# VALVOLINE INC (VVV) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from VALVOLINE INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1674910/000167491022000135/valvoline10-k09302022.htm
Accession: 0001674910-22-000135
Filing date: 2022-11-23
Report date: 2022-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/VVV/
All MD&A years: /company/VVV/mda/
Previous year: /company/VVV/mda/fy2021/ (FY 2021)
Next year: /company/VVV/mda/fy2023/ (FY 2023)

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the accompanying Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

BUSINESS OVERVIEW AND PURPOSE

The quick, easy, and trusted name in preventive vehicle maintenance, Valvoline leads the industry with vehicle service innovations that simplify customer’s lives and take the worry out of car care. With average customer ratings that indicate high levels of service satisfaction, Valvoline has built a new model for transparency in vehicle maintenance. From the signature 15-minute stay-in-your-car oil change to cabin air filters to battery replacements to tire rotations, the Company’s model offers maintenance solutions for all types of vehicles. The Company operates and franchises more than 1,700 service center locations that operate in 47 states in the United States (U.S.”) and five provinces in Canada and is the second and third largest chain in the U.S. and Canada, respectively, by number of stores through its Valvoline Instant Oil ChangeSM and Great Canadian Oil Change retail locations.

Valvoline is focused on expanding its footprint and driving a best-in-class customer experience, while evolving its service offerings to capture growing opportunities in the market by growing non-oil change services, services for the future of mobility, and pursuing fleet service solutions to address medium and heavy-duty vehicles that require comprehensive maintenance needs.

Valvoline's fiscal year ends on September 30 of each year.

RECENT DEVELOPMENTS

On July 31, 2022, the Company entered into a definitive agreement to sell its Global Products business to Aramco Overseas Company B.V. (“Aramco”) for a cash purchase price of $2.65 billion, subject to customary adjustments with respect to working capital and net indebtedness (the “Transaction”). The Transaction is subject to standard closing conditions, including regulatory approvals and is expected to close in early calendar year 2023. The divestiture of the Global Products business allows the Company to focus exclusively on its retail business and represents a strategic shift in operations. The assets and liabilities associated with Global Products have been classified as held for sale within the Consolidated Balance Sheets, and the Global Products operations have been classified as discontinued operations and are reported separately for all periods presented herein. Refer to Note 3 included in Item 8 of Part II of this Annual Report on Form 10-K for further discussion regarding the divestiture.

Once the Transaction closes, Valvoline will retain the Valvoline brand for all retail services purposes globally, excluding China and certain countries in the Middle East and North Africa, while Global Products will own the Valvoline brand for all product uses globally. Based on this brand-sharing arrangement, there will be no licensing

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fees between the parties. In addition, Valvoline will procure motor oil and related products from the Global Products business through a long-term supply agreement that will be effective following the close of the Transaction.

Estimated net proceeds of approximately $2.25 billion, after taxes and other expenses, are expected to be utilized to accelerate the return of capital to shareholders through share repurchases with the remainder used for debt reduction and to invest in growth opportunities within the retail services business. Valvoline anticipates enhancing its capital structure through targeting a 2.5 to 3.5 times adjusted EBITDA net leverage ratio to allow for both investment in the business as well as delivery of returns to shareholders through share repurchases.

FISCAL 2022 OVERVIEW

Key operating highlights from continuing operations are presented below, each of which is discussed more fully in this Annual Report on Form 10-K:

Summarized below are Valvoline's trends in the results of its continuing operations net revenues, income from continuing operations, and adjusted EBITDA over the last three fiscal years:

(a)Adjusted EBITDA is a non-GAAP measure, further described and defined within the “Use of Non-GAAP Measures” section below. Also refer to the “Continuing operations EBITDA and Adjusted EBITDA” section within “Results of Operations” below for a reconciliation of income from continuing operations to Adjusted EBITDA for each period presented above.

Net revenues and adjusted EBITDA increased for the fiscal year ended September 30, 2022 over the prior year periods due to strong top-line performance from system-wide SSS growth driven by contributions from both transactions and average ticket, in addition to acquisitions. Income from continuing operations decreased for the

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fiscal year ended September 30, 2022 compared to the prior year primarily driven by the remeasurement of pension and other postretirement plans that generated losses in fiscal 2022 compared to gains in the prior year, as well as separation-related expenses incurred in fiscal 2022 to evaluate and plan for the separation of the Company’s businesses. Each of these measures is discussed further below.

Fiscal year 2022 marked the 16th consecutive year for system-wide same-store-sales ("SSS") growth and added 121 net new stores to the system. The table below highlights the growth over the last two years:

[[GREPCENT_TABLE]]
[["(In millions, except store count)","","Fiscal Year 2022","","Growth vs.","","Growth vs."],["","","2021","","2020"],["System-wide store sales (a)","","$","2,360.2","","","20","%","","55","%"],["System-wide store count (a)","","1,715","","","8","%","","17","%"],["","","","Years ended September 30"],["","","","2022","","2021","","2020"],["System-wide SSS growth (a)","","13.7","%","","21.2","%","","2.3","%"],["(a)","Measures include Valvoline franchisees, which are independent legal entities. Refer to the \u201cKey Business Measures\u201d section below for additional details on these key business measures, including management\u2019s definitions."]]
[[/GREPCENT_TABLE]]

Summarized below are Valvoline's trends in net income and adjusted EBITDA for the continuing operations over the interim quarterly periods for the last two fiscal years:

(a)Adjusted EBITDA is a non-GAAP measure, further described and defined within the “Use of Non-GAAP Measures” section below. Also refer to the “Continuing operations EBITDA and Adjusted EBITDA” section within “Results of Operations” below for a reconciliation of income from continuing operations to Adjusted EBITDA for each period presented above.

COVID-19 UPDATE

Valvoline has substantially maintained its operations, demonstrating growth and strong results, while managing through the effects of the COVID-19 global pandemic. Valvoline’s global offices and locations have established protocols based on continuous monitoring of the circumstances and trend data surrounding the pandemic. During fiscal 2022, Valvoline updated its protocols, easing restrictions. Employees are allowed to more broadly travel for business and are encouraged to reconnect and collaborate on-site in locations and circumstances where protocols support in-person work, while the flexibility and convenience for employees to work remotely has been maintained in many locations.

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Management is unable to reasonably quantify the impact of COVID-19 on its current year results. The continually evolving COVID-19 pandemic remains uncertain and its future impact on Valvoline will depend on a number of factors, including among others, the duration and severity of the spread of COVID-19, emerging variants, vaccine and booster effectiveness, public acceptance of safety protocols, and government measures, including vaccine and mask mandates, among others. While the Company cannot predict the duration or the scale of the COVID-19 pandemic, or the effect it may continue to have on Valvoline's business, results of operations, or liquidity, management continuously monitors the situation, the sufficiency of its responses, and makes adjustments as needed.

Use of Non-GAAP Measures

To aid in the understanding of Valvoline’s ongoing business performance, certain items within this document are presented on an adjusted, non-GAAP basis. These non-GAAP measures have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, the financial statements presented in accordance with U.S. GAAP. The financial results presented in accordance with U.S. GAAP and reconciliations of non-GAAP measures included within this Annual Report on Form 10-K should be carefully evaluated.

The following are the non-GAAP measures management has included and how management defines them:

•EBITDA - net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;

•Adjusted EBITDA - EBITDA adjusted for certain unusual, infrequent or non-operational activity not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods ("key items," as further described below);

•Adjusted EBITDA margin - adjusted EBITDA divided by net revenues;

•Free cash flow - cash flows from operating activities less capital expenditures and certain other adjustments as applicable; and

•Discretionary free cash flow - cash flows from operating activities less maintenance capital expenditures and certain other adjustments as applicable.

These measures are not prepared in accordance with U.S. GAAP and management believes the use of non-GAAP measures provides a useful supplemental presentation of Valvoline's operating performance, enables comparison of financial trends and results between periods where certain items may vary independent of business performance, and allows for transparency with respect to key metrics used by management in operating the business and measuring performance. The non-GAAP information used by management may not be comparable to similar measures disclosed by other companies, because of differing methods used in calculating such measures. For a reconciliation of the most comparable U.S. GAAP measures to the non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below.

Management believes EBITDA measures provide a meaningful supplemental presentation of Valvoline’s operating performance due to the depreciable assets associated with the nature of the Company’s operations and income tax and interest costs related to Valvoline’s tax and capital structures, respectively. Adjusted EBITDA measures exclude the impact of key items, which consist of income or expenses associated with certain unusual, infrequent or non-operational activity not directly attributable to the underlying business that management believes impacts the comparability of operational results between periods. Adjusted EBITDA measures enable comparison of financial trends and results between periods where key items may vary independent of business performance. Key items are often related to legacy matters or market-driven events considered by management to be outside the comparable operational performance of the business.

Key items may consist of adjustments related to: legacy businesses, including Valvoline’s separation from its former parent company and the impacts of related indemnities; the separation of Valvoline’s current businesses; significant acquisitions or divestitures; restructuring-related matters; and other matters that are non-operational or unusual in nature. Key items also include:

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Net pension and other postretirement plan expense/income - includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, and current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global markets (in particular, interest rates), outside the operational performance of the business, and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA includes the costs of benefits provided to employees for current service, including pension and other postretirement service costs.

Details with respect to the composition of key items recognized during the respective periods presented herein are set forth below in the “EBITDA and Adjusted EBITDA” section of “Results of Operations” that follows.

Management uses free cash flow and discretionary free cash flow as additional non-GAAP metrics of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide an indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Free cash flow includes the impact of capital expenditures, providing a supplemental view of cash generation. Discretionary free cash flow includes the impact of maintenance capital expenditures, which are routine uses of cash that are necessary to maintain the Company's operations and provides a supplemental view of cash flow generation to maintain operations before discretionary investments in growth. Free cash flow and discretionary free cash flow have certain limitations, including that they do not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments.

Key Business Measures

Valvoline tracks its operating performance and manages its business using certain key measures, including system-wide, company-operated and franchised store counts and SSS and system-wide store sales. Management believes these measures are useful to evaluating and understanding Valvoline’s operating performance and should be considered as supplements to, not substitutes for, Valvoline's sales and operating income, as determined in accordance with U.S. GAAP.

Sales are influenced by the number of service center stores and the business performance of those stores. Stores are considered open upon acquisition or opening for business. Temporary store closings remain in the respective store counts with only permanent store closures reflected in the activity and end of period store counts. SSS is defined as sales by U.S. stores (company-operated, franchised and the combination of these for system-wide SSS), with new stores, including franchised conversions, excluded from the metric until the completion of their first full fiscal year in operation as this period is generally required for new store sales levels to begin to normalize.

Sales are limited to sales at company-operated stores, in addition to royalties and other fees from independent franchised and Express Care stores. Although Valvoline does not recognize store-level sales from franchised stores as sales in its Consolidated Statements of Comprehensive Income, management believes system-wide and franchised SSS comparisons, store counts, and total system-wide store sales are useful to assess market position relative to competitors and overall operating performance.

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RESULTS OF OPERATIONS

The following summarizes the results of the Company’s continuing operations for the years ended September 30:

[[GREPCENT_TABLE]]
[["","","","","","2022 vs. 2021","","","","","2021 vs. 2020"],["(In millions)","","2022","2021","","$","%","","2021","2020","","$","%"],["Net revenues","","$","1,236.1","","$","1,037.2","","","$","198.9","","19.2","%","","$","1,037.2","","$","727.0","","","$","310.2","","42.7","%"],["Gross profit","","$","476.4","","$","432.3","","","$","44.1","","10.2","%","","$","432.3","","$","301.0","","","$","131.3","","43.6","%"],["Gross profit margin","","38.5","%","41.7","%","","(320) bps","","41.7","%","41.4","%","","30 bps"],["Net operating expenses","","$","256.1","","$","192.2","","","$","63.9","","33.2","%","","$","192.2","","$","140.8","","","$","51.4","","36.5","%"],["Percentage of net revenues","","20.7","%","18.5","%","","220 bps","","18.5","%","19.4","%","","(90) bps"],["Operating income","","$","220.3","","$","240.1","","","$","(19.8)","","(8.2)","%","","$","240.1","","$","160.2","","","$","79.9","","49.9","%"],["Operating margin","","17.8","%","23.1","%","","(530) bps","","23.1","%","22.0","%","","110 bps"],["Income from continuing operations","","$","109.4","","$","200.1","","","$","(90.7)","","(45.3)","%","","$","200.1","","$","69.6","","","$","130.5","","187.5","%"],["EBITDA","","$","284.8","","$","430.4","","","$","(145.6)","","(33.8)","%","","$","430.4","","$","255.6","","","$","174.8","","68.4","%"],["Adjusted EBITDA","","$","315.7","","$","277.0","","","$","38.7","","14.0","%","","$","277.0","","$","166.0","","","$","111.0","","66.9","%"],["Adjusted EBITDA margin","","25.5","%","26.7","%","","(120) bps","","26.7","%","22.8","%","","390 bps"]]
[[/GREPCENT_TABLE]]

Net revenues

2022 compared to 2021

Net revenues increased 19.2% over the prior year period due to system-wide SSS growth and unit acquisitions. Valvoline marked its 16th consecutive year of system-wide SSS growth, delivering 13.7% growth compared to the prior year driven by contributions from both transactions and average ticket. Net revenues also benefited from unit additions of 121 net new stores. The following reconciles the year-over-year changes in net revenues:

2021 compared to 2020

Net revenues in 2021 increased 42.7% due to volume growth compared to the prior year COVID-19 lows due to strong SSS, unit growth, and benefits from acquisitions completed. System-wide SSS grew 21.2% compared to the prior year period driven by increased transactions and high single-digit growth in average ticket. Transactions benefited from customer base expansion in addition to recovery from the most significant restrictions and limited

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travel during the onset of the pandemic in the prior year. Average ticket increases were driven by pricing and mix improvements, including the shift to synthetics and higher non-oil change services. Year-over-year system-wide unit growth of 9% also contributed to volumes and sale through the addition of 132 net new stores. The following reconciles the year-over-year changes in net revenues:

Gross profit

2022 compared to 2021

Gross profit improved 10.2% driven by increased transactions and higher average ticket from premiumization and non-oil change services, as well as unit growth. These benefits were partially offset by product and labor inflationary cost pressures. The following reconciles the year-over-year changes in gross profit:

The decline in gross profit margin compared to the prior year was primarily the result of result of higher costs and the dilutive impact from passing through cost increases.

2021 compared to 2020

Gross profit improved driven by higher volumes from the prior year unfavorable impacts of the COVID-19 pandemic. Benefits included higher average ticket from the ongoing shift to synthetics as well as unit growth primarily driven by acquisitions made during the year. The following reconciles the year-over-year changes in gross profit:

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Gross profit margin slightly increased compared to the prior year primarily due to premiumization benefits realized partially offset by labor investments made during the period.

Net operating expenses

Details of the components of net operating expenses are summarized below for the years ended September 30:

[[GREPCENT_TABLE]]
[["","","","","","","Variance","","","","","","Variance"],["(In millions)","","2022","","2021","","$","","%","","2021","","2020","","$","","%"],["Selling, general and administrative expenses","","$","244.7","","","$","223.9","","","$","20.8","","","9.3","%","","$","223.9","","","$","177.2","","","$","46.7","","","26.4","%"],["Net legacy and separation-related expenses (income)","","20.5","","","(23.6)","","","44.1","","","(186.9)","%","","(23.6)","","","(30.0)","","","6.4","","","(21.3)","%"],["Other income, net","","(9.1)","","","(8.1)","","","(1.0)","","","12.3","%","","(8.1)","","","(6.4)","","","(1.7)","","","26.6","%"],["Net operating expenses","","$","256.1","","","$","192.2","","","$","63.9","","","33.2","%","","$","192.2","","","$","140.8","","","$","51.4","","","36.5","%"]]
[[/GREPCENT_TABLE]]

2022 compared to 2021

Increased selling, general and administrative expenses in the current year resulted from investments to support future growth, including advertising and travel, in addition to inflationary cost increases, and to lesser extent, information technology investments and transitions, costs related to suspended operations, and depreciation and amortization.

Net legacy and separation-related expenses incurred in the current year were primarily related to evaluating and planning for the separation of the Company’s businesses. These costs included legal, tax and accounting, and other professional advisory and consulting fees, which were generally incurred in the period prior to entering into the Purchase Agreement to sell the Global Products business. The combination of these expenses and legacy-related matters, including settlement benefits recognized, resulted in $20.5 million of expense in fiscal 2022. The prior year included favorable adjustments of tax-related indemnity obligations as a result of the settlement of tax examinations.

The modest increase in other income, net was primarily driven by an economic incentive received during fiscal 2022.

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2021 compared to 2020

The increase in selling, general and administrative expenses was primarily due to higher advertising expenses that were restricted in fiscal 2020 due to the severity of the COVID-19 pandemic, increased variable compensation driven by the Company’s strong performance in fiscal 2021, in addition to investments made to support future growth, including acquisitions of service center stores.

Net legacy and separation-related income was lower in fiscal 2021 as adjustments of tax-related indemnity obligations related to the settlement of tax examinations resulted in lower reductions than the prior year adjustments for the change in utilization expectations of certain legacy attributes.

The increase in other income, net was primarily driven by recoveries related to the settlement of a legal matter.

Net pension and other postretirement plan income

2022 compared to 2021

Net pension and other postretirement plan expense increased $135.1 million from the prior year primarily due to the loss on pension and other postretirement plan remeasurement of $43.9 million compared to a gain of $74.3 million in fiscal 2021. The loss in fiscal 2022 was primarily driven by lower-than-expected performance of plan assets in the current year remeasurement, which more than offset reduced plan obligations from remeasurement at higher discount rates. Additionally, lower recurring non-service income during the year of $16.9 million included $9.7 million of reduced amortization of prior service credits into income from certain other postretirement plan amendments that ceased amortization beginning in fiscal 2022 and also attributed to the increase in expense during the year.

2021 compared to 2020

Net pension and other postretirement plan income increased $73.3 million in fiscal 2021 from the prior year primarily due to the gain on pension and other postretirement plan remeasurement of $74.3 million compared to a gain of $18.6 million in fiscal 2020. This increased gain was primarily attributed to higher discount rates in the fiscal 2021 plan remeasurement. In addition, lower interest cost recognized throughout fiscal 2021 drove higher recurring non-service income.

Net interest and other financing expenses

2022 compared to 2021

Net interest and other financing expense decreased $39.0 million during fiscal 2022 compared to the prior year. The decrease was driven by debt extinguishment costs of $36.4 million associated with the prior year redemption of the 4.375% senior unsecured notes due 2025 with an aggregate principal amount of $800.0 million (the “2025 Notes”).

2021 compared to 2020

Net interest and other financing expense increased $16.2 million in fiscal 2021 compared to fiscal 2020. The increase was driven by higher debt extinguishment costs of $17.0 million as the expense associated with the redemption of the 2025 Notes in fiscal 2021 exceeded those incurred in connection with the extinguishment of the 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375.0 million (the “2024 Notes”) in the prior year.

Income tax expense

The following table summarizes income tax expense and the effective tax rate during the years ended September 30:

[[GREPCENT_TABLE]]
[["(In millions)","","2022","","2021","","2020"],["Income tax expense","","$","34.7","","","$","59.9","","","$","53.4"],["Effective tax rate percentage","","24.1","%","","23.0","%","","43.4","%"]]
[[/GREPCENT_TABLE]]

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2022 compared to 2021

The higher effective tax rate in fiscal 2022 from the prior year was principally driven by tax benefits recognized during the prior year period as a result of audit settlements. Lower pre-tax income in fiscal 2022 resulted in lower current year tax expense over the prior year.

2021 compared to 2020

The lower year-over-year effective tax rate in fiscal 2021 was primarily driven by increased expense recognized in fiscal 2020 to establish a $28.5 million valuation allowance on certain legacy tax attributes, which did not recur in fiscal 2021. Additionally, increased pre-tax income in fiscal 2021 resulted in higher income tax expense over fiscal 2020.

Income from discontinued operations, net of tax

Income from discontinued operations, net of tax for the years ended September 30 are as follows:

[[GREPCENT_TABLE]]
[["(In millions)","","2022","","2021","","2020"],["Income from discontinued operations, net of tax","","$","314.9","","","$","220.2","","","$","247.0"]]
[[/GREPCENT_TABLE]]

2022 compared to 2021

Net income from discontinued operations, net of tax increased $94.7 million during fiscal 2022 compared to the prior year. The increase was driven by a $99.1 million deferred income tax benefit related to the realization of the book-tax basis differences in the non-US entities that will be sold with the Global Products business. This benefit was partially offset by increased costs due to the inflationary raw material cost environment which were moderated by strong top-line growth from passing through raw material cost increases in pricing.

2021 compared to 2020

Income from discontinued operations, net of tax decreased $26.8 million during fiscal 2021 compared to the prior year. The decrease was driven by significant raw material costs increases in the second half of fiscal 2021 and higher operating expenses to support market growth partially offset by net revenues growth driven by higher volumes across all regions, product mix benefits, improved equity income, as well as currency exchange.

Fiscal 2023

As discussed herein, on July 31, 2022, the Company entered into a definitive agreement to sell its Global Products business for a cash purchase price of $2.65 billion, subject to customary adjustments with respect to working capital and net indebtedness. The Transaction is subject to standard closing conditions, including regulatory approvals and is expected to close in early calendar year 2023. Valvoline expects to recognize a substantial gain upon closing this Transaction within Income from discontinued operations. As of September 30, 2022, total assets and liabilities associated with the Global Products business classified as held for sale were $1.46 billion and $539.3 million, respectively.

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Continuing operations EBITDA and Adjusted EBITDA

The following reconciles net income from continuing operations to EBITDA and Adjusted EBITDA for the years ended September 30:

[[GREPCENT_TABLE]]
[["(In millions)","","2022","","2021","","2020"],["Net income","","$","109.4","","","$","200.1","","","$","69.6"],["Income tax expense","","34.7","","","59.9","","","53.4"],["Net interest and other financing expenses","","69.3","","","108.3","","","92.1"],["Depreciation and amortization","","71.4","","","62.1","","","40.5"],["EBITDA","","284.8","","","430.4","","","255.6"],["Net pension and other postretirement plan expenses (income)","","6.9","","","(128.2)","","","(55.0)"],["Net legacy and separation-related expenses (income)","","20.5","","","(23.6)","","","(30.0)"],["Suspended operations","","0.9","","","(1.5)","","","(1.3)"],["Information technology transition costs","","2.6","","","\u2014","","","\u2014"],["Restructuring-related adjustments","","\u2014","","","(0.1)","","","0.3"],["Compensated absences benefits change","","\u2014","","","\u2014","","","(4.9)"],["Acquisition costs","","\u2014","","","\u2014","","","1.3"],["Adjusted EBITDA (a)","","$","315.7","","","$","277.0","","","$","166.0"]]
[[/GREPCENT_TABLE]]

(a)Net pension and other postretirement plan expenses (income) includes remeasurement gains and losses and recurring non-service pension and other postretirement net periodic income, which consists of interest cost, expected return on plan assets and amortization of prior service credit. Refer to Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further details.

The following reconciles net income from continuing operations to EBITDA and Adjusted EBITDA for each quarter of the fiscal year ended September 30, 2022:

[[GREPCENT_TABLE]]
[["","","First Quarter","","Second Quarter","","Third Quarter","","Fourth Quarter"],["(In millions)","","2022","","2022","","2022","","2022"],["Net income","","$","34.2","","","$","23.0","","","$","39.8","","","$","12.4"],["Income tax expense","","10.1","","","9.3","","","13.2","","","2.1"],["Net interest and other financing expenses","","17.0","","","16.9","","","17.3","","","18.1"],["Depreciation and amortization","","16.9","","","17.6","","","17.6","","","19.3"],["EBITDA","","78.2","","","66.8","","","87.9","","","51.9"],["Net pension and other postretirement plan (income) expense","","(9.3)","","","(9.2)","","","(9.2)","","","34.6"],["Net legacy and separation-related expense","","2.8","","","6.2","","","9.9","","","1.6"],["Suspended operations","","(0.3)","","","4.0","","","(2.2)","","","(0.6)"],["Information technology transition costs","","1.0","","","1.6","","","\u2014","","","\u2014"],["Adjusted EBITDA","","$","72.4","","","$","69.4","","","$","86.4","","","$","87.5"]]
[[/GREPCENT_TABLE]]

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The following reconciles net income from continuing operations to EBITDA and Adjusted EBITDA for each quarter of the fiscal year ended September 30, 2021:

[[GREPCENT_TABLE]]
[["","","First Quarter","","Second Quarter","","Third Quarter","","Fourth Quarter"],["(In millions)","","2021","","2021","","2021","","2021"],["Net income","","$","18.1","","","$","8.3","","","$","49.0","","","$","124.7"],["Income tax expense","","6.6","","","2.5","","","17.3","","","33.5"],["Net interest and other financing expenses","","20.5","","","53.8","","","16.7","","","17.3"],["Depreciation and amortization","","14.0","","","15.2","","","15.8","","","17.1"],["EBITDA","","59.2","","","79.8","","","98.8","","","192.6"],["Net pension and other postretirement plan income","","(13.3)","","","(13.4)","","","(13.7)","","","(87.8)"],["Net legacy and separation-related expense (income)","","0.6","","","0.3","","","0.8","","","(25.3)"],["Suspended operations","","(0.4)","","","(0.1)","","","(0.3)","","","(0.7)"],["Restructuring-related adjustments","","(0.1)","","","\u2014","","","\u2014","","","\u2014"],["Adjusted EBITDA","","$","46.0","","","$","66.6","","","$","85.6","","","$","78.8"]]
[[/GREPCENT_TABLE]]

2022 compared to 2021

Adjusted EBITDA increased $38.7 million, or 14.0%, for the year ended September 30, 2022 compared to the prior year driven by top-line expansion and partially offset by increased costs due to inflationary pressures and increased operating expenses to support top-line growth.

2021 compared to 2020

Adjusted EBITDA increased $111.0 million, or 66.9% in fiscal 2021 compared to the prior year. Exceptional system-wide SSS growth due to increased transactions over the effects of the COVID-19 slowdown in fiscal 2020 and improved average ticket, in addition to benefits from acquisitions were partially offset by increased operating expenses principally to support growth.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company closely manages its liquidity and capital resources. Valvoline’s liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, acquisitions, share repurchases, and dividend payments are components of the Company’s cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities that support Valvoline’s business and growth strategies and returning capital to shareholders, while funding ongoing operations.

39

Continuing operations cash flows

Valvoline’s continuing operations cash flows as reflected in the Consolidated Statements of Cash Flows are summarized as follows for the years ended September 30:

[[GREPCENT_TABLE]]
[["(In millions)","","2022","","2021","","2020"],["Cash provided by (used in):"],["Operating activities","","$","134.4","","","$","182.2","","","$","127.2"],["Investing activities","","$","(170.9)","","","$","(358.7)","","","$","(159.4)"],["Financing activities","","$","(262.9)","","","$","(526.1)","","","$","345.2"]]
[[/GREPCENT_TABLE]]

Operating activities

2022 compared to 2021

The decrease in cash flows from continuing operations provided by operating activities during fiscal 2022 compared to 2021 was largely driven by spend related to evaluating and planning for the separation of the businesses, in addition to unfavorable changes in other assets and liabilities primarily due to cloud computing investments and the timing of certain prepayments.

2021 compared to 2020

The increase in cash flows from continuing operations provided by operating activities during fiscal 2021 compared to 2020 was primarily driven by higher cash earnings, partially offset by unfavorable changes in other assets and liabilities.

Investing activities

2022 compared to 2021

The decrease in cash flows from continuing operations used in investing activities for fiscal 2022 compared to 2021 was primarily due to lower current year acquisition activity of $231.0 million, partially offset by higher current year additions to property, plant, and equipment of $28.9 million.

2021 compared to 2020

The increase in cash flows from continuing operations used in investing activities for fiscal 2021 compared to 2020 was primarily due to higher acquisition activity of $241.6 million in fiscal 2021, partially offset by franchisee COVID-19 relief loan activity where repayments in fiscal 2021 compared to lending in fiscal 2020 to generate a $44.6 million year-over-year source of cash.

Financing activities

2022 compared to 2021

The decrease in cash flows from continuing operations used in financing activities for fiscal 2022 compared to 2021 was primarily due to:

•Returning $14.0 million more in cash to shareholders through an increase in share repurchases.

•Net repayments on borrowings were $283.2 million less during the current fiscal year due to the prior year redemption of the $800.0 million 2025 Notes using proceeds from the issuance of the $535.0 million 2031 Notes in combination with cash and cash equivalents.

40

2021 compared to 2020

The increase in cash flows from continuing operations used in financing activities for fiscal 2021 compared to 2020 was primarily due to:

•Returning $73.7 million more in cash to shareholders through increased share repurchases and dividends in fiscal 2021. These increases were due to the resumption of share repurchase activity following the suspension in the prior year at the onset of the COVID-19 pandemic to preserve liquidity along with an 11% increase in the dividend rate during fiscal 2021.

•Increased net repayments on borrowings during fiscal 2021 due to net proceeds from the $535.0 million 2031 Notes and cash and cash equivalents used to redeem the $800.0 million 2025 Notes. During fiscal 2020, net proceeds primarily related to the issuance of the 4.250% senior unsecured notes due 2030 with an aggregate principal amount of $600.0 million (the “2030 Notes”).

Continuing operations free cash flow

The following table sets forth free cash flow and discretionary cash flow from continuing operations and reconciles cash flows from operating activities to both measures. As previously noted, free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments. Refer to “Use of Non-GAAP Measures” within this Item 7 for additional information regarding this non-GAAP measure.

[[GREPCENT_TABLE]]
[["","","For the years ended September 30"],["(In millions)","","2022","","2021","","2020"],["Cash flows provided by operating activities","","$","134.4","","","$","182.2","","","$","127.2"],["Less: Maintenance capital expenditures","","(19.3)","","","(17.6)","","","(15.2)"],["Discretionary free cash flow","","115.1","","","164.6","","","112.0"],["Less: Growth capital expenditures","","(112.7)","","","(85.5)","","","(78.8)"],["Free cash flow","","$","2.4","","","$","79.1","","","$","33.2"]]
[[/GREPCENT_TABLE]]

2022 compared to 2021

The decrease in free cash flow from continuing operations over the prior year was driven by lower cash flow provided by operating activities along with increased investments in capital expenditures. Cash flow from operating activities includes increased spend in the current year related to evaluating and planning the separation of Valvoline’s businesses, while higher capital expenditures primarily related growth-related investments in new store construction within the United States.

2021 compared to 2020

The increase in free cash flow from continuing operations for fiscal 2021 compared to fiscal 2020 was driven by higher cash flow provided by operating activities, partially offset by increased capital expenditures during fiscal 2021, primarily related to new store construction and capital improvements for acquired stores.

Discontinued operations cash flows

Valvoline has historically satisfied its short-term working capital and operational needs, in addition to indebtedness and other obligations, through the earnings, assets and cash flows generated by its consolidated operations. Following the Transaction, Valvoline will not be able to rely on the earnings, assets or cash flows that are attributable to the Global Products business. The cash flows of the discontinued operation are reflected in the Consolidated Statements of Cash Flows and are summarized below for the years ended September 30:

41

[[GREPCENT_TABLE]]
[["(In millions)","","2022","","2021","","2020"],["Cash provided by (used in):"],["Operating activities","","$","149.8","","","$","221.7","","","$","244.5"],["Investing activities","","$","(36.7)","","","$","(41.2)","","","$","(63.2)"],["Financing activities","","$","44.0","","","$","(9.4)","","","$","105.1"]]
[[/GREPCENT_TABLE]]

2022 compared to 2021

The decrease in operating cash flows provided by discontinued operations was primarily driven by unfavorable changes in net working capital due to increases in receivables and inventory. Investing activities of the discontinued operation were lower in fiscal 2022 primarily related to decreased capital expenditures due to higher spend in fiscal 2021 as the China blending and packaging facility commenced operation. Financing activities provided cash in fiscal 2022 due to net proceeds from borrowings under the Accounts Receivable Securitization Facility, while the prior year had net repayment activity primarily attributed to the Accounts Receivable Securitization Facility that more than offset borrowings under the China Construction Facility.

2021 compared to 2020

The decrease in cash flows provided from operating activities by discontinued operations was driven by lower income from discontinued operations during fiscal 2021 primarily attributed to raw material cost inflation. Investing activities of the discontinued operation were lower in fiscal 2021 compared to fiscal 2020 driven by lower capital expenditures related to the China blending and packaging facility, which was being constructed during fiscal 2020. Financing activities were a use of cash in fiscal 2021 due to net repayments driven by the Accounts Receivable Securitization Facility partially offset by borrowings under the China Construction Facility, while both facilities provided net proceeds during fiscal 2020 in support of maintaining liquidity during the COVID-19 pandemic and construction of the China blending and packaging plant.

Debt

The following table summarizes Valvoline’s continuing operations debt as of September 30:

[[GREPCENT_TABLE]]
[["(In millions)","","2022","","2021"],["2031 Notes","","$","535.0","","","$","535.0"],["2030 Notes","","600.0","","","600.0"],["Term Loan","","460.0","","","475.0"],["Trade Receivables Facility","","105.0","","","58.5"],["Debt issuance costs and discounts","","(12.4)","","","(13.8)"],["Total debt","","1,687.6","","","1,654.7"],["Current portion of long-term debt","","162.5","","","\u2014"],["Long-term debt","","$","1,525.1","","","$","1,639.7"]]
[[/GREPCENT_TABLE]]

Inclusive of the Company’s interest rate swap agreements, approximately 87% of Valvoline's outstanding borrowings as of September 30, 2022 had fixed rates, with the remainder bearing variable interest rates. As of September 30, 2022, Valvoline was in compliance with all covenants of its debt obligations and had borrowing capacity remaining of $470.0 million for its facilities expected to remain in place after closing the Transaction. Refer to Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional details regarding the Company’s debt instruments.

42

Material cash requirements

The Company's material cash requirements for the continuing operations include the following contractual obligations and commitments as of September 30, 2022:

[[GREPCENT_TABLE]]
[["(In millions)","","Total","","Less than 1 year","","1-3 years","","3-5 years","","5 years and more"],["Long-term debt (a) (b)","","$","1,700.0","","","$","162.5","","","$","402.5","","","$","\u2014","","","$","1,135.0"],["Interest payments (a) (c)","","392.0","","","58.1","","","95.2","","","89.8","","","148.9"],["Operating lease obligations","","315.8","","","36.8","","","68.2","","","60.8","","","150.0"],["Finance lease obligations","","270.9","","","20.1","","","40.7","","","42.1","","","168.0"],["Employee benefit obligations (d)","","95.8","","","9.0","","","20.7","","","21.1","","","45.0"],["Total","","$","2,774.5","","","$","286.5","","","$","627.3","","","$","213.8","","","$","1,646.9"]]
[[/GREPCENT_TABLE]]

(a)In connection the sale of the Global Products business, outstanding borrowings and interest under the Accounts Receivable Securitization Facility are required to be repaid and are presented within the less than 1 year categories above. The cash flows associated with these repayments will be reported as cash flows attributed to the discontinued operation.

(b)A portion of the net proceeds from the sale of Global Products may be utilized to reduce debt that is classified in the table above based on its current contractual maturity.

(c)Includes interest expense on both variable and fixed rate debt, assuming no prepayments other than for the Accounts Receivable Securitization Facility noted above. Variable interest rates have been assumed to remain constant through payment at the rates that existed as of September 30, 2022.

(d)Includes projected benefit payments through fiscal 2032 for Valvoline’s unfunded benefit plans. Excludes benefit payments from pension plan trust funds.

Fiscal 2023 capital expenditures

Valvoline is currently forecasting approximately $170.0 million to $200.0 million of capital expenditures for fiscal 2023, funded primarily from operating cash flows.

Pension and other postretirement plan obligations

The Company makes cash and non-cash contributions and payments for its pension and other postretirement plans. During fiscal 2022, these were $16.2 million, consisting of $7.9 million in cash payments, for U.S. plans within the continuing operations and $2.5 million of cash contributions and payments for non-U.S. plans attributed to the discontinued operation. Based on current data and assumptions, the Company does not anticipate the need to satisfy any minimum funding requirements to its U.S. qualified pension plans for at least the next 5 years. Refer to Note 10 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information regarding the Company's U.S. pension and other postretirement plans.

Dividend payments and share repurchases

During the year ended September 30, 2022, the Company paid $89.2 million of cash dividends for $0.500 per common share and repurchased approximately 4.5 million shares of its common stock for $142.6 million. Share repurchases were made pursuant to the May 17, 2021 Board to repurchase up to $300 million of common stock through September 30, 2024 (the "2021 Share Repurchase Authorization").

On November 21, 2022, the Board approved a quarterly cash dividend of $0.125 per share of common stock. The dividend is payable December 15, 2022 to shareholders of record on December 2, 2022. Additionally, the Company repurchased approximately 1.8 million shares for an aggregate amount of $51.2 million from October 1, 2022 through November 18, 2022 pursuant to the 2021 Share Repurchase Authorization.

The Company announced on November 15, 2022 that its Board approved a share repurchase authorization of $1.6 billion (the “2022 Share Repurchase Authorization”). The Board approved the 2022 Share Repurchase Authorization to effectuate a significant return of capital to shareholders of a substantial portion of the expected net proceeds from the sale of the Global Products business. The Company generally expects to repurchase shares of its common stock up to the full amount of authorization within 18 months of closing the sale of Global Products. However, the timing and amount of any repurchases of common stock will be solely at the discretion of the Company and is subject to general business and market conditions, including closing the sale of Global Products,

43

as well as other factors, including legal and regulatory restrictions. The 2022 Share Repurchase Authorization is in addition to the 2021 Share Repurchase Authorization of which $79.2 million remained as of November 18, 2022.

The dividend and share repurchase authorization is part of a broader capital allocation framework to deliver value to shareholders by first driving growth in the business, organically and through acquisitions and franchise development, and then returning excess cash to shareholders through dividends and share repurchases. Future declarations of quarterly dividends are subject to approval by the Board and may be adjusted as business needs or market conditions change. As focus further shifts to the growth of Valvoline in connection with the sale of Global Products, the Company expects to discontinue the dividend following the December 2022 payment and return value to shareholders through share repurchases. The timing and amount of any share repurchases will be at the discretion of the Company and based on Valvoline's liquidity, general business and market conditions, and other factors, including alternative investment opportunities.

Summary

As of September 30, 2022, the continuing operation had cash and cash equivalents of $23.4 million, total debt of $1.7 billion, and remaining borrowing capacity of $470.0 million for facilities expected to remain in place after closing the Transaction. Valvoline’s ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in the industry, and is subject to the business and other risk factors described in Item 1A of Part I of this Annual Report on Form 10-K. Valvoline’s ability to generate sufficient cash flows to repay its indebtedness and other obligations and to maintain sufficient working capital will depend on Valvoline’s ability to generate cash following the Transaction. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facilities, Valvoline may be required to seek additional financing alternatives.

Management believes that the Company has sufficient liquidity based on its current cash and cash equivalents position, cash generated from business operations, and existing financing in place, to meet its pension and other postretirement plan requirements, debt servicing obligations, tax-related and other material cash and operating requirements for the next twelve months.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion and analysis of recently issued and adopted accounting pronouncements and the impact on Valvoline, refer to Note 2 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

The preparation of Valvoline’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosures of contingent matters. Significant items that are subject to such estimates and assumptions include, but are not limited to, employee benefit obligations, business combinations, income taxes, and customer incentives.

Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions. Valvoline’s significant accounting policies are discussed in Note 2 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. The Company believes the accounting estimates listed below are the most critical to aid in fully understanding and evaluating the reported financial results, and require the most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain.

44

Employee benefit obligations

[[GREPCENT_TABLE]]
[["Description","Judgments and uncertainties","Effect if actual results differ from assumptions"],["Valvoline sponsors defined benefit pension and other postretirement plans in the U.S. and in certain countries outside the U.S. As of September 30, 2022, Valvoline\u2019s net unfunded pension and other postretirement plan liabilities included in the Consolidated Balance Sheet totaled $185.3 million, of which $177.8 million is included in continuing operations and $7.5 million is included in liabilities held for sale. Total pension and other postretirement net periodic benefit expense recognized in fiscal 2022 within continuing operations was $6.9 million, inclusive of a $43.9 million remeasurement loss. Total pension and other postretirement net periodic benefit income of $1.8 million in fiscal 2022 was included in discontinued operations, inclusive of a $3.5 million remeasurement gain. Valvoline recognizes the change in the fair value of plan assets and the net actuarial gains and losses calculated using updated actuarial assumptions as of the measurement date, which for Valvoline is September 30, and when a plan qualifies for an interim remeasurement. Refer to Note 10 of the Notes to Consolidated Financial Statements included in Item 8 for Part II of this Annual Report on Form 10-K for additional information regarding the Company\u2019s pension and other postretirement plans included in continuing operations.","The Company\u2019s pension and other postretirement benefit costs and obligations are dependent on actuarial valuations and various assumptions that attempt to anticipate future events and are used in calculating the expense and liabilities relating to these plans. These assumptions include estimates and judgments the Company makes about discount rates, expected long-term investment return on plan assets, and mortality, among others. Significant assumptions the Company must review and set annually and at each measurement date related to its pension and other postretirement benefit obligations are described further below.","Though management considers current market conditions and other relevant factors in establishing these assumptions, the actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, longer or shorter life spans of participants, and differences between the actual and expected return on plan assets. These differences may result in a significant impact to the amount of pension or other postretirement benefits cost recorded or that may be recorded. Changes in assumptions or asset values may have a significant effect on the measurement of expense or income."]]
[[/GREPCENT_TABLE]]

Actuarial assumptions

Significant assumptions the Company must review and set annually and at each measurement date related to its pension and other postretirement benefit obligations in both continuing and discontinued operations are:

•Expected long-term return on plan assets — The expected long-term return on plan assets assumption reflects the long-term average rate of return plan assets are expected to earn. This assumption is determined considering each plan's asset allocation targets and overall expected performance, including evaluation of the most recent long-term historical returns, as applicable. The weighted-average long-term expected rate of return on assets assumption was 4.06% for fiscal 2022. In fiscal 2022, the global pension plan assets generated an actual weighted-average negative return of 22.5%, primarily driven by a challenging market environment and unfavorable performance of the plan assets of the U.S. qualified pension plans. The Company’s investment strategy is to hedge the movement in liabilities related to changes in discount rates with investments of a matched duration that provide offsetting returns aligned with changes in interest rates. The expected return on plan assets is designed to be a long-term assumption, and therefore, actual returns will be subject to year-to-year variances. The U.S. qualified pension plans comprise the most significant portion of plan assets, and for fiscal 2023, the expected rate of return on assets assumption for the U.S. qualified pension plans in fiscal 2023 will be 4.90%. The expected long-term return on plan assets assumption has no impact on the reported net liability or net actuarial gains or losses upon remeasurement but does impact the recurring non-service net periodic income recognized ratably throughout the year.

Valvoline’s pension plans hold a variety of investments designed to diversify risk. Plan assets are invested in equity securities, government and agency securities, corporate debt, and other non-traditional assets such as hedge funds. The investment goal of the pension plans is to achieve an adequate net investment return to provide for future benefit payments to its participants. Target asset allocation percentages as of September 30, 2022 for the U.S. qualified pension plans were 90% fixed income and 10% equity

45

investments. The U.S. qualified pension plans are managed by professional investment managers that operate under investment management contracts that include specific investment guidelines, requiring among other actions, adequate diversification and prudent use of risk management practices such as portfolio constraints relating to established benchmarks. Valvoline’s investment strategy and management practices relative to plan assets of non-U.S. plans generally are consistent except in those countries where investment of plan assets is dictated by applicable regulations. Holding all other assumptions constant, a hypothetical 1.00% change in the expected long-term return on plan assets assumption for the U.S. qualified pension plans would impact fiscal 2022 recurring non-service pension income by $19.2 million.

•Discount rate — Reflects the rates at which benefits could effectively be settled and is based on current investment yields of high-quality corporate bonds. Consistent with historical practice, the Company uses an actuarially-developed full yield curve approach, the above mean yield curve, to match the timing of cash flows of expected future benefit payments from the plans by applying specific spot rates along the yield curve to determine the assumed discount rate. Valvoline’s fiscal 2022 expense, excluding actuarial gains and losses, for both U.S. and non-U.S. pension plans was determined using the spot discount rate as of the beginning of the fiscal year. The service and interest cost discount rates for fiscal 2022 pension expense were 1.67% and 2.11%, respectively, and 3.77% and 2.11%, respectively, for other postretirement expense. The weighted-average discount rate at the end of fiscal 2022 was 5.41% for the pension plans and 5.49% for the postretirement health and life plans.

The following table illustrates the estimated impact on hypothetical pension and other postretirement expense that would have resulted from a one percentage point change in discount rates in isolation of impacts on other significant assumptions in the years ended September 30:

[[GREPCENT_TABLE]]
[["(In millions)","","2022","","2021"],["Increase (decrease) in pension and other postretirement plan expense - 1.00% decrease in discount rates:"],["Pension benefits"],["Increase in benefit obligation","","$","150.9","","","$","247.2"],["Increased return on plan assets (a)","","(138.7)","","","$","(211.1)"],["Estimated hypothetical increase in expense","","12.2","","","36.1"],["Other postretirement benefits"],["Increase in benefit obligation","","3.0","","","4.9"],["Total estimated hypothetical increase in expense","","$","15.2","","","$","41.0"],["(a)","The qualified pension plans employ an investing strategy to match the duration of its obligation and investments. These plans represent 92% of Valvoline\u2019s total continuing and discontinued operations gross pension plan obligation as of September 30, 2022 and 2021. This strategy hedges approximately 100% and 93% of the movement in liabilities related to changes in discount rates as of September 30, 2022 and 2021, respectively. Therefore, when discount rates change, asset returns generally mirror the impacts, minimizing the net impact to the consolidated financial statements. This estimated impact does not include increased returns of other plan assets that may also benefit from increased interest rates."]]
[[/GREPCENT_TABLE]]

•Mortality — The mortality assumption for Valvoline's U.S. pension and other postretirement plans is utilizes the Society of Actuaries PRI-2012 mortality base tables and a mortality improvement scale that follows the 2022 Trustees Report of the Social Security Administration Intermediate Alternative as reflected in the MSS-2022 improvement scale. Valvoline's international plans utilize mortality assumptions similar to the U.S., whereby the assumptions are generally based upon country-specific base mortality tables updated for the most currently available improvement scales that have been published by reliable authorities in each jurisdiction. Valvoline believes the updated mortality improvement scales provide a reasonable assessment of current mortality trends and is an appropriate estimate of future mortality projections.

Other assumptions, including the rate of compensation increase and healthcare cost trend rate, do not have a significant impact on Valvoline's pension and other postretirement benefit plan costs and obligations based upon current plan provisions that have generally frozen benefits and limited costs.

46

Business combinations and intangible assets

[[GREPCENT_TABLE]]
[["Description","Judgments and uncertainties","Effect if actual results differ from assumptions"],["Valvoline acquired 37 service center stores during fiscal 2022 for an aggregate purchase price of $50.7 million included in continuing operations, in addition to acquiring the remaining ownership interest of an equity method investment within discontinued operations. The Company allocates the purchase price of an acquired business to its identifiable assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. The excess of the fair value of purchase consideration over the fair value of these assets acquired and liabilities assumed is recorded as goodwill or if the fair value of the assets acquired and liabilities assumed exceed the purchase price consideration, a bargain purchase gain is recorded. Goodwill is tested at the reporting unit level for impairment on an annual basis during the fourth fiscal quarter as of July 1 or more frequently if certain events occur indicating that the carrying value of goodwill may be impaired. At the time of Company\u2019s annual impairment assessment, Valvoline\u2019s reporting units were consistent with its former reportable segments of Retail Services and Global Products. Subsequent to this annual assessment and as a result of classifying the former Global Products reportable segment as a discontinued operation, the Company has determined it has one reporting unit as of September 30, 2022. The Company\u2019s amortizable intangible assets primarily reside within the continuing operations and were $114.9 million, net of $56.0 million of accumulated amortization as of September 30, 2022. Other intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Various factors are considered in determining whether a trigger requiring impairment assessment has occurred, such as, but not limited to, changes in the expected use of the assets, technology or development of alternative assets, economic conditions, operating performance, and expected future cash flows.","Purchase price allocations contain uncertainties because they require management to make significant estimates and assumptions and to apply judgment to estimate the fair value of assets acquired and liabilities assumed, particularly with respect to intangible assets. Management estimates the fair value of assets acquired and liabilities assumed based on quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Critical estimates in valuing intangible assets include, but are not limited to, estimates about: expected future cash flows from customers, including revenue and operating expenses; royalty and customer attrition rates; proprietary technology obsolescence curve; the acquired company's brand awareness and market position; the market awareness of the acquired company's branded technology solutions and services; assumptions about the period of time the brands will continue to be valuable; as well as discount rates. The Company's estimates of fair value are based upon reasonable assumptions, but which are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.","If actual results are materially different than the assumptions used to determine fair value of the assets acquired and liabilities assumed through a business combination, or the useful lives of the acquired intangible assets, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on the Company's financial position and results of operations. Furthermore, if actual results are not consistent with estimates or assumptions, the Company may be exposed to an impairment charge that could materially adversely impact its consolidated financial position and results of operations. There were no impairments to intangible assets recognized by the Company during fiscal 2022, 2021, or 2020. Valvoline elected to perform qualitative impairment assessments of goodwill in 2022 and 2020, which indicated that it was more likely than not that the fair values of the reporting units were in excess of carrying amounts. Though no qualitative factors were present that indicated the existence of a potential impairment, Valvoline performed a quantitative assessment during fiscal 2021 and determined that each reporting unit had a fair value that exceeded its carrying value by 130% and more."]]
[[/GREPCENT_TABLE]]

47

Income taxes

[[GREPCENT_TABLE]]
[["Description","Judgments and uncertainties","Effect if actual results differ from assumptions"],["Valvoline is subject to income taxes in the United States and numerous international jurisdictions where its businesses operate. The provision for income taxes includes current income taxes as well as deferred income taxes. Under U.S. GAAP, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the deferred assets or liabilities are expected to be settled or realized. The effect of changes in tax rates on deferred taxes is recognized in the period in which such changes are enacted. Once the consolidated income tax provision is computed, the tax effect of pre-tax income from continuing operations is determined without consideration of the current year pre-tax income or loss from other financial statement components, including discontinued operations. The portion of total income tax that remains after the attribution of tax to continuing operations is allocated to the remaining components. In connection with completing separation transactions, both from Valvoline\u2019s former parent company and expected upon the closing of the sale of Global Products, the parties generally indemnify one another for various tax matters between the businesses that may arise following the transactions.","Judgment in forecasting taxable income using historical and projected future operating results is required in determining Valvoline\u2019s provision for income taxes and the related assets and liabilities. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is based on the evaluation of positive and negative evidence, which includes historical profitability, future market growth, future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company assesses deferred taxes and the adequacy or need for a valuation allowance on a quarterly basis. The Company is subject to ongoing tax examinations and assessments in various jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities and a number of years may elapse before a particular matter, for which a liability has been established, is audited and fully resolved or clarified. In evaluating the exposures associated with various tax filing positions, the Company may record liabilities for such exposures. Valvoline generally adjusts its liabilities for unrecognized tax benefits and related indemnification obligations through earnings in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and may materially increase or decrease the effective tax rate, as well as impact the Company\u2019s operating results. Indemnifications among parties regarding tax matters require judgment in determining the timing and measurement of related receivables and payables to resolve these obligations.","If the Company is unable to generate sufficient future taxable income, there is a material change in the actual effective tax rates, the time period within which the underlying temporary differences become taxable or deductible, or if the tax laws change unfavorably, then Valvoline could be required to increase the valuation allowance against deferred tax assets, resulting in an increase in income tax expense and the effective tax rate. Adjustments to indemnifications impact pre-tax results and are not directly related to the ongoing business. These adjustments may also affect the income tax provision of the continuing operation dependent on the nature of the underlying issue Each change of $1.4 million and $4.3 million for the continuing operations and consolidated income tax provisions, respectively, would impact the respective fiscal 2022 effective tax rates by one percentage point."]]
[[/GREPCENT_TABLE]]

48

Customer incentives

[[GREPCENT_TABLE]]
[["Description","Judgments and uncertainties","Effect if actual results differ from assumptions"],["Valvoline records revenue for the amount that reflects the consideration the Company is expected to be entitled to based on when control of the promised good or service is transferred to the customer. The nature of Valvoline\u2019s contracts with customers often give rise to variable consideration that generally decrease the transaction price and consist primarily of promotional rebates and customer pricing discounts based on achieving certain levels of sales activity.","Variable consideration is recorded as a reduction of the transaction price at the time of sale and is primarily estimated utilizing the most likely amount method that is expected to be earned as the Company is able to estimate the anticipated discounts within a sufficiently narrow range of possible outcomes based on its extensive historical experience with certain customers, similar programs and management\u2019s judgment with respect to estimating customer participation and performance levels. Variable consideration is reassessed at each reporting date and adjustments are made, when necessary.","The cost of these programs recognized as a reduction of revenues totaled $459.2 million, $401.6 million and $332.4 million in the Consolidated Statements of Comprehensive Income for the years ended September 30, 2022, 2021 and 2020, respectively. Over 60% of these costs are attributed to the Global Products business. A 10% change in the reserves for customer incentive programs as of September 30, 2022 would have affected net earnings by approximately $7.3 million in fiscal 2022, comprised of $7.0 million attributed to discontinued operations and $0.3 million related to continuing operations."]]
[[/GREPCENT_TABLE]]