restructuring activities, acquisition and divestiture-related activity, and business interruption recoveries. Restructuring expense of $1 million and $1 million of legacy and separation-related income were recognized in the first fiscal quarter of 2020, combining for no net impact on operating and pre-tax income. In the second fiscal quarter of 2020, $2 million of acquisition and divestiture-related expenses were incurred, and in the prior year period, legacy and separation-related and restructuring and related expenses were recognized of $3 million and $8 million, respectively. Expenses associated with legacy and separation-related matters and restructuring of $1 million and $4 million were recognized in the third fiscal quarters of 2020 and 2019, respectively. In the fourth fiscal quarter of 2020, income associated with legacy and separation-related adjustments, the compensated absences benefits change, business interruption recoveries, and restructuring were recognized of $30 million, $6 million (in addition to the benefit noted in (a) above), $2 million, and $1 million, respectively. In the fourth quarter of fiscal 2019, income associated with an acquisition-related bargain purchase gain of $4 million was partially offset by $2 million of restructuring and related expenses.
(c)In addition to the matters summarized in (a) and (b), income before income taxes includes debt extinguishment and modification costs of $19 million in the second fiscal quarter of 2020, as well as pension and other postretirement plan remeasurement adjustments, which resulted in a $22 million gain and a $69 million loss in the fourth fiscal quarters of 2020 and 2019, respectively.
(d)Net income includes the matters noted above as well as discrete adjustments to the income tax provision, which included $2 million of expense in the second fiscal quarter of 2020 related to India tax reform, a $2 million benefit in the second fiscal quarter of 2019 associated with Kentucky tax reform, and net expense of $28 million due to establishing a valuation allowance on legacy tax attributes, partially offset by a benefit primarily as a result of federal tax legislation enacted in the fourth fiscal quarter of 2020.
(e)Net earnings per share in each quarter is computed using the weighted average number of shares outstanding during that quarter while net earnings per share for the full year is computed using the weighted average number of shares outstanding during the year. Thus, the sum of the four quarters’ net earnings per share will not necessarily equal the full-year net earnings per share.
NOTE 19 – SUBSEQUENT EVENTS
Quick Lubes acquisitions
From October 1 through November 17, 2020, Valvoline acquired 54 service center stores in single and multi-store transactions for an aggregate purchase price of $162 million. These acquisitions included 14 service center stores in Texas acquired from Kent Lubrication Centers Ltd. (doing business as Avis Lube) on October 1, 2020; 21 former franchise service center stores in Kansas and Missouri acquired from Westco Lube, Inc. on October 15, 2020; and 12 service center stores in Idaho acquired from L & F Enterprises (doing business as Einstein’s Oilery) on October 30, 2020. These acquisitions provide an opportunity to expand Valvoline's Quick Lubes system in key markets and grow to more than 600 company-owned service center stores.
Dividend declared
On November 12, 2020 the Company’s Board of Directors approved a quarterly cash dividend of $0.125 per share of common stock. The dividend is payable December 15, 2020 to shareholders of record on November 30, 2020.
China working capital credit facility
On November 16, 2020, the Company entered into a one-year revolving credit facility of approximately $23 million to finance working capital of the blending and packaging plant in China, as needed. Borrowings will bear interest at the local prime rate less the applicable interest rate margin with interest due monthly and repayment of borrowings due at maturity.