Document Entity Information - USD ($) $ in Billions |
12 Months Ended | ||
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Sep. 30, 2018 |
Nov. 16, 2018 |
Mar. 31, 2018 |
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| Document and Entity Information [Abstract] | |||
| Entity Registrant Name | VALVOLINE INC | ||
| Entity Central Index Key | 0001674910 | ||
| Document Type | 10-K | ||
| Document Period End Date | Sep. 30, 2018 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --09-30 | ||
| Entity Filer Category | Large Accelerated Filer | ||
| Entity Common Stock, Shares Outstanding | 188,163,312 | ||
| Document Fiscal Year Focus | 2018 | ||
| Document Fiscal Period Focus | FY | ||
| Smaller Reporting Company | false | ||
| Emerging Growth Company | false | ||
| Entity Current Reporting Status | Yes | ||
| Entity Voluntary Filers | No | ||
| Entity Well Known Seasoned Issuer | Yes | ||
| Entity Shell Company | false | ||
| Public Float | $ 4.4 |
Consolidated Balance Sheets (Parenthetical) - $ / shares |
Sep. 30, 2018 |
Sep. 30, 2017 |
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| Statement of Financial Position [Abstract] | ||
| Preferred stock authorized (in shares) | 40,000,000 | 40,000,000 |
| Preferred stock issued (in shares) | 0 | 0 |
| Preferred stock outstanding (in shares) | 0 | 0 |
| Common stock, par value (usd per share) | $ 0.01 | $ 0.01 |
| Common stock authorized (in shares) | 400,000,000 | 400,000,000 |
| Common stock issued (in shares) | 188,000,000 | 203,000,000 |
| Common stock outstanding (in shares) | 188,000,000 | 203,000,000 |
Consolidated Statements of Stockholders' Deficit (Parenthetical) - $ / shares |
12 Months Ended | ||
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Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2016 |
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| Statement of Stockholders' Equity [Abstract] | |||
| Dividends paid per common share (usd per share) | $ 0.298 | $ 0.196 | $ 0.00 |
Consolidated Statements of Cash Flows (Parenthetical) $ in Millions |
12 Months Ended |
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Sep. 30, 2016
USD ($)
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| Statement of Cash Flows [Abstract] | |
| Offering costs incurred in initial public offering | $ 40 |
Description of Business and Basis of Presentation |
12 Months Ended |
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Sep. 30, 2018 | |
| Accounting Policies [Abstract] | |
| Description of Business and Basis of Presentation | 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 and respected premium consumer brands in the global automotive lubricant industry, known for its high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans more than 150 years, during which it has developed powerful name recognition across multiple product and service channels. Valvoline was incorporated in May 2016 as a subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). Prior to this time, Valvoline operated as an unincorporated commercial unit of Ashland. Following a series of restructuring steps prior to the initial public offering (the “IPO”) of Valvoline common stock, the Valvoline business was transferred from Ashland to Valvoline such that the Valvoline business included substantially all of the historical Valvoline business reported by Ashland, as well as certain other legacy Ashland assets and liabilities transferred to Valvoline from Ashland (the “Contribution”). In connection with the IPO on September 28, 2016, 34.5 million shares of Valvoline common stock were sold to investors and Ashland retained 170 million shares representing 83% of the total outstanding shares of Valvoline common stock. On May 12, 2017, Ashland distributed all of its remaining interest in Valvoline to Ashland stockholders (the “Distribution”) through a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017, which marked the completion of Valvoline’s separation from Ashland. Effective upon the Distribution, Ashland no longer owned any shares of Valvoline common stock, and Valvoline was no longer a controlled and consolidated subsidiary of Ashland. Basis of presentation and consolidation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and U.S. Securities and Exchange Commission (“SEC”) regulations. The financial statements are presented on a consolidated basis for all periods presented and include the accounts of the Company and its majority-owned 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. The Contribution of the Valvoline business by Ashland to Valvoline was treated as a reorganization of entities under common Ashland control. As a result, Valvoline retrospectively presented the consolidated financial statements of Valvoline and its subsidiaries for periods presented prior to the completion of the Contribution, which were prepared on a stand-alone basis and derived from Ashland’s consolidated financial statements and accounting records using the historical results of operations, and assets and liabilities attributed to Valvoline’s operations, as well as allocations of expenses from Ashland. The consolidated financial statements for periods presented subsequent to the completion of the Contribution reflect the transfer of various assets and liabilities from Ashland on a carryover basis (historical cost) and the consolidated operations of Valvoline and its majority-owned subsidiaries as a separate, stand-alone entity. All transactions and balances between Valvoline and Ashland have been reported in the consolidated financial statements. For periods prior to the IPO, these transactions were considered to be effectively settled for cash at the time the transactions were recorded. These transactions and net cash transfers to and from Ashland’s centralized cash management system are reflected as a component of Ashland’s net investment in the Consolidated Statements of Stockholders’ Deficit and as a financing activity within the accompanying Consolidated Statements of Cash Flows. Ashland’s net investment represents the cumulative net investment by Ashland in Valvoline through the IPO, including net income through the completion of the IPO and net cash transfers to and from Ashland through Distribution. Valvoline’s retained earnings from the IPO through September 30, 2016 were not material and accordingly, were not separately presented in the Consolidated Statements of Stockholders’ Deficit. Concurrent with the Distribution, Ashland’s net investment in Valvoline was reduced to zero with a corresponding adjustment to Paid-in capital and Retained deficit. Prior to the completion of the IPO, Valvoline utilized centralized functions of Ashland to support its operations, and in return, Ashland allocated certain of its expenses to Valvoline. These costs, together with an allocation of Ashland overhead costs, are included within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income for the year ended September 30, 2016 and are disclosed in more detail in Note 18. Upon completion of the IPO, Valvoline assumed responsibility for the costs of these functions. |
Significant Accounting Policies |
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| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||
| Significant Accounting Policies | SIGNIFICANT ACCOUNTING POLICIES Valvoline’s significant accounting policies, which conform to U.S. GAAP and are applied on a consistent basis in all years presented, except 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. Cash and cash equivalents All short-term, highly liquid investments having original maturities of three months or less are considered to be cash equivalents. Accounts receivable and allowance for doubtful accounts Valvoline records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses for accounts receivable. Valvoline estimates the allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, the financial health of its customers, macroeconomic conditions, past transaction history with the customer and changes in customer payment terms. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible accounts receivable against the allowance for doubtful accounts 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. Cost includes materials, labor and manufacturing overhead related to the purchase and production of inventories. The Company regularly reviews inventory quantities on hand and the estimated utility 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 5 to 25 years and machinery and equipment principally over 5 to 30 years. Property, plant and equipment is relieved of the cost and related accumulated depreciation when assets are disposed of or otherwise retired. Gains or losses on the dispositions of property, plant and equipment are included in the Consolidated Statements of Comprehensive Income 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 identifiable level of cash flows. Such indicators could include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of property, plant and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale). Business combinations The financial results of the businesses that Valvoline has acquired are included in the Company’s consolidated financial results from the respective dates of the acquisitions. The Company allocates the purchase consideration to the identifiable assets acquired and liabilities assumed in the business combination based on their acquisition-date fair values. The excess of the purchase consideration over the amounts assigned to the identifiable assets and liabilities is recognized as goodwill. Factors giving rise to goodwill generally include synergies that are anticipated as a result of the business combination, including access to new customers and markets. The fair values of identifiable intangible assets acquired in business combinations are generally determined using an income approach, requiring financial forecasts and estimates as well as market participant assumptions. Goodwill and other intangible assets Valvoline tests goodwill for impairment annually as of July 1 or when events and circumstances indicate an impairment may have occurred. This annual assessment consists of Valvoline determining each reporting unit’s current fair value compared to its current carrying value. Valvoline’s reporting units are Core North America, Quick Lubes, and International. In evaluating goodwill for impairment, Valvoline has the option to first perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Qualitative factors include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance, among others. If under the quantitative assessment, the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, must be measured under step two of the impairment analysis. In step two of the analysis, an impairment loss will be recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a discounted cash flow (“DCF”) analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate, weighted average cost of capital, terminal values and working capital changes. Several of these assumptions vary among reporting units. The cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies method which is based on earnings multiple data. The Company also performs a reconciliation between market capitalization and the estimate of the aggregate fair value of the reporting units, including consideration of a control premium. Valvoline elected to perform a qualitative assessment during fiscal 2018 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 value, which is determined generally using an income approach, and the Company employs assumptions developed using the perspective of a market participant. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Valvoline reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable and any not expected to be recovered through undiscounted future net cash flows and assets are written down to current fair value. Equity method investments Investments in companies, including joint ventures, where Valvoline has the ability to exert significant influence, but not control, over operating and financial policies of the investee are accounted for 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. The majority of these plans were transferred to and assumed by the Company in the Contribution of certain of Ashland’s pension and other postretirement benefit obligations and plan assets in late fiscal 2016. Following the Contribution, Valvoline accounts for these obligations as single-employer plans for which Valvoline recognizes the net liabilities and the full amount of any costs or gains. Valvoline also has certain international single-employer pension plans for which the net liabilities and associated costs have been recognized in each period presented herein. 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, which is at least annually as of September 30, the measurement date, and whenever a remeasurement is triggered. The remaining components of pension and other postretirement benefits 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 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, expected return on plan assets, 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 income other than service cost are recognized below operating income within Net pension and other postretirement plan income in the Consolidated Statements of Comprehensive Income. Prior to the Contribution in fiscal 2016, Valvoline employees were eligible to participate in pension and other postretirement benefit plans sponsored by Ashland in many of the countries where the Company did business. Valvoline accounted for its participation in Ashland-sponsored pension and other postretirement benefit plans as a participation in a multiemployer plan and recognized its allocated portion of net periodic benefit cost based on Valvoline-specific plan participants. 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 Sales generally are recognized when persuasive evidence of an arrangement exists, products are delivered or services are rendered, the sales price is fixed or determinable and collectability is reasonably assured. Valvoline reports all sales net of tax assessed by qualifying governmental authorities. Certain shipping and handling costs paid by the customer are recorded in sales, while those costs paid by Valvoline are recorded in cost of sales. Shipping and handling costs recorded in sales were $10 million in fiscal 2018 and $16 million in both fiscal 2017 and 2016. Sales rebates and discounts, consisting primarily of promotional rebates and customer pricing discounts, are offered through various programs to customers. Sales are recorded net of these rebates and discounts totaling $357 million, $360 million, and $388 million in the Consolidated Statements of Comprehensive Income for the years ended September 30, 2018, 2017, and 2016, respectively. Provisions for sales rebates and discounts are established and recognized as incurred, generally at the time of the sale, or over the term of the sales contract. Valvoline bases its estimates on historical rates of customer discounts and rebates as well as the specific identification of discounts and rebates expected to be realized. Allowances related to these customer incentive programs are adjusted based on actual experience and adjustments are recorded to earnings in the period changes are known and reasonably estimable. Reserves for these customer programs and incentives were $57 million and $54 million as of September 30, 2018 and 2017, respectively, and are recorded within Accrued expenses and other liabilities in the Consolidated Balance Sheets. Franchise revenue included within sales was $29 million, $28 million, and $25 million during fiscal 2018, 2017, and 2016, respectively. Franchise revenue generally consists of initial franchise fees and royalties. Initial franchise fees are recognized when all material obligations have been substantially performed and the store has opened for business. Franchise royalties are based upon a percentage of monthly sales of the franchisees and are recognized as such sales occur. Expense recognition Cost of sales include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving, inspection, warehousing, internal transfers and all other distribution network costs. Selling, general and administrative expenses are expensed as incurred and include sales and marketing costs, research and development costs, advertising, customer support, and administrative costs, including allocated corporate charges from Ashland in the periods prior to the IPO. Advertising costs ($63 million in fiscal 2018, $61 million in fiscal 2017 and $58 million in fiscal 2016) and research and development costs ($14 million in fiscal 2018 and $13 million in both fiscal 2017 and 2016) are expensed as incurred. 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. Income taxes Income tax expense is provided based on income before income taxes. Deferred income taxes represent benefits and expenses that will be used to reduce or increase corporate taxes expected to be paid as well as differences between the tax bases and carrying amounts of assets and liabilities that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary 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. For the periods prior to the Distribution, Valvoline’s operating results are included in Ashland’s consolidated U.S., state, and certain international subsidiaries’ income tax returns. For these periods, the income tax provision in these Consolidated Statements of Comprehensive Income was calculated on a separate return basis as if Valvoline was operating on a stand-alone basis and filed separate tax returns in the jurisdictions in which it operated. 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 contracts, which are accounted for as either assets or liabilities in the Consolidated Balance Sheets at fair value and the resulting gains or losses are recognized as adjustments to earnings. Valvoline does not currently have any derivative instruments that are designated and qualify as hedging instruments. The Company classifies its cash flows for these transactions as investing activities in the Consolidated Statements of Cash Flows. Fair value measurements Fair value is defined as an exit price, representing an amount that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance prioritizes the inputs used to measure fair value into the three-tier fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. 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:
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. 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 share-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 2018, Valvoline adopted the following:
Issued but not yet adopted In May 2014, the FASB issued accounting guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance. This guidance introduces a five-step model for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. The Company has substantially completed its assessment of the accounting required under the new revenue recognition guidance and will adopt the new guidance in the first quarter of fiscal 2019. The Company’s revenue is primarily generated from the sale and service delivery of engine and automotive maintenance products to customers, which is not accounted for under industry-specific guidance. Valvoline’s performance obligations generally consist of a single delivery element whereby revenue is recognized at the point in time when ownership, risks and rewards transfer. Revenue transactions recorded under the new guidance are expected to be substantially consistent with the treatment under existing guidance. The Company will adopt the new revenue recognition guidance using the modified retrospective method, which recognizes the cumulative effect of the changes in retained deficit at adoption, but will not retrospectively apply the new guidance to prior periods. The Company expects to adjust retained deficit at adoption primarily related to the timing of certain sales made to distributors for approximately $15 million to $20 million on a pre-tax basis. In addition, the Company expects immaterial impacts to reclassify certain activities in the Consolidated Statements of Comprehensive Income on an ongoing basis following adoption. The Company will expand footnote disclosures under the new revenue guidance beginning in the first quarter of fiscal 2019, including disaggregation of revenue, pro forma impacts of changes to the financial statements in the initial year of adoption, and qualitative disclosures related to the nature and terms of its sales, timing of the transfer of control and judgments used in the application of the five-step model. The Company has also implemented appropriate changes to business processes to support recognition and disclosure under the new guidance. In August 2018, the FASB issued new accounting guidance related to fees paid by a customer in a cloud computing arrangement, which aligns the accounting for implementation costs incurred in a cloud computing arrangement that is a service arrangement with the existing capitalization guidance for implementation costs incurred to develop or obtain internal-use software. Valvoline will early adopt this guidance on a prospective basis on October 1, 2018, and as a result, certain relevant costs related to these arrangements may be capitalized. The adoption of this guidance is not expected to have a material impact on the Company's financial condition, results of operations or cash flows. In February 2016, the FASB issued new accounting guidance related to lease transactions. The primary objective of this guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. This new guidance is effective for the Company in the first quarter of fiscal 2020 using a modified retrospective approach. The Company has begun planning its assessment and implementation process, including a process to identify all forms of its leases globally, as well as analyzing the practical expedients and evaluating the specific impacts on its consolidated financial statements. While the Company’s evaluation of this guidance is in the early stages, adoption is expected to have a material impact on the Consolidated Balance Sheets as the majority of the Company’s operating leases are expected to be recognized as right of use assets and associated lease liabilities. The Company also anticipates expanded footnote disclosures related to its leases under the new guidance. The FASB issued other accounting guidance during the period that is not currently applicable or expected to have a material impact on Valvoline’s financial statements, and therefore, is not described above. |
Fair Value Measurements |
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| Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value Measurements | FAIR VALUE MEASUREMENTS Valvoline uses applicable guidance for defining fair value, the initial recording and periodic remeasurement of certain assets and liabilities measured at fair value, and related disclosures for instruments measured at fair value. Fair value accounting guidance establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. An instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. Valvoline measures assets and liabilities using inputs from the following three levels of fair value hierarchy: Level 1 - Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect Valvoline’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which may include Valvoline’s own financial data, such as internally developed pricing models, DCF methodologies, as well as instruments for which the fair value determination requires significant management judgment. The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy as of September 30:
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 that have maturities of three months or less. Time deposits are held 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 hedge non-U.S. currency denominated balance sheet exposures and exchange one currency for another for a fixed rate on a future date of twelve months or less. The Company had outstanding contracts with notional values of $74 million and $47 million as of September 30, 2018 and 2017, 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 master netting 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, 2018 or 2017. 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 foreign 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 to fund benefit payments for certain of its U.S. non-qualified pension plans. This fund is classified as Level 1 as it primarily consists of highly liquid fixed income U.S. government bonds that trade with sufficient frequency and volume to enable pricing information to be obtained on an ongoing basis. 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. Long-term debt The Company’s outstanding fixed rate senior notes consist of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million issued in July 2016 (the “2024 Notes”) and 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million issued in August 2017 (the “2025 Notes” and together with the 2024 Notes, the “Senior Notes”). The fair values of the 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.
Refer to Note 10 for details of other debt instruments that have variable interest rates, and accordingly, their carrying amounts approximate fair value. Pension plan assets Pension plan assets are measured at fair value at least annually on September 30. Refer to Note 13 for disclosures regarding the fair value of plan assets, including classification within the fair value hierarchy. |
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Acquisitions and Divestitures |
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| Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisitions and Divestitures | ACQUISITIONS AND DIVESTITURES Quick Lubes store acquisitions During fiscal 2018, Valvoline acquired 136 service center stores for an aggregate purchase price of $125 million. These acquisitions included 73 franchise service center stores, 60 former franchise service center stores, and 3 service center stores acquired in single and multi-store transactions. During fiscal 2017, the Company acquired 43 service center stores for an aggregate purchase price of $72 million, of which $4 million was paid in fiscal 2016. These acquisitions included 14 former franchise service center stores and 29 service center stores acquired in single and multi-store transactions. During fiscal 2016, 104 service center stores were acquired for an aggregate purchase price of $79 million. These acquisitions included 42 franchise service center stores, 9 former franchise service center stores and 53 service center stores acquired in single and multi-store transactions. The Company’s acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. Unless otherwise noted, goodwill is generally expected to be deductible for income tax purposes and is primarily attributed to the operational synergies and potential growth expected to result in economic benefits in the respective markets of the acquisitions. A summary follows of the aggregate cash consideration paid and the total assets acquired and liabilities assumed for the years ended September 30:
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. The incremental results of operations of the acquired stores, which were not material to the Company’s consolidated results, have been included in the consolidated financial statements from the date of each acquisition, and accordingly, pro forma disclosure of financial information has not been presented. Below are further details on the significant acquisitions completed in each period presented in the consolidated financial statements herein. Fiscal 2018 acquisitions Henley Bluewater On October 2, 2017, the Company acquired the business assets of 56 former franchise service center stores from Henley Bluewater LLC for $60 million. These stores build on the infrastructure and talent base of the existing Company-owned operations in northern Ohio and add Company-owned locations in Michigan. Of the $60 million, approximately $36 million was allocated to goodwill with the remainder primarily allocated to reacquired franchise rights intangible assets, which are being amortized on a straight-line basis over the weighted average remaining term of approximately seven years. Great Canadian Oil Change On July 13, 2018, Valvoline acquired the business assets of 73 franchise service center stores from Great Canadian Oil Change Ltd. for $53 million. This acquisition expands Valvoline’s Quick Lubes footprint outside of the United States and increases the Quick Lubes system to more than 1,200 company-owned and franchised locations in North America. Of the $53 million, approximately $16 million was allocated to goodwill with $27 million allocated to trade names, $9 million to customer relationships, and the remainder allocated to working capital. The finite-lived intangible assets are being amortized on a straight-line basis over 20 years and 15 years for trade names and customer relationships, respectively. Fiscal 2017 acquisitions Time-It Lube On January 31, 2017, Valvoline acquired the business assets of 28 service center stores from Time-It Lube LLC and Time-It Lube of Texas, LP (collectively, “Time-It Lube”) for $49 million, of which approximately $45 million was allocated to goodwill, and the remainder was allocated to working capital, trade names and customer relationships. This acquisition expanded the presence of Quick Lubes into east Texas and marked its entry into Louisiana. Fiscal 2016 acquisitions Oil Can Henry’s On February 1, 2016, the business assets of 42 franchise service center stores and 47 service center stores were acquired from OCH International, Inc. (“Oil Can Henry’s”) for $62 million. This acquisition complemented the existing Quick Lubes service center store base and expanded its profile within several northwest U.S. markets. Of the $62 million purchase price, $82 million was allocated to goodwill, $11 million to the assumption of debt, and the remainder was allocated to net working capital, property, plant and equipment, trade names, and other noncurrent assets and liabilities. Remaining ownership interest in subsidiary Valvoline historically owned a 70% controlling interest and consolidated the financial results of its subsidiary in Thailand. In December 2017, Valvoline purchased the remaining 30% interest for total consideration of approximately $16 million, making it a wholly-owned subsidiary of the Company. This interest was not material to the current or prior period financial statements for presentation and disclosure as a noncontrolling interest, which was eliminated as a result of this purchase through an adjustment to Paid-in capital and Retained deficit. Dispositions During fiscal 2018, Valvoline completed the liquidation of its Brazilian subsidiary within the International reportable segment and sold two service center stores to a franchisee within the Quick Lubes reportable segment. These transactions resulted in a net gain of $2 million, which was recognized in Equity and other income, net in the Consolidated Statements of Comprehensive Income during the year ended September 30, 2018. |
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Equity Method Investments |
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| Equity Method Investments and Joint Ventures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Method Investments | 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. Valvoline’s investments in these unconsolidated affiliates were $31 million and $30 million as of September 30, 2018 and 2017, respectively. Valvoline’s stockholders’ deficit included $30 million and $28 million of undistributed earnings from affiliates accounted for under the equity method as of September 30, 2018 and 2017, respectively. Summarized financial information for Valvoline’s equity method investments follows as of and for the years ended September 30:
The Company’s transactions with affiliate companies accounted for under the equity method were as follows for the years ended September 30:
Valvoline has outstanding receivable balances with affiliates accounted for under the equity method of $6 million and $3 million as of September 30, 2018 and 2017, respectively, included in Accounts receivable, net within the Consolidated Balance Sheets. |
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Accounts Receivable |
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| Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounts Receivable | ACCOUNTS RECEIVABLE The following summarizes Valvoline’s accounts receivable in the Consolidated Balance Sheets as of September 30:
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. During the year ended September 30, 2018, Valvoline sold $129 million of accounts receivable to the financial institution. Prior to the Distribution, Ashland was party to the agreement to sell certain Valvoline trade accounts receivable and remitted payment to Valvoline upon sale. During fiscal 2017 and prior to the Distribution, $40 million of Valvoline accounts receivable were sold to the financial institution and proceeds were remitted to Valvoline. Once Valvoline became party to the arrangement following the Distribution and through the remainder of the year ended September 30, 2017, $50 million of accounts receivable were sold to the financial institution, for a total of $90 million in fiscal 2017. |
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Inventories |
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| Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventories | 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 $89 million at September 30, 2018 and $83 million at September 30, 2017 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:
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Property, Plant and Equipment |
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| Property, Plant and Equipment | 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:
Non-cash accruals included in total property, plant and equipment totaled $13 million and $39 million for the years ended September 30, 2018 and 2017, respectively. The following summarizes property, plant and equipment charges included within the Consolidated Statements of Comprehensive Income.
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Other Intangibles | GOODWILL AND OTHER INTANGIBLES Goodwill The following summarizes the changes in the carrying amount of goodwill for each reportable segment and in total during fiscal 2018 and 2017:
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:
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:
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Debt |
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| Debt | DEBT The following table summarizes Valvoline’s short-term borrowings and long-term debt as of September 30:
Senior Notes During August 2017, Valvoline completed the issuance of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million. The net proceeds from the offering of the 2025 Notes were $394 million (after deducting initial purchasers’ discounts and debt issuance costs), which were used to make a voluntary contribution to the Company’s qualified U.S. pension plan. During July 2016, Valvoline completed the issuance of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million. The net proceeds from the offering of the 2024 Notes were $370 million (after deducting initial purchasers’ discounts and debt issuance costs), which were transferred to Valvoline’s former parent, Ashland. The Senior Notes are subject to customary events of default for similar debt securities, which if triggered may accelerate the payment of principal, premium, if any, and accrued but unpaid interest on the notes. Such events of default include non-payment of principal and interest, non-performance of covenants and obligations, default on other material debt, and bankruptcy or insolvency. If a change of control repurchase event occurs, Valvoline, may be required to offer to purchase the 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 their maturity in the manner specified in the governing indentures. The Senior Notes are guaranteed by each of Valvoline’s subsidiaries that guarantee obligations under the existing senior credit facility described below. Valvoline completed registered exchange offers for the Senior Notes in December 2017, for which no additional proceeds were received. Senior Credit Agreement The 2016 Senior Credit Agreement provides for an aggregate principal amount of $1,325 million in senior secured credit facilities (“2016 Credit Facilities”), comprised of (i) a five-year $875 million term loan facility (“Term Loans”), and (ii) a five-year $450 million revolving credit facility (including a $100 million letter of credit sublimit) (“Revolver”). As of September 30, 2018 and 2017, the Term Loans had outstanding principal balances of $270 million and $285 million, respectively. As of September 30, 2018, there was $147 million outstanding under the Revolver, and there was no amount outstanding as of September 30, 2017. During the year ended September 30, 2018, Valvoline borrowed $204 million and made payments of $57 million on the Revolver. As of September 30, 2018, the total borrowing capacity remaining under the Revolver was $293 million due to a reduction of $10 million for letters of credit outstanding. The outstanding principal balance of the Term Loans is required to be repaid in quarterly installments of approximately $8 million for each of fiscal 2019 and 2020, $15 million for fiscal 2021, with the balance due at maturity. At Valvoline’s option, amounts outstanding under the 2016 Senior Credit Agreement bear interest at either LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. The interest rate fluctuates between LIBOR plus 1.500% per annum and LIBOR plus 2.500% per annum (or between the alternate base rate plus 0.500% per annum and the alternate base rate plus 1.500% annum), based upon Valvoline’s corporate credit ratings or the consolidated first lien net leverage ratio (as defined in the 2016 Senior Credit Agreement). The 2016 Credit Facilities are guaranteed by 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), and are secured by a first-priority security interest in substantially all the personal property assets and certain real property assets of Valvoline and the guarantors, including all or a portion of the equity interests of certain of Valvoline’s domestic subsidiaries and first-tier non-U.S. subsidiaries. The 2016 Credit Facilities may be prepaid at any time without premium. The 2016 Senior Credit Agreement contains usual and customary representations and warranties and usual and customary affirmative and negative covenants, including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants (including maintenance of a maximum consolidated net leverage ratio and a minimum consolidated interest coverage ratio). As of the end of any fiscal quarter, the maximum consolidated net leverage ratio and minimum consolidated interest coverage ratio permitted under the 2016 Senior Credit Agreement are 4.5 and 3.0, respectively. As of September 30, 2018, Valvoline was in compliance with all covenants under the 2016 Senior Credit Agreement. Trade Receivables Facility On November 29 2016, Valvoline entered into a $125 million, one-year revolving trade receivables securitization facility (“Trade Receivables Facility”) with certain financial institutions. On November 20, 2017, the Company amended the Trade Receivables Facility to extend the maturity date to November 19, 2020 and increase the maximum funding under the facility to $175 million based on the availability of eligible receivables and other customary factors and conditions. 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. 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. During the first fiscal quarter of 2017, Valvoline borrowed $75 million under the Trade Receivables Facility and used the net proceeds to repay an equal amount of the Term Loans. During the year ended September 30, 2018, Valvoline made payments of $36 million and borrowed $101 million under the Trade Receivables Facility, using the proceeds to supplement the Company’s daily cash needs. The Company accounts for the Trade Receivables Facility as secured borrowings. Based upon the maturity dates in place in each respective period, as of September 30, 2018, the $140 million balance outstanding was classified as Long-term debt and the $75 million balance at September 30, 2017 was classified as Short-term debt in the Consolidated Balance Sheets. Based on the availability of eligible receivables, the total borrowing capacity remaining under the Trade Receivables Facility as of September 30, 2018 was approximately $35 million. The financing subsidiary owned $275 million and $247 million of outstanding accounts receivable as of September 30, 2018 and 2017, respectively, and these amounts are included in Accounts receivable, net in the Company’s Consolidated Balance Sheets. 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 2.8% and 1.8% for the years ended September 30, 2018 and 2017, 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. Long-term debt maturities The future maturities of debt outstanding as of September 30, 2018, excluding debt issuance costs and discounts, are as follows:
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Lease Commitments |
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| Lease Commitments | LEASE COMMITMENTS Valvoline conducts certain of its sales, support, manufacturing and distribution operations using leased facilities, and also operates certain equipment and vehicles under leases, the initial lease terms of which vary in length. Many of the leases contain renewal options and escalation clauses that are not material to the consolidated financial statements. Capitalized and financing lease obligations are primarily included in Other noncurrent liabilities with related assets in Property, plant and equipment, net within the Consolidated Balance Sheets. Future minimum lease payments for noncancelable operating and capital leases and financing obligations as of September 30, 2018 for the following fiscal years ended September 30 are:
(a) Minimum payments have not been reduced by minimum sublease rental income of approximately $4 million due under future noncancelable subleases. The composition of net rent expense for all operating leases, including leases of property and equipment, was as follows for the years ended September 30:
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Income Taxes |
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| Income Tax Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes | INCOME TAXES 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:
Tax reform legislation On December 22, 2017, the President of the United States signed into law tax reform legislation (the “Act”), which generally became effective January 1, 2018. The Act includes a number of provisions, including lowering the federal corporate income tax rate from a maximum of 35% to 21% and changing or limiting certain tax deductions. While the Company expects this rate reduction will ultimately benefit Valvoline, the Act also includes provisions that are expected to offset some of the benefit of the rate reduction, including the repeal of the deduction for domestic production activities and the expansion of the limitation on the deduction of certain executive compensation. In addition, the Act alters the landscape of taxation of non-U.S. operations and provides immediate deductions for certain new investments, among other provisions. Based on the effective date of the rate reduction in the Act, the Company’s federal corporate statutory income tax rate was a blended rate of 24.5% for fiscal 2018, declining to 21% for fiscal 2019 and beyond. During the year ended September 30, 2018, enactment of the Act resulted in the following provisional impacts:
The estimated impacts of the Act recorded during the year ended September 30, 2018 are provisional, and management will continue to assess the impact and record adjustments through the income tax provision up to one year from the enactment date as amounts are known and reasonably estimable. Accordingly, the impact of the Act may differ from the Company’s provisional estimates due to and among other factors, information currently not available, changes in interpretations and the issuance of additional guidance, as well as changes in assumptions the Company has currently made, including actions the Company may take in future periods as a result of the Act. The Company also reclassified $8 million from accumulated other comprehensive income to retained deficit related to the stranded tax effects resulting from the change in the federal corporate tax rate during fiscal 2018 as further detailed in Notes 2 and 17. Many states have enacted state specific tax reform and legislation in response to the Act. In general, these impacts are not material to the Company’s financial statements. Valvoline is incorporated in Kentucky, which enacted income tax reform on April 13, 2018. The provisions of Kentucky tax reform generally become effective in fiscal 2019 and include a number of provisions, notably lowering the corporate income tax rate from a maximum of 6% to 5%. While the Company expects these changes will ultimately benefit Valvoline, during the year ended September 30, 2018, the enactment of Kentucky tax reform resulted in the following impacts:
The Company will continue to monitor enacted state legislation and make relevant updates to estimates when warranted. Components of income tax expense Income tax expense consisted of the following for the years ended September 30:
Deferred income taxes are provided for income and expense items recognized in different years for tax and financial reporting purposes. Deferred taxes A summary of the deferred tax assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:
As a result of the Act and Kentucky tax reform, the Company revalued its net deferred tax assets, which resulted in a reduction in the value of approximately $71 million primarily related to the reduction in the federal and Kentucky corporate income tax rates that was recorded as additional deferred income tax expense in the Company’s Consolidated Statements of Comprehensive Income for the year ended September 30, 2018 as noted above. Undistributed earnings The Act implements a new territorial tax system that imposes a one-time transition tax, or deemed repatriation, on undistributed earnings of certain non-U.S. subsidiaries that is based in part on the amount of these earnings held in cash and other specified assets. The mandatory deemed repatriation resulted in a $23 million gross liability, but allows for the realization of $19 million of previously unrecognized foreign tax credits related to taxes previously paid in relevant local jurisdictions. The net result was $4 million of income tax expense which was recognized during the year ended September 30, 2018. Prior to the Act, 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 based on access to sufficient liquidity within the United States, as well as plans for use and investment outside of the United States. As these tax basis differences were subject to the deemed repatriation tax, the Company reevaluated its assertion and no longer intends to indefinitely reinvest the Company’s non-U.S. current and undistributed earnings. As a result, Valvoline recorded $2 million for estimated incremental withholding taxes during fiscal 2018 and began to 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 remain indefinitely reinvested. If these earnings were to be repatriated in the future, the Company may be subject to additional income and withholding taxes, which are not practicable to estimate. Tax Matters Agreement The Tax Matters Agreement was entered into on September 22, 2016 between Ashland and Valvoline (the “Tax Matters Agreement”) and generally provides that Valvoline is required to indemnify Ashland for the following items:
For taxable periods that begin on or after the day after the date of Distribution, Valvoline has not been included in Ashland’s consolidated U.S. and state income tax returns, nor in income tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). Following the Distribution, Valvoline files tax returns that include only Valvoline and/or its subsidiaries, as appropriate, and accordingly, Valvoline is not required to make tax sharing payments to Ashland for these taxable periods. Valvoline has joint and several liability with Ashland to the U.S. Internal Revenue Service (“IRS”) for the consolidated U.S. federal income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland Group Returns. Valvoline will have joint control with Ashland, over any audit or examination related to taxes for which Valvoline is required to indemnify Ashland. For the periods prior to the Distribution, Valvoline was included in the Ashland Group Returns. Under the Tax Matters Agreement, Ashland generally made all necessary tax payments to the relevant tax authorities with respect to Ashland Group Returns, and Valvoline made tax sharing payments to Ashland, inclusive of tax attributes utilized. The amount of the tax sharing payments were generally determined as if Valvoline and each of its relevant subsidiaries included in the Ashland Group Returns filed their own consolidated, combined or separate tax returns for the period from the IPO to the Distribution that include only Valvoline and/or its relevant subsidiaries, as the case may be. During fiscal 2017, Valvoline made $48 million in net tax-sharing payments to Ashland for the period prior to the Distribution. During fiscal 2018, Valvoline recognized $8 million of pre-tax expense in Legacy and separation-related expenses, net within the Consolidated Statements of Comprehensive Income for the estimated adjustments in net amounts due to Ashland primarily as a result of Ashland’s lower than expected utilization of Valvoline tax attributes in Ashland Group Returns, tax reform legislation that reduced statutory rates, as well as the settlement of fiscal 2012 and 2013 federal examinations that resulted in increases in Valvoline’s expected utilization of tax attributes. Valvoline recognized an income tax benefit of $5 million during fiscal 2018 related to these changes. In fiscal 2017, Valvoline recognized a $16 million pre-tax benefit in Legacy and separation-related expenses, net for a reduction in amounts due to Ashland under the Tax Matters Agreement as a result of Ashland’s estimated utilization of Valvoline tax attributes in the Ashland Group Returns. This pre-tax benefit was offset by income tax expense of $16 million. 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 $66 million and $62 million as of September 30, 2018 and 2017, respectively. The Tax Matters Agreement also provides that Valvoline indemnify Ashland for any taxes (and reasonable expenses) resulting from the failure of the Distribution to qualify for non-recognition of gain and loss or certain reorganization transactions related to the Contribution or the Distribution to qualify for their intended tax treatment (“Transaction Taxes”), where the taxes result from (1) breaches of covenants (including covenants containing the restrictions described below that are designed to preserve the tax-free nature of the Distribution), (2) the application of certain provisions of U.S. federal income tax law to the Distribution with respect to acquisitions of Valvoline’s common stock, or (3) any other actions that Valvoline knows or reasonably should expect would give rise to such taxes. The Tax Matters Agreement also requires Valvoline to indemnify Ashland for a portion of certain other Transaction Taxes allocated to Valvoline based on Valvoline’s market capitalization relative to the market capitalization of Ashland. The Tax Matters Agreement imposes c | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||