VALVOLINE INC, 10-Q filed on 8/8/2017
Quarterly Report
Document Entity Information
9 Months Ended
Jun. 30, 2017
Jul. 31, 2017
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
VALVOLINE INC 
 
Entity Central Index Key
0001674910 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--09-30 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
202,625,205 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Net Income (Loss) Attributable to Parent [Abstract]
 
 
 
 
Sales
$ 534 
$ 499 
$ 1,537 
$ 1,435 
Cost of sales
337 
300 
957 
868 
Gross profit
197 
199 
580 
567 
Selling, general and administrative expense
100 
93 
292 
273 
Pension and other postretirement plan non-service income and remeasurement adjustments, net
(17)
(2)
(60)
(3)
Separation costs
15 
27 
Equity and other income
(5)
(5)
(20)
(16)
Operating income
104 
113 
341 
313 
Net interest and other financing expense
10 
28 
Net loss on acquisition
(1)
Income before income taxes
94 
113 
313 
312 
Income tax expense
38 
38 
114 
104 
Net income
56 
75 
199 
208 
NET INCOME PER SHARE
 
 
 
 
Net income per share, basic (usd per share)
$ 0.27 1
$ 0.44 1
$ 0.97 1
$ 1.22 1
Net income per share, diluted (usd per share)
$ 0.27 1
$ 0.44 1
$ 0.97 1
$ 1.22 1
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
 
 
 
 
Weighted average common shares outstanding, basic (in shares)
204 1
170 1
204 1
170 1
Weighted average common shares outstanding, diluted (in shares)
204 1
170 1
204 1
170 1
Dividends paid per common share (usd per share)
$ 0.05 
$ 0.00 
$ 0.15 
$ 0.00 
COMPREHENSIVE INCOME
 
 
 
 
Net income
56 
75 
199 
208 
Other comprehensive income (loss), net of tax
 
 
 
 
Unrealized translation gain (loss)
(8)
(3)
Pension and other postretirement obligation adjustment
(2)
(6)
Other comprehensive income (loss)
(8)
(3)
(3)
Comprehensive income
$ 60 
$ 67 
$ 196 
$ 205 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2017
Sep. 30, 2016
Current assets
 
 
Cash and cash equivalents
$ 132 
$ 172 
Accounts receivable
403 
363 
Inventories
181 
139 
Other assets
32 
56 
Total current assets
748 
730 
Property, plant and equipment
 
 
Cost
792 
727 
Accumulated depreciation
423 
403 
Net property, plant and equipment
369 
324 
Goodwill and intangibles
334 
267 
Equity method investments
29 
26 
Deferred income taxes
394 
389 
Other assets
86 
89 
Total noncurrent assets
1,212 
1,095 
Total assets
1,960 
1,825 
Current liabilities
 
 
Short-term debt
75 
Current portion of long-term debt
15 
19 
Trade and other payables
196 
177 
Accrued expenses and other liabilities
235 
204 
Total current liabilities
521 
400 
Noncurrent liabilities
 
 
Long-term debt
643 
724 
Employee benefit obligations
811 
886 
Deferred income taxes
Other liabilities
186 
143 
Total noncurrent liabilities
1,642 
1,755 
Commitments and contingencies
   
   
Stockholders’ deficit
 
 
Preferred stock, no par value, 40 shares authorized; no shares issued and outstanding
Common stock, par value $0.01 per share, 400 shares authorized; 203 and 205 shares issued and outstanding at June 30, 2017 and September 30, 2016, respectively
Paid-in capital
710 
Retained deficit
(207)
Ashland's net investment
(1,039)
Accumulated other comprehensive loss
(3)
Total stockholders’ deficit
(203)
(330)
Total liabilities and stockholders’ deficit
$ 1,960 
$ 1,825 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Jun. 30, 2017
Sep. 30, 2016
Statement of Financial Position [Abstract]
 
 
Preferred stock authorized (shares)
40,000,000 
40,000,000 
Preferred stock issued (shares)
Preferred stock outstanding (shares)
Common stock, par value (usd per share)
$ 0.01 
$ 0.01 
Common stock authorized (shares)
400,000,000 
400,000,000 
Common stock issued (shares)
203,000,000 
205,000,000 
Common stock outstanding (shares)
203,000,000 
205,000,000 
Condensed Consolidated Statement of Stockholders' Deficit (USD $)
In Millions, except Share data, unless otherwise specified
Total
Common stock
Paid-in capital
Retained deficit
Accumulated other comprehensive (loss) income
Ashland's net investment
Common stock outstanding, beginning balance (shares) at Sep. 30, 2016
$ (330)
$ 2 
$ 710 
$ 0 
$ (3)
$ (1,039)
Common stock outstanding, beginning balance (in shares) at Sep. 30, 2016
205,000,000 
205,000,000 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income
199 
 
 
199 
 
 
Contribution of net liabilities from former parent
 
 
 
(2)
Net transfers from former parent
 
 
 
 
Distribution of Ashland's net investment
 
(710)
(326)
 
1,036 
Unrealized translation gain (loss)
 
 
 
 
Stock-based compensation
 
 
 
 
Pension and other postretirement obligation adjustment
(6)
 
 
 
(6)
 
Repurchase of common stock (in shares)
 
(2,000,000)
 
 
 
 
Repurchase of common stock
(50)
 
 
(50)
 
 
Dividends paid, $0.049 per common share
(30)
 
 
(30)
 
 
Common stock outstanding, ending balance (shares) at Jun. 30, 2017
$ (203)
$ 2 
$ 2 
$ (207)
$ 0 
$ 0 
Common stock outstanding, ending balance (in shares) at Jun. 30, 2017
203,000,000 
203,000,000 
 
 
 
 
Condensed Consolidated Statement of Stockholders' Deficit (Parenthetical)
3 Months Ended 9 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Statement of Stockholders' Equity [Abstract]
 
 
 
 
Dividends paid per common share (usd per share)
$ 0.05 
$ 0.00 
$ 0.15 
$ 0.00 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Cash flows from operating activities
 
 
Net income
$ 199 
$ 208 
Adjustments to reconcile net income to cash flows from operating activities
 
 
Depreciation and amortization
30 
29 
Debt issuance cost amortization
Equity income from affiliates
(10)
(11)
Distributions from equity affiliates
11 
Net loss on acquisition
Pension contributions
(16)
Gain on pension and other postretirement plan remeasurements
(8)
Stock-based compensation expense
Change in assets and liabilities
 
 
Accounts receivable
(39)1
(3)1
Inventories
(41)1
(10)1
Payables and accrued liabilities
43 1
(14)1
Other assets and liabilities
(16)1
(25)1
Total cash provided by operating activities
157 
186 
Cash flows from investing activities
 
 
Additions to property, plant and equipment
(43)
(32)
Proceeds from disposal of property, plant and equipment
Acquisitions, net of cash acquired
(66)
(70)
Other investing activities, net
(1)
Total cash used in investing activities
(109)
(101)
Cash flows from financing activities
 
 
Net transfers from (to) Ashland
(85)
Proceeds from borrowings
75 
Repayments on borrowings
(87)
Repurchase of common stock
(50)
Cash dividends paid
(30)
Total cash used in financing activities
(87)
(85)
Effect of currency exchange rate changes on cash and cash equivalents
(1)
Decrease in cash and cash equivalents
(40)
Cash and cash equivalents - beginning of period
172 
Cash and cash equivalents - end of period
$ 132 
$ 0 
Basis of Presentation
Basis of Presentation
BASIS OF PRESENTATION

Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide producer, marketer, and supplier of engine and automotive maintenance products and services. On September 22, 2015, the Company's former parent, Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as "Ashland"), announced that its Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the Valvoline business and Ashland's specialty chemicals business (the “Separation”). Following a series of restructuring steps, Valvoline was incorporated in May 2016, and prior to the completion of the Company’s initial public offering (“IPO”) on September 28, 2016, substantially all of the historical Valvoline business reported by Ashland, as well as certain other legacy Ashland assets and liabilities, were transferred to Valvoline (the "Contribution"). After completing the IPO, Ashland owned approximately 83% of the outstanding shares of Valvoline’s common stock. On May 12, 2017, Ashland distributed all of its remaining interest in Valvoline to Ashland stockholders (the "Distribution") through a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017, marking the completion of Valvoline's Separation from Ashland. Effective upon Distribution, Ashland no longer owns any shares of Valvoline common stock, and Valvoline is no longer a controlled and consolidated subsidiary of Ashland.

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 is retrospectively presenting the condensed consolidated financial statements of Valvoline and its subsidiaries for periods presented prior to the completion of the IPO, which have been prepared on a stand-alone basis and derived from Ashland’s consolidated financial statements and accounting records using the historical results of operations, and assets and liabilities attributed to Valvoline’s operations, as well as allocations of expenses from Ashland. The condensed consolidated financial statements for periods presented subsequent to the completion of the IPO reflect 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 condensed consolidated financial statements. For periods prior to the completion of the IPO, transactions between Valvoline and Ashland 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 Condensed Consolidated Balance Sheets and as a financing activity within the accompanying Condensed Consolidated Statements of Cash Flows. Ashland's net investment on the Condensed Consolidated Balance Sheets represents the cumulative net investment by Ashland in Valvoline, including net income through the completion of the IPO and net cash transfers to and from Ashland. In the Condensed Consolidated Statement of Stockholders’ Deficit, Ashland's net investment represents the cumulative net investment by Ashland in Valvoline through IPO, including net cash transfers to and from Ashland through Distribution. 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.

The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and Securities and Exchange Commission regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Certain prior period amounts have been reclassified to conform to current presentation. In addition, refer to Note 11 for information regarding a revision to correct an immaterial error in the net earnings per share (“EPS”) calculations previously reported in the consolidated and condensed consolidated financial statements for the periods prior to and including September 30, 2016.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, all adjustments considered necessary for a fair presentation have been included herein, and the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable.  The results for the interim periods are not necessarily indicative of results to be expected for the entire year.

New accounting standards

A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of all new accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The following standards relevant to Valvoline were either issued or adopted in the current period.

In April 2015, the FASB issued accounting guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Cloud computing arrangements represent the delivery of hosted services over the internet which includes software, platforms, infrastructure and other hosting arrangements. Under the guidance, customers that gain access to software in a cloud computing arrangement account for the software as internal-use software only if the arrangement includes a software license. Valvoline adopted this standard on a prospective basis on October 1, 2016. As a result, certain costs related to these arrangements will be expensed when incurred.

In March 2016, the FASB issued new accounting guidance for certain aspects of share-based payments to employees, which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. In particular, the tax effects of all stock-based compensation awards will be included in income, windfall tax benefits and deficiencies will be reported as discrete items in the interim period when they arise, all tax-related cash flows from share-based payments will be reported as operating activities in the statement of cash flows, the classification of awards as liabilities or equity due to tax withholdings may change, and accounting for forfeitures may change. This guidance is effective for the Company beginning October 1, 2017; however, Valvoline elected to early adopt this guidance in the quarter ended June 30, 2017, with all relevant adjustments applied as of the beginning of the fiscal year. This guidance also allows entities to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company has elected to recognize forfeitures as they occur rather than estimate a forfeiture rate. The impact on Valvoline's condensed consolidated financial statements as a result of adopting this new guidance was not material.

In January 2017, the FASB issued accounting guidance which simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step impairment test under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The guidance instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance must be applied prospectively and will become effective for Valvoline on October 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Valvoline's annual evaluation of goodwill for impairment is performed as of July 1. As this guidance simplifies the process for measuring impairment, management does not expect there will be an impact on the consolidated financial statements given the Company's historical excess fair value of its reporting units.

In March 2017, the FASB issued accounting guidance that will change how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Condensed Consolidated Statements of Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Condensed Consolidated Statements of Comprehensive Income as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost will be presented separately outside of the operating income caption. This guidance must be applied retrospectively and will become effective for Valvoline on October 1, 2018, with early adoption being optional. Valvoline currently intends to early adopt this guidance on October 1, 2017 and expects this guidance will have a significant impact on the presentation of the Condensed Consolidated Statements of Comprehensive Income as it will result in a reclassification of Pension and other postretirement plan non-service income and remeasurement adjustments, net from within operating income to non-operating income.

In May 2017, the FASB issued accounting guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. This guidance must be applied prospectively and will become effective for Valvoline on October 1, 2018, with early adoption being optional. Valvoline does not expect this guidance to have a significant impact on the consolidated financial statements, though the impacts will depend on the nature of any future changes in Valvoline's share-based awards. This guidance will be applied in relevant future periods when terms or conditions of share-based awards are changed.
Acquisitions
Acquisitions
ACQUISITIONS

Time-It Lube

On January 31, 2017, Valvoline completed the acquisition of the business assets related to 28 quick-lube stores, primarily located in east Texas and Louisiana, from Time-It Lube LLC and Time-It Lube of Texas, LP (together, "Time-It Lube") for a purchase price of $48 million. Of the $48 million, $44 million was preliminarily allocated to goodwill and the remainder was allocated to working capital, customer relationships and trade names. This acquisition is recorded within the Quick Lubes reportable segment.

Goodwill is calculated as the excess of the consideration transferred over the net assets acquired and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition of Time-It Lube. The goodwill is expected to be deductible for income tax purposes.

Oil Can Henry’s

On February 1, 2016, Valvoline completed the acquisition of OCH International, Inc. (Oil Can Henry’s), which included 89 quick-lube stores, 47 company-owned stores and 42 franchise locations in Oregon, Washington, California, Arizona, Idaho and Colorado.
The total purchase price, net of cash acquired, for the acquisition of Oil Can Henry’s within the Quick Lubes reportable segment was $62 million. Of the $62 million, $83 million was allocated to goodwill and $10 million to assets, including working capital, property, plant and equipment, intangible assets, and other non-current assets. Valvoline also assumed $11 million of debt, $11 million of current liabilities and $9 million of noncurrent liabilities.
The factors contributing to the recognition of goodwill were based on strategic benefits that are expected to be realized from the acquisition of Oil Can Henry’s. None of the goodwill is expected to be deductible for income tax purposes.
 
Other Quick Lubes acquisitions

During the nine months ended June 30, 2017, the Company completed the acquisition of 14 franchise locations within the Quick Lubes reportable segment for an aggregate purchase price of $22 million. The purchase price has primarily been allocated to Goodwill and intangibles within the Condensed Consolidated Balance Sheets.
Accounts Receivable
Accounts Receivable
ACCOUNTS RECEIVABLE

The following summarizes Valvoline’s accounts receivable as of the Condensed Consolidated Balance Sheet dates:

(In millions)
June 30
2017
 
September 30
2016
Trade and other accounts receivable
$
408

 
$
368

Less: Allowance for doubtful accounts
(5
)
 
(5
)
 
$
403

 
$
363

Inventories
Inventories
INVENTORIES

Inventories are carried at the lower of cost or market value.  Inventories are primarily stated at cost using the weighted average cost method. In addition, certain lubricants are valued at cost using the last-in, first-out (“LIFO”) method. 

The following summarizes Valvoline’s inventories as of the Condensed Consolidated Balance Sheet dates:
(In millions)
June 30
2017
 
September 30
2016
Finished products
$
186

 
$
149

Raw materials, supplies and work in process
28

 
21

LIFO reserves
(30
)
 
(29
)
Obsolete inventory reserves
(3
)
 
(2
)
 
$
181

 
$
139

Goodwill
Goodwill
GOODWILL

Goodwill

Valvoline reviews goodwill for impairment annually 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 as of July 1. The performance of the annual impairment analysis during 2016 did not result in any impairment of goodwill, and no events or circumstances that would indicate an impairment may have occurred were noted during the nine months ended June 30, 2017. The estimated fair value of each reporting unit with a goodwill balance was significantly in excess of its carrying value.

The following is a progression of goodwill by reportable segment for the nine months ended June 30, 2017.

(In millions)
Core North America
 
Quick Lubes
 
International
 
Total
September 30, 2016
$
89

 
$
135

 
$
40

 
$
264

Acquisitions (a)

 
65

 

 
65

June 30, 2017
$
89

 
$
200

 
$
40

 
$
329

 
 
 
 
 
 
 
 
(a) Relates to $44 million for the acquisition of Time-It Lube and $21 million for the acquisition of 14 locations within the Quick Lubes reportable segment during the nine months ended June 30, 2017. See Note 2 for more information.
Debt
Debt
DEBT

The following table summarizes Valvoline’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets:
(In millions)
June 30
2017
 
September 30 2016
Senior Notes
$
375

 
$
375

Term Loan A
289

 
375

Accounts Receivable Securitization
75

 

Revolver

 

Other (a)
(6
)
 
(7
)
Total debt
$
733

 
$
743

Short-term debt
75

 

Current portion of long-term debt
15

 
19

Long-term debt
$
643

 
$
724

 
 
 
 
(a) At June 30, 2017, Other includes $8 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions. At September 30, 2016, Other included $9 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions.

At June 30, 2017, Valvoline’s long-term debt (including current portion and excluding debt issuance costs) had a carrying value of $666 million, compared to a fair value of $690 million.  At September 30, 2016, Valvoline’s long-term debt (including current portion and excluding debt issuance costs) had a carrying value of $752 million, compared to a fair value of $771 million.  Borrowings under the Term Loans (as defined below) are at variable interest rates and accordingly their carrying amounts approximate fair value. The fair value of the 5.500% senior unsecured notes due 2024 (“Senior Notes”) is based on quoted market prices, which are Level 1 inputs within the fair value hierarchy.

Accounts Receivable Securitization

In November 2016, Valvoline entered into a $125 million accounts receivable securitization facility (the “2017 Accounts Receivable Securitization Facility”) with various financial institutions. The Company may from time to time, obtain up to $125 million (in the form of cash or letters of credit) through the sale of an undivided interest in its accounts receivable. The agreement has a term of one year but is extendable at the discretion of the Company and the financial institutions. The Company accounts for the 2017 Accounts Receivable Securitization Facility as secured borrowings, which are classified as Short-term debt and the receivables sold are included in Accounts receivable in the Condensed Consolidated Balance Sheets. 

During the first quarter of 2017, Valvoline borrowed $75 million under the 2017 Accounts Receivable Securitization Facility and used the net proceeds to repay an equal amount of the Term Loan A. As a result, the Company recognized an immaterial charge related to the accelerated amortization of previously capitalized debt issuance costs, which is included in Net interest and other financing expense in the Condensed Consolidated Statements of Comprehensive Income for the nine months ended June 30, 2017. At June 30, 2017, $75 million was outstanding and the total borrowing capacity remaining under the 2017 Accounts Receivable Securitization Facility was $50 million. The weighted average interest rate for this instrument was 1.8% and 1.7% for the three and nine months ended June 30, 2017, respectively.

Senior Credit Agreement

The 2016 Senior Credit Agreement provided for an aggregate principal amount of $1,325 million in senior secured credit facilities (“2016 Credit Facilities”), composed of (i) a five year $875 million Term Loan A facility (“Term Loans”) and (ii) a five year $450 million revolving credit facility (including a $100 million letter of credit sublimit) (“Revolver”). At June 30, 2017, there were no borrowings under the Revolver and the total borrowing capacity remaining under the Revolver was $436 million due to a reduction of $14 million for letters of credit outstanding.

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 June 30, 2017, Valvoline is in compliance with all covenants under the 2016 Senior Credit Agreement.
Income Taxes
Income Taxes
INCOME TAXES

Tax Matters Agreement

For the periods prior to Separation from Ashland, Valvoline will be included in Ashland’s consolidated U.S. and state income tax returns and in tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). Under the Tax Matters Agreement between Valvoline and Ashland that was entered into on September 22, 2016, Ashland will generally make all necessary tax payments to the relevant tax authorities with respect to Ashland Group Returns, and Valvoline will make tax sharing payments to Ashland, inclusive of tax attributes utilized. The amount of the tax sharing payments will generally be determined as if Valvoline and each of its relevant subsidiaries included in the Ashland Group Returns filed their own consolidated, combined or separate tax returns for the periods prior to Distribution that include only Valvoline and/or its relevant subsidiaries, as the case may be. During the three and nine months ended June 30, 2017, Valvoline recognized a $2 million benefit in Selling, general and administrative expense for a reduction in amounts due to Ashland under the Tax Matters Agreement as a result of Ashland's utilization of Valvoline tax attributes in the Ashland Group Returns. This benefit was offset by additional income tax expense of $2 million. We could have similar Tax Matters Agreement activity in future periods based upon Ashland's ability to utilize Valvoline's estimated tax benefits in the Ashland Group Returns for the pre-Distribution periods.

Total net liabilities related to these and other obligations owed to Ashland under the Tax Matters Agreement were $66 million at June 30, 2017 and September 30, 2016. The net liability at June 30, 2017 consisted of receivables from Ashland of $9 million recorded in other current assets and deferred tax benefits of $1 million in deferred income tax assets, net of $76 million recorded in other long-term liabilities in the Condensed Consolidated Balance Sheets. As of September 30, 2016, the net liability consisted of receivables from Ashland of $5 million recorded in Other current assets and $71 million recorded in Other long-term liabilities in the Condensed Consolidated Balance Sheets.

Effective income tax rates

Income tax provisions for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items. Income tax expense for the three months ended June 30, 2017 was $38 million, an effective tax rate of 40.4% compared to an expense of $38 million, an effective tax rate of 33.6% for the three months ended June 30, 2016. The difference in these rates is primarily related to certain non-deductible Separation costs, as well as additional income tax expense resulting from the Tax Matters Agreement with Ashland.

Income tax expense for the nine months ended June 30, 2017 was $114 million, an effective tax rate of 36.4% compared to an expense of $104 million, an effective tax rate of 33.3% for the nine months ended June 30, 2016. The increase in the effective tax rate in the current year was primarily attributed to certain non-deductible Separation costs, additional income tax expense resulting from the Tax Matters Agreement with Ashland, and net favorable discrete items in the prior year related to the tax law change from the reinstatement of research and development credits.


Unrecognized tax benefits

Valvoline recognized less than $1 million of expense for uncertain tax positions for the three months ended June 30, 2017 and $1 million of expense for the nine months ended June 30, 2017, which related to increases in positions taken in the current year as well as increases related to positions taken on items from prior years. Valvoline expects no decrease in the amount of accrual for uncertain tax positions in the next twelve months. However, it is reasonably possible that there could be material changes to the amount of uncertain tax positions due to activities of the taxing authorities, settlement of audit issues, reassessment of existing uncertain tax positions, or the expiration of applicable statute of limitations; however, Valvoline is not able to estimate the impact of these items at this time.
Employee Benefit Plans
Employee Benefit Plans
EMPLOYEE BENEFIT PLANS

During September 2016 and prior to the IPO, Ashland transferred a substantial portion of its U.S. qualified and non-qualified pension plans as well as certain other postretirement obligations to Valvoline. Prior to the transfer, Valvoline accounted for its participation in the Ashland sponsored pension and other postretirement benefit plans as multi-employer plans. For purposes of these financial statements, costs for multi-employer plans were allocated based on Valvoline employee’s participation in the plan prior to September 1, 2016.

Subsequent to the transfer from Ashland, Valvoline accounts for the plans as single-employer plans recognizing the full amount of any costs, gains, and net liabilities within the condensed consolidated financial statements. The total pension and other postretirement benefit income accounted for under the single employer plan method of $16 million and $58 million during the three and nine months ended June 30, 2017, respectively, was primarily recognized within Pension and other postretirement plan non-service income and remeasurement adjustments, net in the Condensed Consolidated Statements of Comprehensive Income.

The total pension and other postretirement benefit costs allocated to Valvoline as multi-employer pension plans were zero and income of $2 million for the three and nine months ended June 30, 2016, respectively. During the three and nine months ended June 30, 2016, these allocated costs include non-service income and remeasurement adjustments of $3 million and $5 million of income, respectively. Of these amounts, approximately $1 million and $2 million of income were recorded to Cost of Sales during the three and nine months ended June 30, 2016, respectively, and $2 million and $3 million of income were recorded for the three and nine months ended June 30, 3016, respectively, to Pension and other postretirement plan non-service income and remeasurement adjustments, net in the Condensed Consolidated Statements of Comprehensive Income. During the three months ended June 30, 2016, service cost was $3 million, for which $1 million was recognized within Cost of goods sold as well as $2 million in Selling, general and administrative expense. During the nine months ended June 30, 2016, service cost was $7 million, and $3 million was within Cost of goods sold and $4 million within Selling, general and administrative expense.

Contributions to the pension plans were approximately $6 million and $16 million during the three and nine months ended June 30, 2017, respectively. Expected contributions to pension plans for the remainder of 2017 are approximately $400 million, including the planned voluntary contribution to the U.S. qualified pension plan discussed in Note 15.

Plan amendments and remeasurements

Effective January 1, 2017, Valvoline discontinued certain other postretirement health and life insurance benefits. The effect of these plan amendments resulted in a remeasurement gain of $8 million within Pension and other postretirement plan non-service income and remeasurement adjustments, net in the Condensed Consolidated Statements of Comprehensive Income for the nine months ended June 30, 2017.

During March 2016, Ashland announced that the majority of its defined benefit pension plans, accounted for as multi-employer plans, would freeze the accrual of benefits effective September 30, 2016. Additionally, during March 2016, Ashland announced that retiree life and medical benefits would be reduced effective October 1, 2016 and January 1, 2017, respectively. The effect of these plan amendments resulted in a remeasurement loss of $5 million for the nine months ended June 30, 2016. Approximately $2 million was recorded within Cost of sales and $3 million within Pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income for the nine months ended June 30, 2016.

Components of net periodic benefit costs (income)

For segment reporting purposes, service cost is proportionately allocated to each reportable segment, while all other components of net periodic benefit income are recognized within Unallocated and other.

The following table summarizes the components of pension and other postretirement benefit income. For the three and nine months ended June 30, 2016, these amounts were generally related to allocations to Valvoline under a multi-employer plan method of accounting.
 
 
 
 
 
 
Other postretirement benefits
 
 
Pension benefits
 
(In millions)
 
2017
 
2016
 
2017
 
2016
Three months ended June 30
 
 
 
 
 
 
 
 
Service cost
 
$
1

 
$
3

 
$

 
$

Interest cost
 
22

 
6

 

 

Expected return on plan assets
 
(36
)
 
(9
)
 

 

Amortization of prior service credit
 

 

 
(3
)
 

Net periodic benefit income
 
$
(13
)

$


$
(3
)
 
$

 
 
 
 
 
 
 
 
 
Nine months ended June 30
 
 
 
 
 
 
 
 
Service cost
 
$
2

 
$
7

 
$

 
$

Interest cost
 
65

 
18

 
1

 
1

Expected return on plan assets
 
(109
)
 
(27
)
 

 

Amortization of prior service credit
 

 

 
(9
)
 
(2
)
Curtailment gain
 

 
(12
)
 

 
(6
)
Actuarial loss (gain)
 

 
22

 
(8
)
 
1

Net periodic benefit (income) costs
 
$
(42
)
 
$
8

 
$
(16
)
 
$
(6
)

Non-qualified trust funds

The Company maintains a non-qualified trust to fund benefit payments for its non-qualified pension plan. Valvoline had $32 million and $34 million of non-qualified benefit plan investments as of June 30, 2017 and September 30, 2016, respectively, which primarily consist of fixed income U.S government bonds and are classified as Other noncurrent assets in the Condensed Consolidated Balance Sheets. Gains and losses related to deferred compensation investments are immediately recognized within the Condensed Consolidated Statements of Comprehensive Income. These investments consist of Level 1 measurements within the fair value hierarchy, which are observable inputs, such as unadjusted quoted prices in active markets for identical assets and liabilities.
Litigation, Claims and Contingencies
Litigation, Claims and Contingencies
LITIGATION, CLAIMS AND CONTINGENCIES

There are various claims, lawsuits and administrative proceedings pending or threatened against Valvoline and its various subsidiary companies. Such actions are with respect to commercial and tax disputes, product liability, toxic tort liability, environmental, and other matters which seek remedies or damages, in some cases in substantial amounts. While Valvoline cannot predict with certainty the outcome of such actions, it believes that adequate reserves have been recorded where appropriate. Losses already recognized with respect to such actions were not material as of June 30, 2017 and September 30, 2016.  There is a reasonable possibility that a loss exceeding amounts already recognized may be incurred related to these actions; however, Valvoline currently believes that such potential losses will not be material.
Stock-Based Compensation Plans
Stock-based Compensation Plans
STOCK-BASED COMPENSATION PLANS

Prior to the Distribution, share-based awards for key Valvoline employees and directors were principally settled in Ashland common stock and granted through participation in Ashland’s stock incentive plans, primarily in the form of stock appreciation rights ("SARs"), restricted stock, performance shares and other nonvested stock awards. In periods preceding the Distribution, stock-based compensation expense was allocated to Valvoline based on the awards and terms previously granted. In connection with the Distribution on May 12, 2017, outstanding Ashland share-based awards held by Valvoline employees were converted to equivalent share-based awards of Valvoline based on an exchange ratio of Ashland’s fair market value prior to Distribution in relation to Valvoline’s fair market value post-Distribution.

The 2016 Valvoline Inc. Incentive Plan (the "Valvoline IP") was adopted by Valvoline's Board of Directors effective October 1, 2016, after having been approved by Ashland as controlling stockholder on September 27, 2016. Share-based awards granted under the Valvoline IP contain similar terms and conditions as those granted under the Ashland stock incentive plans, including SARs, restricted stock, performance shares and other nonvested stock awards. A total of 7 million shares are authorized to be issued under the Valvoline IP.

Valvoline recognizes stock-based compensation expense within the Selling, general and administrative expense caption of the Condensed Consolidated Statements of Comprehensive Income. In the periods following the Distribution, Valvoline recognizes stock-based compensation expense based on the grant date fair value of new or modified awards over the requisite vesting period. Stock-based compensation expense was $3 million for each of the three months ended June 30, 2017 and 2016 and $7 million and $8 million for the nine months ended June 30, 2017 and 2016, respectively. During the prior year periods, this expense was based on an allocation from Ashland, and during the three and nine months ended June 30, 2017, these allocations were $1 million and $4 million, respectively. Included in the total stock-based compensation expense below is approximately $1 million for the three and nine months ended June 30, 2017 related to certain awards that are cash-settled and liability-classified; therefore, fair value is remeasured at the end of each reporting period until settlement.

The following is a summary of stock-based compensation expense recognized by the Company during the three and nine months ended June 30, 2017:

 
 
Three months ended
 
Nine months ended
 
 
June 30
 
June 30
(In millions)
 
2017
 
2017
SARs
 
$
1

 
$
2

Nonvested stock awards
 
1

 
4

Performance awards
 
1

 
1

Total stock-based compensation expense, pre-tax
 
3

 
7

Tax benefit
 
(1
)
 
(3
)
Total stock-based compensation expense, net of tax
 
$
2

 
$
4

 
 
 
 
 


SARs

Through Valvoline’s participation in Ashland’s stock incentive plans, SARs were granted to certain Valvoline employees to provide award holders with the ability to profit from the appreciation in value of a set number of shares of Ashland’s common stock over a period of time by exercising their award and receiving the sum of the increase in shares. SARs were granted at a price equal to the fair market value of the stock on the date of grant and typically vest and become exercisable over a period of one to three years. Unexercised SARs lapse ten years and one month after the date of grant.

In connection with the Distribution, Ashland SARs held by Valvoline employees were converted to equivalent Valvoline SARs based on the exchange ratio described above, which modified the number of SARs outstanding as well as the exercise price. The conversion was treated as a modification for accounting purposes, and accordingly, Valvoline estimated its pre- and post-modification fair value using the Black-Scholes option pricing model, which resulted in an immaterial increase in the incremental fair value of the awards. This model requires several assumptions, which were developed and updated based on historical trends and current market observations.  The following table illustrates the weighted average of key assumptions used within the Black-Scholes option-pricing model to estimate fair value of the modified SARs at Distribution. The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the modification for the expected term of the instrument. The dividend yield reflects the assumption that the current dividend payout will continue with no anticipated increases. Due to the lack of historical data for Valvoline, the volatility assumption was calculated by utilizing average volatility of peer companies with look-back periods commensurate with the expected term for each tranche of awards. The expected term is based on the vesting period and contractual term for each vesting tranche of awards, which generally utilized the mid-point between the vesting date and the expiration date as the expected term.

Weighted average fair value per share of SARs
 
$
7.44

Assumptions (weighted average)
 
 
 
Risk-free interest rate (a)
 
 
1.7
%
Expected dividend yield
 
 
0.9
%
Expected volatility (b)
 
 
22.8
%
Expected term (in years) (c)
 
 
7.45

 
 
 
 
(a) The range of risk-free interest rates used for the SARs converted to Valvoline shares at Distribution was 1.1% to 1.9%.
(b) The range of expected volatility used for the SARs converted to Valvoline shares at Distribution was 21.5% to 24.4%.
(c) For SARs that were fully vested at Distribution, the expected term is based on the mid-point of the Distribution date and the expiration date.

The following table summarizes the activity relative to SARs for the nine months ended June 30, 2017:

 
Number of Shares
(in thousands)
 
Weighted Average Exercise Price Per Share
 
Weighted Average Remaining Term
(in years)
 
Aggregate Intrinsic Value (in millions)
SARs outstanding at September 30, 2016

 
$

 
0 years
 
$

Conversion of Ashland awards to awards in Valvoline stock
1,896

 
17.53

 
 
 
 
Exercised (a)
(14
)
 
19.22

 
 
 

SARs outstanding at June 30, 2017
1,882

 
$
17.52

 
7.4 years
 
$
12

SARs exercisable at June 30, 2017
1,007

 
$
14.97

 
5.9 years
 
$
9

 
 
 
 
 
 
 
 

(a) The aggregate intrinsic value of awards exercised was less than $1 million.

As of June 30, 2017, there was $3 million of total unrecognized compensation costs related to SARs, which is expected to be recognized over a weighted average period of 1.6 years.

Nonvested stock awards

Primarily through Valvoline’s participation in Ashland’s stock incentive plans, nonvested stock awards in the form of Restricted Stock Awards (“RSAs”) and Restricted Stock Units (“RSUs”) were granted to certain Valvoline employees and directors. These awards were granted at a price equal to the fair market value of the underlying common stock on the grant date, generally vest over a one to five-year period, and are subject to forfeiture upon termination of service before the vesting period ends. These awards were primarily granted as RSUs that will convert to shares upon vesting, while the RSAs were grants made in shares, which entitle award holders to vote the shares, though the rights in the shares are restricted until vesting. Dividends on nonvested stock awards granted are in the form of additional units or shares of nonvested stock awards, which are subject to vesting and forfeiture provisions.

In connection with the Distribution, Ashland nonvested stock awards held by Valvoline employees were converted to equivalent Valvoline awards based on the exchange ratio described above, which modified the number of awards outstanding. The conversion was treated as a modification for accounting purposes, and accordingly, Valvoline determined its pre- and post-modification fair value, which resulted in an immaterial increase in the incremental fair value of the awards that will be expensed ratably over the remaining vesting period of each award.

The following table summarizes nonvested share activity for the nine months ended June 30, 2017:

 
 
Number of Shares
(in thousands)
 
Weighted Average Modified Grant Date Fair Value per Share
Outstanding balance at September 30, 2016
 

 
$

Granted
 
69

 
22.76

Conversion of Ashland service-based awards to awards in Valvoline stock
 
464

 
22.65

Vested and distributed
 
(3
)
 
23.66

Outstanding shares at June 30, 2017
 
530

 
$
22.66

 
 
 
 
 


As of June 30, 2017, there was $5 million of total unrecognized compensation costs related to nonvested stock awards, which is expected to be recognized over a weighted average period of 2.5 years. The aggregate intrinsic value of the nonvested stock awards as of June 30, 2017 is $13 million.

Performance awards
Through Valvoline’s participation in Ashland’s stock incentive plans, performance shares/units were awarded to certain key Valvoline employees that were tied to Ashland’s overall financial performance relative to the financial performance of selected industry peer groups and/or internal targets. Awards were granted annually, with each award covering a three-year vesting period. Each performance share/unit is convertible to one share of common stock, and the actual number of shares issuable upon vesting is determined based upon actual performance compared to market and financial performance condition targets. Nonvested performance shares/units generally do not entitle employees to vote the shares or to receive any dividends thereon.

In connection with the Distribution, Ashland performance awards held by Valvoline employees were converted to equivalent Valvoline awards based on the exchange ratio described above, which modified the number of awards outstanding. In addition, certain terms and conditions of the original grants were modified relative to the performance and market measures and related performance periods. The conversion was treated as a modification for accounting purposes, and accordingly, Valvoline estimated its pre- and post-modification fair value, which resulted in an immaterial increase in the incremental fair value of the awards that will be expensed ratably over the remaining vesting period of each award.

For those awards with remaining post-Distribution performance and market conditions, Valvoline estimated its modified fair value of each award using a two-step approach to consider both the performance and market conditions. With regard to the performance conditions, the modified fair value is equal to the fair market value of Valvoline's common stock on the modification date, and compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied. For the market conditions, compensation cost is recognized regardless of whether the conditions are satisfied and based on the modified fair value that was estimated using a Monte Carlo simulation valuation model using key assumptions summarized in the following table:
Assumptions (weighted average)
 
 
Risk-free interest rate (a)
 
1.2
%
Expected dividend yield
 
1.0
%
Expected volatility (b)
 
21.0
%
Expected term (in years)
 
1.9

(a) The range of risk-free interest rates used for the performance awards converted to Valvoline shares at Distribution was 0.9% to 1.5%.
(b) The range of expected volatility used for the performance awards converted to Valvoline shares at Distribution was 18.9% to 22.4%.

The following table summarizes performance award activity for the nine months ended June 30, 2017:

 
 
Number of Shares
(in thousands)
 
Weighted Average Modified Grant Date Fair Value per Share
Outstanding balance at September 30, 2016
 

 
$

Conversion of Ashland performance-based awards to awards in Valvoline stock
 
258

 
18.44

Outstanding shares at June 30, 2017
 
258

 
$
18.44

 
 
 
 
 


As of June 30, 2017, there was $3 million of unrecognized compensation costs related to nonvested performance share awards. That cost is expected to be recognized over a weighted average period of approximately 2.3 years.
Earnings Per Share
Earnings Per Share
EARNINGS PER SHARE

The Company corrected an immaterial error in the EPS calculations previously reported in the consolidated and condensed consolidated financial statements for the periods prior to and including September 30, 2016. EPS was previously reported in these periods based on weighted average common shares outstanding of 204.5 million, which included both the 170 million shares issued to Ashland in the Contribution as well as the 34.5 million shares issued in the IPO on September 28, 2016. The weighted average number of shares outstanding included in the EPS calculation have been revised for the respective prior year periods to include the IPO shares only for the period they were outstanding in the year ended September 30, 2016. The impact of this revision did not affect the current period financial statements or previously reported net income, financial position or cash flows.

Basic and diluted EPS previously reported in the Annual Report on Form 10-K for the fiscal year ended September 30, 2016 were $1.33, $0.96 and $0.84 for the years ended September 30, 2016, 2015 and 2014, respectively. After correction of the weighted average number of common shares outstanding, revised basic and diluted EPS were $1.60, $1.15 and $1.02 for the years ended September 30, 2016, 2015 and 2014, respectively. The Company evaluated the impact of the revision on prior periods, assessing materiality quantitatively and qualitatively and concluded that the error was not material to any of the interim and annual periods previously presented. The referenced periods not presented herein will be revised, as applicable, in future filings.

The following is the computation of basic and diluted EPS for the three and nine months ended June 30, 2017 and 2016. EPS is reported under the treasury stock method.

 
 
Three months ended
 
Nine months ended
 
 
June 30
 
June 30
(In millions except per share data)
 
2017
 
2016 (a)
 
2017
 
2016 (a)
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
56

 
$
75

 
$
199

 
$
208

Denominator
 
 
 
 
 
 
 
 
Weighted average shares used to compute basic EPS
 
204

 
170

 
204

 
170

Effect of dilutive securities (b)
 

 

 

 

Weighted average shares used to compute diluted EPS
 
204


170

 
204

 
170

 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.27

 
$
0.44

 
$
0.97

 
$
1.22

Diluted
 
$
0.27

 
$
0.44

 
$
0.97

 
$
1.22

 
 
 
 
 
 
 
 
 
(a) The weighted average number of shares outstanding for the three and nine months ended June 30, 2016 are based on the 170 million shares issued to Ashland in the Contribution.
(b) During the three and nine months ended June 30, 2017, share-based awards that were previously denominated in Ashland common stock were converted to Valvoline common stock at Distribution. As presented in the table, there was not a significant dilutive impact for the three and nine months ended June 30, 2017.
Stockholders' Deficit
Stockholders' Deficit
STOCKHOLDERS’ DEFICIT

Separation from Ashland

On May 12, 2017, Ashland completed the Distribution of all 170 million shares of Valvoline common stock as a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017. Based on the shares of Ashland common stock outstanding on the record date, each share of Ashland common stock received 2.745338 shares of Valvoline common stock in the Distribution. Concurrent with the Distribution, Ashland's net investment in Valvoline was reduced to zero with a corresponding adjustment to Paid-in capital and Retained deficit. See Note 1 for additional information regarding the Separation from Ashland.

Stockholder dividends

The Company's dividend activity during the nine months ended June 30, 2017 was as follows:
Declaration Date
 
Record Date
 
Payment Date
 
Dividend Per Common Share

 
Cash Outlay
(in millions)
 
Cash Paid to Ashland
(in millions)
November 15, 2016
 
December 5, 2016
 
December 20, 2016
 
$
0.049

 
$
10

 
$
8

January 24, 2017
 
March 1, 2017
 
March 15, 2017
 
$
0.049

 
$
10

 
$
8

April 27, 2017
 
June 1, 2017
 
June 15, 2017
 
$
0.049

 
$
10

 
$

 
 
 
 
 
 
 
 
 
 
 


Share repurchases

On April 24, 2017, Valvoline's Board of Directors authorized a share repurchase program under which Valvoline may repurchase up to $150 million of its common stock through December 31, 2019. During the three and nine months ended June 30, 2017, $50 million was used to repurchase 2 million common shares, which were retired on repurchase and recorded as a reduction in Common stock for par value, with the price paid in excess of par value recorded as an increase in Retained deficit. As of June 30, 2017, $100 million remains available for repurchase under this authorization.

Accumulated other comprehensive income (loss)

Components of other comprehensive income (loss) recorded in the Condensed Consolidated Statements of Comprehensive Income are presented in the following table, before tax and net of tax effects.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
(In millions)
Before tax
 
Tax benefit (expense)
 
Net of tax
 
Before tax
 
Tax benefit (expense)
 
Net of tax
Three months ended June 30
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation gain (loss)
$
6

 
$

 
$
6

 
$
(8
)
 
$

 
$
(8
)
Pension and other postretirement obligation adjustment:
 
 
 
 


 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(3
)
 
1

 
(2
)
 

 

 

Total other comprehensive income (loss)
$
3

 
$
1

 
$
4

 
$
(8
)
 
$

 
$
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended June 30
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation gain (loss)
$
3

 
$

 
$
3

 
$
(3
)
 
$

 
$
(3
)
Pension and other postretirement obligation adjustment:
 
 
 
 
 
 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(9
)
 
3

 
(6
)
 

 

 

Total other comprehensive (loss) income
$
(6
)
 
$
3

 
$
(3
)
 
$
(3
)
 
$

 
$
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 (a) Amortization of unrecognized prior service credits are included in net periodic benefit income for pension and other postretirement plans and are included in Pension and other postretirement plan non-service income and remeasurement adjustments in the Condensed Consolidated Statements of Comprehensive Income.
Related Party Transactions
Related Party Transactions
RELATED PARTY TRANSACTIONS

Separation from Ashland

Immediately prior to the Distribution, Ashland owned 170 million shares of Valvoline common stock, representing approximately 83% of the outstanding shares of Valvoline common stock. Effective upon the Distribution, Ashland no longer holds any shares of Valvoline common stock. See Note 1 for further information on the Separation from Ashland. Also refer to Note 11 for information regarding the conversion of share-based awards from Ashland to Valvoline at Distribution.

Financial assets

Prior to the Distribution in May, Ashland was party to an agreement to sell certain Valvoline customer accounts receivable in the form of drafts or bills of exchange to a financial institution. Each draft constitutes an order to pay for obligations of the customer to Ashland arising from the sale of goods to the customer. The intention of the arrangement is to decrease the time accounts receivable is outstanding and increase cash flows as Ashland in turn remits payment to Valvoline. Prior to the Distribution, during the three and nine months ended June 30, 2017, there were $29 million and $40 million of accounts receivable sold to the financial institution, respectively. During the three and nine months ended June 30, 2016, there were $39 million and $97 million of accounts receivable sold to the financial institution, respectively.

Derivative instruments

Until the IPO, Valvoline participated in Ashland’s centralized derivative programs that engage in certain hedging activities, which Ashland used to manage its exposure to fluctuations in foreign currencies. Gains and losses related to a hedge were either recognized in Ashland’s income immediately, to offset the gain or loss on the hedged item, or deferred and recorded in the equity section of Ashland’s balance sheet as a component of accumulated other comprehensive loss and subsequently recognized in Ashland’s income when the underlying hedged item was recognized in earnings. As a result, gains or losses on hedges during the three and nine months ended June 30, 2016 were not material and are reflected in Valvoline’s Condensed Consolidated Statements of Comprehensive Income through allocation from Ashland in Selling, general and administrative expense. 

Valvoline began its own hedging program in September 2016 to manage exposure to fluctuations in foreign currency. These foreign currency derivative instruments typically require exchange of one foreign currency for another for a fixed rate at a future date and generally have maturities of less than twelve months. All derivative instruments are recognized as assets and liabilities and are measured at fair value with the changes in fair value recorded within Selling, general and administrative expense in the Condensed Consolidated Statements of Comprehensive Income. Gains and losses recognized during the three and nine months ended June 30, 2017 related to changes in fair value of these instruments were not material. The Company has outstanding contracts with a notional value of $35 million as of June 30, 2017, and the fair values of the outstanding derivatives as of June 30, 2017 are included in other current assets and Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets were not material.

Related party receivables and payables

At June 30, 2017, Valvoline had receivables from Ashland of $10 million recorded in other current assets on the Condensed Consolidated Balance Sheets as well as $1 million in deferred tax benefits in deferred tax assets. Also, at June 30, 2017, Valvoline had payables to Ashland of $1 million, which was included in Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheets, and $76 million, which was recorded in other long-term liabilities in the Condensed Consolidated Balance Sheets. The current liability relates primarily to obligations owed to Ashland for transition services and other miscellaneous billings. The assets and long-term liability primarily relate to net obligations under the Tax Matters Agreement.

At September 30, 2016, Valvoline had receivables from Ashland of $30 million recorded in other current assets on the Condensed Consolidated Balance Sheets. Also, at September 30, 2016, Valvoline had recorded obligations to Ashland of $73 million, of which $2 million is in accrued expenses and Other liabilities in the Condensed Consolidated Balance Sheets and $71 million was recorded in other noncurrent liabilities in the Condensed Consolidated Balance Sheets. The long-term liability related primarily to the obligations under the Tax Matters Agreement.

Corporate allocations

Prior to the completion of the IPO, Valvoline utilized centralized functions of Ashland to support its operations, and in return, Ashland allocated certain of its expenses to Valvoline. Such expenses represent costs related, but not limited to, treasury, legal, accounting, insurance, information technology, payroll administration, human resources, incentive plans and other services. These costs, together with an allocation of Ashland overhead costs, are included within the Selling, general and administrative caption of the Condensed Consolidated Statements of Comprehensive Income. Where it was possible to specifically attribute such expenses to activities of Valvoline, amounts have been charged or credited directly to Valvoline without allocation or apportionment. Allocation of all other such expenses was based on a reasonable reflection of the utilization of service provided or benefits received by Valvoline during the periods presented on a consistent basis, such as headcount, square footage, tangible assets or sales. Valvoline’s management supports the methods used in allocating expenses and believes these methods to be reasonable estimates.

There were no general corporate expenses allocated to Valvoline during the three and nine months ended June 30, 2017, while there were $19 million and $60 million allocated during the three and nine months ended June 30, 2016, respectively. The following table summarizes the centralized and administrative support costs of Ashland that were allocated to Valvoline for the three and nine months ended June 30, 2016.

 
 
Three months ended June 30
 
Nine months ended June 30
(In millions)
 
2016
 
2016
Information technology
 
$
5

 
$
15

Financial and accounting
 
4

 
10

Building services
 
2

 
8

Legal and environmental
 
2

 
5

Human resources
 
2

 
4

Shared services
 

 
1

Other general and administrative
 
4

 
17

Total
 
$
19

 
$
60

Reportable Segment Information
Reportable Segment Information
REPORTABLE SEGMENT INFORMATION

Valvoline’s business is managed within reportable segments based on how operations are managed internally for the products and services sold to customers, including how the results are reviewed by the chief operating decision maker, which includes determining resource allocation methodologies used for reportable segments. Valvoline’s operating segments are identical to its reportable segments. Operating income is the primary measure reviewed by the chief operating decision maker in assessing each reportable segment’s financial performance. Valvoline’s businesses are managed within three reportable operating segments:  Core North America, Quick Lubes, and International. Additionally, to reconcile to total consolidated Operating income, certain corporate and other non-operational costs are included in Unallocated and other.

Reportable segment business descriptions

The Core North America business segment sells Valvoline™ and other branded products in the United States and Canada to both consumers who perform their own automotive maintenance, referred to as “Do-It-Yourself” or “DIY” consumers, as well as to installer customers who use Valvoline products to service vehicles owned by “Do-It-For Me” or “DIFM” consumers. Valvoline sells to its DIY consumers through national retail auto parts stores, leading mass merchandisers and independent auto part stores. Valvoline sells to its DIFM consumers through installers in the United States and Canada. Installer customers include car dealers, general repair shops, and third-party quick lube chains. Valvoline directly serves these customers as well as through a network of distributors. Valvoline’s installer channel also sells products and solutions to heavy duty customers such as original equipment manufacturers, on-highway fleets and construction companies.

Through its Quick Lubes business segment, Valvoline operates Valvoline Instant Oil Change (“VIOC”), a quick-lube service chain involving both Company-owned and franchised stores. Valvoline also sells its products and provides Valvoline branded signage to independent quick lube operators through its Express Care program.

The International business segment sells Valvoline™ and Valvoline’s other branded products in approximately 140 countries outside of the United States and Canada. Valvoline’s key international markets include China, India, EMEA, Latin America and Australia Pacific. The International business segment sells products for both consumer and commercial vehicles and equipment, and is served by company-owned plants in the United States, Australia and the Netherlands, a joint venture-owned plant in India and third-party warehouses and toll manufacturers in other regions. In most of the countries where Valvoline’s products are sold, Valvoline goes to market via independent distributors.
Unallocated and other generally includes items such as components of pension and other postretirement benefit plan expenses (excluding service costs, which are allocated to the reportable segments), certain significant company-wide restructuring activities and legacy costs or adjustments that relate to divested businesses, including $15 million and $27 million of Separation costs during the three and nine months ended June 30, 2017, respectively.

Reportable segment results

Results of Valvoline’s reportable segments are presented based on how operations are managed internally for the products and services sold to customers, including how the results are reviewed by the chief operating decision maker, which includes determining resource allocation methodologies used for reportable segments.  The structure and practices are specific to Valvoline; therefore, the financial results of Valvoline’s reportable segments are not necessarily comparable with similar information for other companies.  Valvoline allocates all costs to its reportable segments except for certain significant company-wide restructuring activities, such as the restructuring plans and/or other costs or adjustments that relate to former businesses that Valvoline no longer operates. The service cost component of pension and other postretirement benefits costs has historically been allocated to each reportable segment on a ratable basis (currently, the only plans with ongoing service costs are international plans within the International reportable segment), while the remaining components of pension and other postretirement benefits costs are recorded to Unallocated and other.  

The following table presents various financial information for each reportable segment:



(In millions)
Three months ended June 30
 
Nine months ended June 30
2017
 
2016
 
2017
 
2016
Sales
 
 
 
 
 
 
 
Core North America
$
258

 
$
251

 
$
748

 
$
740

Quick Lubes
139

 
119

 
394

 
332

International
137

 
129

 
395

 
363

 
$
534

 
$
499

 
$
1,537

 
$
1,435

Operating Income
 
 
 
 
 
 
 
Core North America
$
48

 
$
58

 
$
156

 
$
170

Quick Lubes
34

 
32

 
94

 
84

International
18

 
20

 
56

 
53

Total operating segments
$
100

 
$
110

 
$
306

 
$
307

Unallocated and other (a)
4

 
3

 
35

 
6

 
$
104

 
$
113

 
$
341

 
$
313

 
 
 
 
 
 
 
 
(a)
Unallocated and other includes a gain of $8 million during the nine months ended June 30, 2017 and a loss of $5 million during the nine months ended June 30, 2016 related to pension and other postretirement plan actuarial remeasurements. Unallocated and other also includes $2 million of benefit in the three and nine months ended June 30, 2017 related to the tax indemnity with Ashland, as well as Separation costs of $15 million and $27 million for the three and nine months ending June 30, 2017, respectively.
Subsequent Events
Subsequent Events
SUBSEQUENT EVENTS

Dividend declared

On July 27, 2017, the Board of Directors of Valvoline declared a quarterly cash dividend of $0.049 per share on Valvoline common stock. The dividend is payable on September 15, 2017 to shareholders of record on September 1, 2017.

Pension contribution and senior notes

On August 8, 2017, Valvoline made a voluntary contribution of approximately $395 million to its U.S. qualified pension plan. This contribution was funded by net proceeds from the issuance of 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $400 million received on August 8, 2017.
Basis of Presentation (Policies)
BASIS OF PRESENTATION

Valvoline Inc. (“Valvoline” or the “Company”) is a worldwide producer, marketer, and supplier of engine and automotive maintenance products and services. On September 22, 2015, the Company's former parent, Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as "Ashland"), announced that its Board of Directors approved proceeding with a plan to separate Ashland into two independent, publicly traded companies comprising of the Valvoline business and Ashland's specialty chemicals business (the “Separation”). Following a series of restructuring steps, Valvoline was incorporated in May 2016, and prior to the completion of the Company’s initial public offering (“IPO”) on September 28, 2016, substantially all of the historical Valvoline business reported by Ashland, as well as certain other legacy Ashland assets and liabilities, were transferred to Valvoline (the "Contribution"). After completing the IPO, Ashland owned approximately 83% of the outstanding shares of Valvoline’s common stock. On May 12, 2017, Ashland distributed all of its remaining interest in Valvoline to Ashland stockholders (the "Distribution") through a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017, marking the completion of Valvoline's Separation from Ashland. Effective upon Distribution, Ashland no longer owns any shares of Valvoline common stock, and Valvoline is no longer a controlled and consolidated subsidiary of Ashland.

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 is retrospectively presenting the condensed consolidated financial statements of Valvoline and its subsidiaries for periods presented prior to the completion of the IPO, which have been prepared on a stand-alone basis and derived from Ashland’s consolidated financial statements and accounting records using the historical results of operations, and assets and liabilities attributed to Valvoline’s operations, as well as allocations of expenses from Ashland. The condensed consolidated financial statements for periods presented subsequent to the completion of the IPO reflect 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 condensed consolidated financial statements. For periods prior to the completion of the IPO, transactions between Valvoline and Ashland 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 Condensed Consolidated Balance Sheets and as a financing activity within the accompanying Condensed Consolidated Statements of Cash Flows. Ashland's net investment on the Condensed Consolidated Balance Sheets represents the cumulative net investment by Ashland in Valvoline, including net income through the completion of the IPO and net cash transfers to and from Ashland. In the Condensed Consolidated Statement of Stockholders’ Deficit, Ashland's net investment represents the cumulative net investment by Ashland in Valvoline through IPO, including net cash transfers to and from Ashland through Distribution. 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.

The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and Securities and Exchange Commission regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Certain prior period amounts have been reclassified to conform to current presentation. In addition, refer to Note 11 for information regarding a revision to correct an immaterial error in the net earnings per share (“EPS”) calculations previously reported in the consolidated and condensed consolidated financial statements for the periods prior to and including September 30, 2016.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, all adjustments considered necessary for a fair presentation have been included herein, and the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable.  The results for the interim periods are not necessarily indicative of results to be expected for the entire year.

New accounting standards

A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of all new accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2016. The following standards relevant to Valvoline were either issued or adopted in the current period.

In April 2015, the FASB issued accounting guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Cloud computing arrangements represent the delivery of hosted services over the internet which includes software, platforms, infrastructure and other hosting arrangements. Under the guidance, customers that gain access to software in a cloud computing arrangement account for the software as internal-use software only if the arrangement includes a software license. Valvoline adopted this standard on a prospective basis on October 1, 2016. As a result, certain costs related to these arrangements will be expensed when incurred.

In March 2016, the FASB issued new accounting guidance for certain aspects of share-based payments to employees, which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. In particular, the tax effects of all stock-based compensation awards will be included in income, windfall tax benefits and deficiencies will be reported as discrete items in the interim period when they arise, all tax-related cash flows from share-based payments will be reported as operating activities in the statement of cash flows, the classification of awards as liabilities or equity due to tax withholdings may change, and accounting for forfeitures may change. This guidance is effective for the Company beginning October 1, 2017; however, Valvoline elected to early adopt this guidance in the quarter ended June 30, 2017, with all relevant adjustments applied as of the beginning of the fiscal year. This guidance also allows entities to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company has elected to recognize forfeitures as they occur rather than estimate a forfeiture rate. The impact on Valvoline's condensed consolidated financial statements as a result of adopting this new guidance was not material.

In January 2017, the FASB issued accounting guidance which simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step impairment test under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The guidance instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value. This guidance must be applied prospectively and will become effective for Valvoline on October 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Valvoline's annual evaluation of goodwill for impairment is performed as of July 1. As this guidance simplifies the process for measuring impairment, management does not expect there will be an impact on the consolidated financial statements given the Company's historical excess fair value of its reporting units.

In March 2017, the FASB issued accounting guidance that will change how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Condensed Consolidated Statements of Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption within the Condensed Consolidated Statements of Comprehensive Income as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost will be presented separately outside of the operating income caption. This guidance must be applied retrospectively and will become effective for Valvoline on October 1, 2018, with early adoption being optional. Valvoline currently intends to early adopt this guidance on October 1, 2017 and expects this guidance will have a significant impact on the presentation of the Condensed Consolidated Statements of Comprehensive Income as it will result in a reclassification of Pension and other postretirement plan non-service income and remeasurement adjustments, net from within operating income to non-operating income.

In May 2017, the FASB issued accounting guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. This guidance must be applied prospectively and will become effective for Valvoline on October 1, 2018, with early adoption being optional. Valvoline does not expect this guidance to have a significant impact on the consolidated financial statements, though the impacts will depend on the nature of any future changes in Valvoline's share-based awards. This guidance will be applied in relevant future periods when terms or conditions of share-based awards are changed.
INVENTORIES

Inventories are carried at the lower of cost or market value.  Inventories are primarily stated at cost using the weighted average cost method. In addition, certain lubricants are valued at cost using the last-in, first-out (“LIFO”) method. 
Goodwill

Valvoline reviews goodwill for impairment annually 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 as of July 1.
EPS is reported under the treasury stock method.
Derivative instruments

Until the IPO, Valvoline participated in Ashland’s centralized derivative programs that engage in certain hedging activities, which Ashland used to manage its exposure to fluctuations in foreign currencies. Gains and losses related to a hedge were either recognized in Ashland’s income immediately, to offset the gain or loss on the hedged item, or deferred and recorded in the equity section of Ashland’s balance sheet as a component of accumulated other comprehensive loss and subsequently recognized in Ashland’s income when the underlying hedged item was recognized in earnings. As a result, gains or losses on hedges during the three and nine months ended June 30, 2016 were not material and are reflected in Valvoline’s Condensed Consolidated Statements of Comprehensive Income through allocation from Ashland in Selling, general and administrative expense. 

Valvoline began its own hedging program in September 2016 to manage exposure to fluctuations in foreign currency. These foreign currency derivative instruments typically require exchange of one foreign currency for another for a fixed rate at a future date and generally have maturities of less than twelve months. All derivative instruments are recognized as assets and liabilities and are measured at fair value with the changes in fair value recorded within Selling, general and administrative expense in the Condensed Consolidated Statements of Comprehensive Income. Gains and losses recognized during the three and nine months ended June 30, 2017 related to changes in fair value of these instruments were not material. The Company has outstanding contracts with a notional value of $35 million as of June 30, 2017, and the fair values of the outstanding derivatives as of June 30, 2017 are included in other current assets and Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets were not material.
Accounts Receivable (Tables)
Summary of Accounts Receivable
The following summarizes Valvoline’s accounts receivable as of the Condensed Consolidated Balance Sheet dates:

(In millions)
June 30
2017
 
September 30
2016
Trade and other accounts receivable
$
408

 
$
368

Less: Allowance for doubtful accounts
(5
)
 
(5
)
 
$
403

 
$
363

Inventories (Tables)
Summary of Inventory
The following summarizes Valvoline’s inventories as of the Condensed Consolidated Balance Sheet dates:
(In millions)
June 30
2017
 
September 30
2016
Finished products
$
186

 
$
149

Raw materials, supplies and work in process
28

 
21

LIFO reserves
(30
)
 
(29
)
Obsolete inventory reserves
(3
)
 
(2
)
 
$
181

 
$
139

Goodwill (Tables)
Schedule of Goodwill
The following is a progression of goodwill by reportable segment for the nine months ended June 30, 2017.

(In millions)
Core North America
 
Quick Lubes
 
International
 
Total
September 30, 2016
$
89

 
$
135

 
$
40

 
$
264

Acquisitions (a)

 
65

 

 
65

June 30, 2017
$
89

 
$
200

 
$
40

 
$
329

 
 
 
 
 
 
 
 
(a) Relates to $44 million for the acquisition of Time-It Lube and $21 million for the acquisition of 14 locations within the Quick Lubes reportable segment during the nine months ended June 30, 2017. See Note 2 for more information.

Debt (Tables)
Schedule of Long-term Debt
The following table summarizes Valvoline’s current and long-term debt as of the dates reported in the Condensed Consolidated Balance Sheets:
(In millions)
June 30
2017
 
September 30 2016
Senior Notes
$
375

 
$
375

Term Loan A
289

 
375

Accounts Receivable Securitization
75

 

Revolver

 

Other (a)
(6
)
 
(7
)
Total debt
$
733

 
$
743

Short-term debt
75

 

Current portion of long-term debt
15

 
19

Long-term debt
$
643

 
$
724

 
 
 
 
(a) At June 30, 2017, Other includes $8 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions. At September 30, 2016, Other included $9 million of debt issuance cost discounts and $2 million of debt acquired through acquisitions.
Employee Benefit Plans (Tables)
Components of Benefit Costs
The following table summarizes the components of pension and other postretirement benefit income. For the three and nine months ended June 30, 2016, these amounts were generally related to allocations to Valvoline under a multi-employer plan method of accounting.
 
 
 
 
 
 
Other postretirement benefits
 
 
Pension benefits
 
(In millions)
 
2017
 
2016
 
2017
 
2016
Three months ended June 30
 
 
 
 
 
 
 
 
Service cost
 
$
1

 
$
3

 
$

 
$

Interest cost
 
22

 
6

 

 

Expected return on plan assets
 
(36
)
 
(9
)
 

 

Amortization of prior service credit
 

 

 
(3
)
 

Net periodic benefit income
 
$
(13
)

$


$
(3
)
 
$

 
 
 
 
 
 
 
 
 
Nine months ended June 30
 
 
 
 
 
 
 
 
Service cost
 
$
2

 
$
7

 
$

 
$

Interest cost
 
65

 
18

 
1

 
1

Expected return on plan assets
 
(109
)
 
(27
)
 

 

Amortization of prior service credit
 

 

 
(9
)
 
(2
)
Curtailment gain
 

 
(12
)
 

 
(6
)
Actuarial loss (gain)
 

 
22

 
(8
)
 
1

Net periodic benefit (income) costs
 
$
(42
)
 
$
8

 
$
(16
)
 
$
(6
)
Stock-Based Compensation Plans (Tables)
The following is a summary of stock-based compensation expense recognized by the Company during the three and nine months ended June 30, 2017:

 
 
Three months ended
 
Nine months ended
 
 
June 30
 
June 30
(In millions)
 
2017
 
2017
SARs
 
$
1

 
$
2

Nonvested stock awards
 
1

 
4

Performance awards
 
1

 
1

Total stock-based compensation expense, pre-tax
 
3

 
7

Tax benefit
 
(1
)
 
(3
)
Total stock-based compensation expense, net of tax
 
$
2

 
$
4

 
 
 
 
 
For the market conditions, compensation cost is recognized regardless of whether the conditions are satisfied and based on the modified fair value that was estimated using a Monte Carlo simulation valuation model using key assumptions summarized in the following table:
Assumptions (weighted average)
 
 
Risk-free interest rate (a)
 
1.2
%
Expected dividend yield
 
1.0
%
Expected volatility (b)
 
21.0
%
Expected term (in years)
 
1.9

(a) The range of risk-free interest rates used for the performance awards converted to Valvoline shares at Distribution was 0.9% to 1.5%.
(b) The range of expected volatility used for the performance awards converted to Valvoline shares at Distribution was 18.9% to 22.4%.
The expected term is based on the vesting period and contractual term for each vesting tranche of awards, which generally utilized the mid-point between the vesting date and the expiration date as the expected term.

Weighted average fair value per share of SARs
 
$
7.44

Assumptions (weighted average)
 
 
 
Risk-free interest rate (a)
 
 
1.7
%
Expected dividend yield
 
 
0.9
%
Expected volatility (b)
 
 
22.8
%
Expected term (in years) (c)
 
 
7.45

 
 
 
 
(a) The range of risk-free interest rates used for the SARs converted to Valvoline shares at Distribution was 1.1% to 1.9%.
(b) The range of expected volatility used for the SARs converted to Valvoline shares at Distribution was 21.5% to 24.4%.
(c) For SARs that were fully vested at Distribution, the expected term is based on the mid-point of the Distribution date and the expiration date.
The following table summarizes the activity relative to SARs for the nine months ended June 30, 2017:

 
Number of Shares
(in thousands)
 
Weighted Average Exercise Price Per Share
 
Weighted Average Remaining Term
(in years)
 
Aggregate Intrinsic Value (in millions)
SARs outstanding at September 30, 2016

 
$

 
0 years
 
$

Conversion of Ashland awards to awards in Valvoline stock
1,896

 
17.53

 
 
 
 
Exercised (a)
(14
)
 
19.22

 
 
 

SARs outstanding at June 30, 2017
1,882

 
$
17.52

 
7.4 years
 
$
12

SARs exercisable at June 30, 2017
1,007

 
$
14.97

 
5.9 years
 
$
9

 
 
 
 
 
 
 
 
The following table summarizes nonvested share activity for the nine months ended June 30, 2017:

 
 
Number of Shares
(in thousands)
 
Weighted Average Modified Grant Date Fair Value per Share
Outstanding balance at September 30, 2016
 

 
$

Granted
 
69

 
22.76

Conversion of Ashland service-based awards to awards in Valvoline stock
 
464

 
22.65

Vested and distributed
 
(3
)
 
23.66

Outstanding shares at June 30, 2017
 
530

 
$
22.66

 
 
 
 
 
The following table summarizes performance award activity for the nine months ended June 30, 2017:

 
 
Number of Shares
(in thousands)
 
Weighted Average Modified Grant Date Fair Value per Share
Outstanding balance at September 30, 2016
 

 
$

Conversion of Ashland performance-based awards to awards in Valvoline stock
 
258

 
18.44

Outstanding shares at June 30, 2017
 
258

 
$
18.44

 
 
 
 
 
Earnings Per Share (Tables)
Schedule of Earnings Per Share, Basic and Diluted
The following is the computation of basic and diluted EPS for the three and nine months ended June 30, 2017 and 2016. EPS is reported under the treasury stock method.

 
 
Three months ended
 
Nine months ended
 
 
June 30
 
June 30
(In millions except per share data)
 
2017
 
2016 (a)
 
2017
 
2016 (a)
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
56

 
$
75

 
$
199

 
$
208

Denominator
 
 
 
 
 
 
 
 
Weighted average shares used to compute basic EPS
 
204

 
170

 
204

 
170

Effect of dilutive securities (b)
 

 

 

 

Weighted average shares used to compute diluted EPS
 
204


170

 
204

 
170

 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.27

 
$
0.44

 
$
0.97

 
$
1.22

Diluted
 
$
0.27

 
$
0.44

 
$
0.97

 
$
1.22

 
 
 
 
 
 
 
 
 
(a) The weighted average number of shares outstanding for the three and nine months ended June 30, 2016 are based on the 170 million shares issued to Ashland in the Contribution.
(b) During the three and nine months ended June 30, 2017, share-based awards that were previously denominated in Ashland common stock were converted to Valvoline common stock at Distribution. As presented in the table, there was not a significant dilutive impact for the three and nine months ended June 30, 2017.
Stockholders' Deficit (Tables)
The Company's dividend activity during the nine months ended June 30, 2017 was as follows:
Declaration Date
 
Record Date
 
Payment Date
 
Dividend Per Common Share

 
Cash Outlay
(in millions)
 
Cash Paid to Ashland
(in millions)
November 15, 2016
 
December 5, 2016
 
December 20, 2016
 
$
0.049

 
$
10

 
$
8

January 24, 2017
 
March 1, 2017
 
March 15, 2017
 
$
0.049

 
$
10

 
$
8

April 27, 2017
 
June 1, 2017
 
June 15, 2017
 
$
0.049

 
$
10

 
$

 
 
 
 
 
 
 
 
 
 
 
Components of other comprehensive income (loss) recorded in the Condensed Consolidated Statements of Comprehensive Income are presented in the following table, before tax and net of tax effects.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
(In millions)
Before tax
 
Tax benefit (expense)
 
Net of tax
 
Before tax
 
Tax benefit (expense)
 
Net of tax
Three months ended June 30
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation gain (loss)
$
6

 
$

 
$
6

 
$
(8
)
 
$

 
$
(8
)
Pension and other postretirement obligation adjustment:
 
 
 
 


 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(3
)
 
1

 
(2
)
 

 

 

Total other comprehensive income (loss)
$
3

 
$
1

 
$
4

 
$
(8
)
 
$

 
$
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended June 30
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Unrealized translation gain (loss)
$
3

 
$

 
$
3

 
$
(3
)
 
$

 
$
(3
)
Pension and other postretirement obligation adjustment:
 
 
 
 
 
 
 
 
 
 
 
Amortization of unrecognized prior service credits included in net income (a)
(9
)
 
3

 
(6
)
 

 

 

Total other comprehensive (loss) income
$
(6
)
 
$
3

 
$
(3
)
 
$
(3
)
 
$

 
$
(3
)