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EX-32 - EXHIBIT 32 - VALVOLINE INCexhibit32-certificationofs.htm
EX-31.2 - EXHIBIT 31.2 - VALVOLINE INCexhibit312-certificationof.htm
EX-31.1 - EXHIBIT 31.1 - VALVOLINE INCexhibit311-certificationof.htm
EX-24 - EXHIBIT 24 - VALVOLINE INCexhibit24-powerofattorney9.htm
EX-23.1 - EXHIBIT 23.1 - VALVOLINE INCexhibit231-consentofernsty.htm
EX-21 - EXHIBIT 21 - VALVOLINE INCexhibit21-listofsubsidiari.htm
EX-12.1 - EXHIBIT 12.1 - VALVOLINE INCexhibit121-ratiosofearnings.htm
EX-10.17 - EXHIBIT 10.17 - VALVOLINE INCexhibit1017-amendmenttoser.htm
EX-10.16 - EXHIBIT 10.16 - VALVOLINE INCexhibit1016-amendmenttoser.htm
EX-10.15 - EXHIBIT 10.15 - VALVOLINE INCexhibit1015-valvolinesuppl.htm
EX-10.12 - EXHIBIT 10.12 - VALVOLINE INCexhibit1012-valvolinenonqu.htm
EX-10.7 - EXHIBIT 10.7 - VALVOLINE INCexhibit107-restrictedstock.htm
EX-3.1 - EXHIBIT 3.1 - VALVOLINE INCexhibit31-amendedandrestat.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-K
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 001-37884
VALVOLINE INC.
vlogo.jpg
Kentucky
(State or other jurisdiction of incorporation or organization)
30-0939371
(I.R.S. Employer Identification No.)
100 Valvoline Way
Lexington, Kentucky 40509
Telephone Number (859) 357-7777
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, par value $0.01 per share
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes þ      No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes o    No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ     No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).   Yes þ    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer þ
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o
(Do not check if a smaller reporting company)
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  o    No  þ
The aggregate market value of voting common stock held by non-affiliates at March 31, 2017 was approximately $850 million. At November 10, 2017, there were 202,527,634 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement (“Proxy Statement”) for its 2018 Annual Meeting of Shareholders, which will be filed within 120 days of the Registrant’s fiscal year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.



TABLE OF CONTENTS

 
 
 
 Page
PART I
 
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
PART II
 
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
PART III
 
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
PART IV
 
 
 
 
Item 15.












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Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Valvoline has identified some of these forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “projects,” “forecasts,” “may,” “will,” “should” and “intends” and the negative of these words or other comparable terminology. In addition, Valvoline may from time to time make forward-looking statements in its quarterly reports and other filings with the Securities and Exchange Commission (“SEC”), news releases and other written and oral communications.

These forward-looking statements are based on Valvoline’s current expectations and assumptions regarding, as of the date such statements are made, Valvoline’s future operating performance and financial condition, strategic and competitive advantages, leadership and future opportunities, as well as the economy and other future events or circumstances. Valvoline’s expectations and assumptions include, without limitation, internal forecasts and analyses of current and future market conditions and trends, management plans and strategies, operating efficiencies and economic conditions (such as prices, supply and demand, cost of raw materials, and the ability to recover raw-material cost increases through price increases), and risks and uncertainties associated with the following: demand for Valvoline’s products and services; sales growth in emerging markets; the prices and margins of Valvoline’s products and services; the strength of Valvoline’s reputation and brand; Valvoline’s ability to develop and successfully market new products and implement its digital platforms; Valvoline's ability to attract and retain key employees; Valvoline's ability to operate in highly competitive markets; Valvoline’s ability to retain its largest customers; the success of Valvoline's marketing activities to promote and grow its business; potential product liability claims; new laws or regulations or changes in existing laws or regulations; imposition of new taxes or additional liabilities; Valvoline's ability to execute its growth strategy; third-party risks associated with Valvoline's joint ventures; dependence on franchised locations in Valvoline's Quick Lubes business; business disruptions from natural disasters; Valvoline’s substantial indebtedness (including the possibility that such indebtedness and related restrictive covenants may adversely affect Valvoline’s future cash flows, results of operations, financial condition and Valvoline’s ability to repay debt); Valvoline's ability to access the capital markets or obtain bank credit; operating as a stand-alone public company; Valvoline’s relationship with Ashland; payment-related risks associated with company-owned and franchised Quick Lubes locations; failure, caused by Valvoline, of the stock distribution to Ashland's stockholders to qualify for tax-free treatment, which may result in significant tax liabilities to Ashland for which Valvoline may be required to indemnify Ashland; and the impact of acquisitions and/or divestitures Valvoline has made or may make (including the possibility that Valvoline may not realize the anticipated benefits from such transactions or encounter difficulties with integration). These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although Valvoline believes that the expectations reflected in these forward-looking statements are reasonable, Valvoline cannot guarantee future results, level of activity, performance or achievements. In addition, neither Valvoline nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by Valvoline or any other person that Valvoline will achieve its objectives and plans in any specified time frame, or at all. These forward-looking statements are as of the date of this Annual Report on Form 10-K. Except as required by law, Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Other important factors that could cause actual results to differ materially from those contained in these forward-looking statements are discussed under “Use of estimates, risks and uncertainties” in Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.  For a discussion of other factors and risks that could affect Valvoline’s expectations and operations, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K.

All forward-looking statements attributable to Valvoline are expressly qualified in their entirety by these cautionary statements as well as others made in this Annual Report on Form 10-K, and hereafter in Valvoline’s other SEC filings and public communications. You should evaluate all forward-looking statements made by Valvoline in the context of these risks and uncertainties.



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PART I

ITEM 1.  BUSINESS

General

Valvoline Inc., a Kentucky corporation, is a worldwide producer, marketer and supplier of engine and automotive maintenance products and services. The terms “Valvoline,” the “Company,” “we,” “us,” “management” and “our” as used herein refer to Valvoline Inc., its predecessors and its consolidated subsidiaries, except where the context indicates otherwise. On September 28, 2016, Valvoline completed its initial public offering (“IPO”) of common stock and trades on the New York Stock Exchange (“NYSE”) under the symbol, “VVV.”

Valvoline is one of the most recognized and respected premium consumer brands in the global automotive lubricant industry, known for its high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed powerful name recognition across multiple product and service channels.

Valvoline Inc. was incorporated in May 2016 as a subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). Prior to this time, Valvoline operated as an unincorporated commercial unit of Ashland. Following a series of restructuring steps prior to the IPO of Valvoline common stock, the Valvoline business was transferred from Ashland to Valvoline such that the Valvoline business included substantially all of the historical Valvoline business, as well as certain other assets and liabilities transferred to Valvoline by Ashland. In connection with the IPO, 34.5 million shares of Valvoline common stock were sold to investors and Ashland retained 170 million shares, representing approximately 83% of the total outstanding shares of Valvoline common stock.

Company Developments

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 the Distribution, Ashland no longer owned any shares of Valvoline common stock, and Valvoline was no longer a controlled and consolidated subsidiary of Ashland.

During the fiscal year ended September 30, 2017, Valvoline acquired 43 company-owned stores within the Quick Lubes reportable segment, including 28 stores related to the acquisition of business assets from Time-It Lube LLC and Time-It Lube of Texas, LP in the second fiscal quarter of 2017.

Reportable Segments

Valvoline’s reporting structure is composed of three reportable segments: Core North America, Quick Lubes and International. Additionally, to reconcile to consolidated results, certain corporate and other non-operational matters are included in Unallocated and other. Refer to the below for a description of each reportable segment:

Core North America - The Core North America segment sells Valvoline™ and other branded and private label products in the United States and Canada to both retailers for consumers to 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 DIY sales are primarily to retail auto parts stores, such as NAPA Auto Parts, AutoZone, O’Reilly Auto Parts and Advance Auto Parts, as well as leading mass merchandisers and independent auto part stores. Valvoline also sells branded products and services to installer customers such as car dealers, general repair shops and third-party quick lube locations, including Goodyear, Monro, Express Oil Change, TBC Retail Group, directly as well as through a national network of approximately 140 distributors. The Valvoline team also sells branded products and solutions to heavy duty customers, such as on-highway fleets and construction companies and has a strategic relationship with Cummins Inc. (“Cummins”), a leading heavy duty engine manufacturer, for co-branding products in the heavy duty business.

Quick Lubes - The Quick Lubes segment services the passenger car and light truck quick lube market through two platforms: Valvoline’s company-owned and franchised Valvoline Instant Oil ChangeSM (“VIOC”) stores, the second largest U.S. retail quick lube service chain by number of stores; and Express Care™, a quick lube customer platform developed for independent operators who purchase Valvoline motor oil and other products pursuant to contracts while displaying Valvoline branded signage. VIOC centers offer customers a quick, easy and trusted way to maintain their vehicles, utilizing well-trained technicians who have access to a proprietary service process that sets forth rigorous protocols for both the steps that must be followed in the service of vehicles and for interactions

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with customers. As of September 30, 2017, the VIOC network consisted of 384 company-owned and 743 franchised locations and operated in 46 states with eleven years of consecutive same-store sales growth for both company-owned and franchised stores (determined on a fiscal year basis, with new stores excluded from the metric until the completion of their first full fiscal year in operation). The Express Care™ platform supports smaller (typically single store) operators that do not fit Valvoline’s franchise model and typically offer other non-quick lube services such as auto repairs and car washes. As of September 30, 2017, there were 316 Express Care™ locations.

International - Valvoline’s International segment sells Valvoline™ and other branded products through wholly-owned affiliates, joint ventures, licensees and independent distributors in approximately 140 countries outside of the United States and Canada. Key international markets include China; India; Europe, Middle East, and Africa (“EMEA”); Latin America; and Australia Pacific. Valvoline has a growing presence in a number of markets, with primary growth targets being China, India and select countries within Latin America. International sales include products for both light duty (passenger cars, light trucks and two wheelers) and heavy duty (heavy trucks, agricultural, mining and construction equipment). Light duty products are sold internationally primarily through distributors to installer customers. Heavy duty products are sold either directly to key customers or through distributors. Valvoline goes to market in its International business segment in three ways: (1) through its own local sales, marketing, and back office support teams; (2) through joint ventures; and (3) through independent distributors. Valvoline has 50/50 joint ventures with Cummins in India, China and Argentina, and smaller joint ventures in select countries in South America and Asia.

Unallocated and other - Unallocated and other generally includes items that are non-operational in nature and not directly attributable to any of the reportable segments, such as components of pension and other postretirement benefit plan expense/income (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 costs related to the separation from Ashland.
The information required by Item 1 with respect to Valvoline's reportable segments and financial information regarding its geographic operations can be found in Note 20 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

Industry Overview

Valvoline participates primarily in the global finished lubricants market. In total, global lubricants demand is estimated to be approximately 11 billion gallons. Demand for passenger car motor oil and motorcycle oil accounted for approximately 21% of global lubricant demand, while the remaining 79% of demand was for commercial and industrial products. The United States has historically accounted for the largest amount of lubricant demand, followed by China and India. The lubricants market is impacted by the following key drivers and trends:

Global lubricants market demand is shifting towards higher performance finished lubricants, largely driven by advancements in vehicle/equipment design and original equipment manufacturer (“OEM”) requirements for improved efficiency, reduced carbon footprints and optimized fuel consumption.

There has been increasingly stringent regulation, particularly in North America and Europe, aimed at reducing toxic emissions, which has led to a continuous drive for innovation given changing specifications for lubricants.

Between 2007 and 2012, the North American transport lubes market experienced average annual volume declines of 2.7% per annum, due in part to an increase in oil change intervals, which have resulted from changing OEM recommendations and advancements in engine technology. However, market conditions have shown some indications of improvement due to an increase in the number of cars on the road and miles driven.

A surge in the number of cars on the road has led to rapid expansion of passenger vehicle lubricant sales in developing regions.

Business and Growth Strategies

The strength of Valvoline’s business model is the ability to generate profitable sales across multiple channels to market, leveraging the Valvoline brand through effective marketing, innovative product technology and the capabilities of the Valvoline team. Valvoline has delivered strong profits and return on capital, with balanced results. Today, Valvoline is a high margin, high free cash flow generating business, with significant growth opportunities. Valvoline’s key business and growth strategies include:

growing and strengthening Valvoline’s quick lube network through organic store expansion, opportunistic, high-quality acquisitions in both core and new markets within the VIOC system and strong sales efforts to partner with new Express Care operators, in addition to continued same-store sales growth and profitability within Valvoline’s existing VIOC

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system stores as a result of attracting new customers and increasing customer satisfaction, customer loyalty and average transaction size;

accelerating international growth across key markets where demand for premium lubricants is growing, such as China, India and select countries in Latin America, by building strong distribution channels in under-served geographies, replacing less successful distributors and improving brand awareness among installer customers in those regions; and

leveraging innovation, in terms of product development, packaging, marketing and the implementation of Valvoline’s new digital infrastructure, to strengthen market share and profitability.

Valvoline’s Products

Valvoline’s portfolio is designed to deliver quality product solutions to meet the needs of its wide variety of customers with varying needs. Valvoline has a history of leading innovation with revolutionary products such as All Climate™, DuraBlend™, and MaxLife™. In addition to the iconic Valvoline-branded passenger car motor oils and other co-branded and private label automotive lubricant products, Valvoline provides a wide array of lubricants used in heavy duty equipment, as well as automotive coolants and chemicals designed to improve engine performance and lifespan. Premium branded product offerings enhance Valvoline’s high quality reputation and provide customers with solutions that address a wide variety of needs. Valvoline's product offerings fall into the following categories:
Product Line
 
% of 2017 Sales
 
Description
Lubricants
Passenger Car / Light Duty
 
89%
 
Comprehensive assortment meeting the needs of passenger car, motorcycle and other light duty engines, including motor oil, transmission fluid, greases and gear oil
Heavy Duty
 
 
Lubricating solutions for a wide range of heavy duty applications ranging from on-road (Class 4 – Class 8 vehicles) to off-road construction, mining, agricultural and power generation equipment
Antifreeze
Antifreeze / Coolants
 
4%
 
Antifreeze/coolants for OEMs; full assortment of additive technologies and chemistries to meet virtually all light-duty and heavy duty engine applications and heat transfer requirements of batteries and fuel cells used to power electric vehicles
 
 
Chemicals
Maintenance Chemicals
 
4%
 
Functional and maintenance chemicals ranging from brake fluids and power steering fluids to chemicals specifically designed to clean and maintain optimal performance of fuel, cooling and drive train systems
Coatings
 
 
Specialty coatings designed to target rust prevention, and sound absorption for automotive and industrial applications
Filters
Filters
 
3%
 
Oil and air filters meeting the needs of light-duty vehicles
 
 
Other
Other Complementary Products
 
-%
 
Windshield wiper blades, light bulbs, serpentine belts and drain plugs
 
 
Included within lubricants above are revenues for related preventive maintenance services, including full-service oil changes, that VIOC stores provide.

Competition

The industry is highly competitive and Valvoline faces competition in all product categories and subcategories. Competition is based on several key criteria, including brand recognition, product performance and quality, product price, product availability and security of supply, ability to develop products in cooperation with customers and customer service, as well as the ability to bring innovative products or services to the marketplace. 


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In the Core North America reportable segment, Valvoline’s principal competitors for retail customers are global integrated oil brands, such as Shell, which produces Pennzoil and Quaker State; BP, which produces Castrol; Exxon Mobil, which produces Mobil 1; as well as mid-tier brands and private label producers. With respect to installer customers in the United States and Canada, Valvoline competes with these same major integrated oil brands, many of which have significantly greater financial resources and more diverse portfolios of products and services, leading to greater operating and financial flexibility. 

The Quick Lubes segment competes with other major franchised brands that offer a turn-key operations management system, such as Jiffy Lube (owned by Shell), Grease Monkey, Take 5 Oil Change, and Express Oil Change, as well as national branded companies that offer a professional signage program with limited business model support, similar to Valvoline’s Express Care network, and regional players such as Super-Lube, American Lube Fast and Express Oil Change that are not directly affiliated with a major brand. Valvoline also competes to some degree with automotive dealerships and service stations, which provide quick lube and other preventative maintenance services. Valvoline believes there are over 9,000 existing quick lube stores currently operating in the U.S. market. Jiffy Lube is currently the Company's largest competitor by number of stores with just over 1,900 stores owned or operated by franchisees.

Major competitors of Valvoline’s International business vary by region. Valvoline generally faces strong competition from global integrated oil brands, as these companies have a particularly strong presence in Europe and Asia. In certain markets, Valvoline also competes with regional brands, including brands produced by national oil companies, such as Sinopec in China and Indian Oil in India.

Competitive factors in all of these markets include price, product or service technology, brand awareness and loyalty, customer service, and sales and marketing. Valvoline’s Core North America and International reportable segments also compete on the basis of shelf space and product packaging.

Marketing and Advertising

Valvoline places a high priority on sales and marketing and focuses marketing efforts on areas expected to yield the highest rate of return. Valvoline has dedicated marketing resources in each reportable segment, which are well qualified to reach target customers. The majority of Valvoline’s large customers are supported by direct sales representatives with a number of key customers having dedicated Valvoline teams. In addition, Valvoline has a number of distributors within the Core North America and International reportable segments that represent the Company's products. In Core North America, Valvoline products are sold to consumers through over 30,000 retail outlets, to installer customers with over 12,000 locations, and in Quick Lubes through 1,127 Valvoline-branded franchised and company-owned stores. Valvoline serves the customer base through an extensive sales force and technical support organization, allowing leverage of the technology portfolio and customer relationships globally, while meeting customer demands locally.

Valvoline uses a variety of marketing techniques to build awareness of, and create demand for, Valvoline products and services. Valvoline advertises through social and digital media, as well as traditional media outlets such as television, print and radio. Valvoline selectively sponsors teams in high performance racing series, including a current sponsorship of Hendrick Motorsports, featuring drivers Dale Earnhardt Jr., Chase Elliott, Jimmie Johnson and Kasey Kahne. In addition, Valvoline sponsors other teams and players in other high performing sports, including the Manchester City Football Club and the Memphis Grizzlies, as well as Valvoline's joint venture sponsorship of renowned Indian cricket player, Virat Kohli.

Valvoline has also embarked on a digital infrastructure initiative that will enable the use of technology across the entire enterprise. Valvoline believes its digital marketing infrastructure will drive more effective engagement to deliver growth, customer retention and acquisition as a strategic business partner.

Research and Development

Valvoline’s innovation is central to the successful performance of its business. Valvoline research and development is focused on developing new and innovative products to meet the current and future needs of its customers. These products are developed through Valvoline’s “Hands on Expertise” innovation approach, which begins with the mathematical modeling of critical product design elements and extends through field testing. In addition, Valvoline technology centers, located in the Americas, Europe and Asia Pacific regions, develop solutions for existing and emerging on and off-road equipment. Valvoline’s research and development team also leverages its strong relationships with customers and suppliers to incorporate their feedback into the research and development process. In addition to its own research and development initiatives, Valvoline also conducts limited testing for other entities, which builds its expertise and partially offsets its research and development costs. Expenses for research and development are classified in Selling, general and administrative expense in the Consolidated Statements of Comprehensive Income included in Item 8 of Part II of this Annual Report on Form 10-K, which were $13 million in each of fiscal 2017 and fiscal 2016 and $11 million in fiscal 2015. Valvoline anticipates that the Company will continue to incur research and development expenditures in the future to ensure a continuing flow of innovative, high-quality products and services and to help maintain and enhance Valvoline's competitive position. 

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Intellectual Property

Valvoline is continually seeking to develop new technology and enhance its existing technology. Valvoline has been issued 34 U.S. and 59 international patents and has 17 U.S. and 51 international patent applications pending or published. Valvoline also holds over 2,450 trademarks in various countries around the world, which Valvoline believes are some of its most valuable assets, for which Valvoline dedicates significant resources to protect. These trademarks include the Valvoline trademark and the famous “V” brand logo trademark, which are registered in over 150 countries. In addition, Valvoline uses various trade names and service marks in its business, including ValvolineTM, Valvoline Instant Oil ChangeSM, MaxLifeTM, All Climate™, DuraBlend™, SynPowerTM and Premium BlueTM. Valvoline also has a variety of intellectual property licensing agreements primarily with its franchisees. Valvoline owns over 700 domain names that are used to promote Valvoline products and services and provide information about the Company.

Raw Material Supply and Prices

The key raw materials used in Valvoline’s business are base oils, additives, packaging materials (high density polyethylene bottles, corrugated packaging and steel drums) and ethylene glycol. Valvoline continuously monitors global supply and cost trends of these key raw materials and obtains these raw materials from a diversified network of large global suppliers and regional providers. Valvoline’s sourcing strategy is to ensure supply through contracting a diversified supply base while leveraging market conditions to take advantage of spot opportunities whenever such conditions are available. Valvoline leverages worldwide spend to obtain favorable contract terms from the global suppliers and use the regional providers to ensure market competitiveness and reliability in its supply chain.  For materials that must be customized, Valvoline works with market leaders with global footprints and well developed business continuity plans. Valvoline also utilizes the Company’s research and development resources to develop alternative product formulations, which provide flexibility in the event of supply interruptions. Valvoline closely monitors the Company’s supply chain and conducts annual supply risk assessments of its critical suppliers to reduce risk.

Valvoline has a large manufacturing and distribution footprint in the United States, with seven lubricant blending and packaging plants, two distribution centers and several packaging and warehouse locations. Additional lubricant blending and packaging plants are located in Australia and the Netherlands. Valvoline also has a blending and packaging facility in Canada. In addition, Valvoline also uses numerous third-party toll manufacturers and warehouses.

Valvoline seeks to actively manage fluctuations in supply costs, product selling prices and the timing thereof to preserve unit margins. The prices of many of Valvoline’s products fluctuate based on the price of base oil, which is a large percentage of Valvoline’s cost of sales. Historically, base oil prices have been volatile, which sometimes causes sharp cost increases during periods of short supply. Since 2011, base oil supply has increased dramatically while global demand has generally grown at a steady and moderate rate. Although base oil, a derivative of crude, is highly correlated to the global oil market, excess supply of base oil in recent years has contributed to reduced volatility in the base oil market. Base oil prices generally follow crude prices, but the lag period between changes in the price of crude oil and changes in the price of base oil is influenced by whether there is an excess of or shortness in the supply of base oil. 

Valvoline has generally been successful in adjusting product selling prices to react to changes in base oil costs to preserve unit margins. As part of the strategy to mitigate the impact of base oil volatility, Valvoline has negotiated base oil supply contracts with terms that have reduced the impact of changes in the base oil market on Valvoline’s financial results. Valvoline has revised contracts in several of the Company’s sales channels to accelerate the timing of adjustments to selling prices in response to changes in raw material prices. Pricing adjustments to product sold to Valvoline’s larger national or regional installer customer accounts tend to be made pursuant to contract and are often based on movements in published base oil indices. Pricing for product sold to Valvoline’s franchisees is adjusted on a periodic basis pursuant to an agreed upon index (weighted combination of published base oil indices), the composition and weighting of which may be updated from time to time by Valvoline and representatives of Valvoline’s franchisees. Pricing adjustments for product sold to retail customers, private label products in the United States and product sold to smaller installer customer accounts are generally market driven, based on negotiations in light of base oil costs and the pricing strategies of Valvoline’s competitors.

Backlog

Although Valvoline may experience availability constraints from time to time for certain products, orders are generally filled within 30 days of receiving them. Therefore, Valvoline usually has a product backlog of less than 30 days at any one time, which the Company does not consider material to its business.
 
Seasonality

Overall, there is little seasonality in Valvoline’s business. Valvoline's Quick Lubes business and to a lesser extent, its Core North America business tend to experience slightly higher sales volume in the summer months due to summer vacations and increased

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driving, as well as during the periods of time leading into holidays. Both businesses also tend to slow a little from October to February due to inclement weather in parts of the United States and Canada. Valvoline’s International business experiences almost no seasonality due to its geographic diversity and the high percentage of its business in the commercial and industrial lubricants market, which is less influenced by weather.

Environmental and Regulatory Matters

Valvoline is subject to numerous foreign, federal, state and local Environmental Health and Safety (“EHS”) laws and regulations. These laws and regulations govern matters such as safe working conditions; product stewardship; air emissions; discharges to the land and surface waters; generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials; and the registration and evaluation of chemicals. Valvoline maintains policies and procedures to control EHS risks and monitor compliance with applicable EHS laws and regulations. These laws and regulations also require Valvoline to obtain and comply with permits, registrations or other authorizations issued by governmental authorities. These authorities can modify or revoke the Company's permits, registrations or other authorizations and can enforce compliance through fines and injunctions.

Valvoline expects to incur ongoing costs to comply with existing and future EHS requirements, including the cost of a dedicated EHS group that is responsible for ensuring its business maintains compliance with applicable laws and regulations. This responsibility is carried out through training; formulation of and widespread communication of EHS policies; formulation of procedures and working practices; design and implementation of EHS management systems; internal compliance and management assessments; monitoring legislative and regulatory developments that may affect Valvoline's operations; and incident response planning.

Valvoline is also subject to regulation by various U.S. federal regulatory agencies and by the applicable regulatory authorities in countries in which Valvoline’s products are manufactured and sold. Such regulations principally relate to the ingredients, classification, labeling, manufacturing, packaging, transportation, advertising and marketing of Valvoline’s products. In addition, the Company is subject to the Foreign Corrupt Practices Act and other countries’ anti-corruption and anti-bribery regimes.

Valvoline could incur substantial costs if the Company were to violate or become liable under environmental laws or other applicable regulations. Liabilities are accrued when Valvoline considers the matter to be probable of loss and the costs can reasonably be estimated. Such costs and accruals are presently not material to Valvoline's results of operations, financial position, or cash flows. There can be no assurances that existing or future environmental laws and other regulations applicable to the Company's operations or products will not lead to a material adverse impact on Valvoline's results of operations, financial position or cash flows.

Employees

As of September 30, 2017, Valvoline had approximately 5,600 employees worldwide (excluding contract employees).

Available Information

More information about Valvoline is available on Valvoline’s website at http://www.valvoline.com. On this website, Valvoline makes available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, as well as any beneficial ownership reports of officers and directors filed on Forms 3, 4 and 5. All such reports are available as soon as reasonably practicable after they are electronically filed with, or electronically furnished to, the SEC. Valvoline also makes available, free of charge on its website, its Corporate Governance Guidelines, Board Committee Charters, Director Independence Standards and the Global Standards of Business Conduct that applies to Valvoline’s directors, officers and employees. These documents are also available in print to any shareholder who requests them. Information contained on Valvoline’s website is not part of this Annual Report on Form 10-K and is not incorporated by reference in this document. The public may read and copy any materials Valvoline files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC website (http://www.sec.gov) contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.



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Executive Officers of Valvoline
The following is a list of Valvoline’s executive officers, their ages, positions and experience during the last five years.

SAMUEL J. MITCHELL, JR. (age 56) is Chief Executive Officer and Director of Valvoline. Mr. Mitchell was appointed as a director and Chief Executive Officer in May 2016 and September 2016, respectively. He served as Senior Vice President of Ashland from 2011 to September 2016 and President of Valvoline from 2002 to September 2016.

MARY E. MEIXELSPERGER (age 57) is Chief Financial Officer of Valvoline since June 2016. Prior to joining Valvoline, Ms. Meixelsperger was Senior Vice President and Chief Financial Officer of DSW Inc. from April 2014 to June 2016 and held the roles of Chief Financial Officer, Controller and Treasurer at Shopko Stores from 2006 to 2014.

JULIE M. O’DANIEL (age 50) is Senior Vice President, General Counsel and Corporate Secretary of Valvoline since September 2016. She served as Lead Commercial Counsel of Valvoline from April 2014 to September 2016. Ms. O’Daniel previously served as Litigation Counsel of Valvoline from July 2007 to April 2014.

THOMAS A. GERRALD II (age 53) is Senior Vice President, Core North America of Valvoline since September 2016. He served as Senior Vice President, U.S. Installer Channel, of Valvoline from June 2012 to September 2016.

FRANCES E. LOCKWOOD (age 67) is Chief Technology Officer of Valvoline since September 2016. She served as Senior Vice President, Technology, of Valvoline from May 1994 to September 2016.

HEIDI J. MATHEYS (age 45) is Chief Marketing Officer of Valvoline since September 2016. She served as Senior Vice President, Do-It-Yourself Channels, of Valvoline from August 2013 to September 2016. Ms. Matheys previously served as Vice President, Global Brands, of Valvoline from September 2012 to August 2013.

CRAIG A. MOUGHLER (age 60) is Senior Vice President, International & Product Supply of Valvoline since September 2016. He served as Senior Vice President, International of Valvoline from October 2002 to September 2016.
 
ANTHONY R. PUCKETT (age 55) is President, Quick Lubes of Valvoline since September 2016. He served as President of Valvoline Instant Oil Change from August 2007 to September 2016.

VICTOR T. RIOS (age 48) is Chief Information Officer and Chief Digital Officer since June 2016. Prior to joining Valvoline, Mr. Rios was Chief Information Officer for the Consumer Medical Technologies division of Johnson & Johnson from November 2013 to February 2016 and held the roles of Chief Information Officer of the Vision Care division and Vice President of IT, Global Solutions Delivery at Johnson & Johnson from 2011 to 2013.

DAVID J. SCHEVE (age 42) is Chief Accounting Officer and Controller of Valvoline since October 2016. Mr. Scheve joined the Company from Southern Graphic Systems, a supplier of design-to-print brand development products and services, where he started in June 2007 as its Global Corporate Controller and was most recently its Chief Financial Officer and Vice President of Finance.

SARA K. STENSRUD (age 50) is Chief People and Communications Officer of Valvoline since August 2016. Prior to joining Valvoline, Ms. Stensrud was Executive Vice President and Chief Human Resources Officer of Chico’s FAS, Inc. from 2010 to 2016.

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ITEM 1A.  RISK FACTORS

The following “risk factors” could materially and adversely affect Valvoline’s business, operations, financial position or future financial performance. This information should be considered when reading the rest of this Annual Report on Form 10-K, including Management’s Discussion and Analysis and the consolidated financial statements and related notes. These factors could cause future results to differ from those in forward-looking statements and from historical trends.
Risks Related to Valvoline’s Business
Damage to Valvoline’s brand and reputation could have an adverse effect on its business.

Maintaining Valvoline’s strong reputation with both consumers and customers is a key component of its business. Product or service complaints or recalls, its inability to ship, sell or transport affected products and governmental investigations may harm its reputation with consumers and customers, which may materially and adversely affect its business operations, decrease sales and increase costs.

Valvoline manufactures and markets a variety of products, such as automotive and industrial lubricants and antifreeze, and provides automotive maintenance services. If allegations are made that some of Valvoline’s products have failed to perform up to consumers’ or customers’ expectations or have caused damage or injury to individuals or property, or that Valvoline’s services were not provided in a manner consistent with its vision and values, the public may develop a negative perception of its brands. In addition, if Valvoline’s franchisees or Express Care operators do not successfully operate their quick lube service centers in a manner consistent with Valvoline’s standards, its brand, image and reputation could be harmed, which in turn could negatively impact its business and operating results. In addition, if any party with whom Valvoline has a sponsorship relationship were to generate adverse publicity, Valvoline's brand image could be harmed. A negative public perception of Valvoline’s brands, whether justified or not, could impair its reputation, involve it in litigation, damage its brand equity and have a material adverse effect on its business. In addition, damage to the reputation of Valvoline’s competitors or others in its industry could negatively impact Valvoline’s reputation and business.

Valvoline has set aggressive growth goals for its business, including increasing sales, cash flow, market share, margins and number of VIOC stores, in order to achieve its long-term strategic objectives. Execution of Valvoline’s growth strategies and business plans to facilitate that growth involves a number of risks.

Valvoline has set aggressive growth goals for its business in order to meet its long-term strategic objectives and improve shareholder value. Valvoline’s failure to meet one or more of these goals or objectives would negatively impact its business and is one of the most important risks that Valvoline faces. Aspects of that risk include, among others, changes to the economic environment, changes to the competitive landscape, including those related to automotive maintenance recommendations and consumer preferences, attraction and retention of skilled employees, the potential failure of product innovation plans, failure to comply with existing or new regulatory requirements, failure to maintain a competitive cost structure and other risks outlined in greater detail in this “Risk Factors” section.

Demand for Valvoline’s products and services could be adversely affected by consumer spending trends, declining economic conditions, trends in Valvoline’s industry and a number of other factors, all of which are beyond its control.

Demand for Valvoline’s products and services may be affected by a number of factors it cannot control, including the number and age of vehicles in current service, regulation and legislation, technological advances in the automotive industry and changes in engine technology, including the adoption rate of electric or other alternative engine technologies, changing automotive original equipment manufacturer (“OEM”) specifications and longer recommended intervals between oil changes. In addition, during periods of declining economic conditions, consumers may defer vehicle maintenance. Similarly, increases in energy prices or other factors may cause miles driven to decline, resulting in less wear and tear and lower demand for maintenance, which may lead to consumers deferring purchases of Valvoline’s products and services. All of these factors, which impact metrics such as drain intervals and oil changes per day, could result in a decline in the demand for Valvoline’s products and services and adversely affect its sales, cash flows and overall financial condition.

The success of Valvoline’s growth initiatives depends on its ability to successfully develop and implement one or more integrated digital platforms that will help it better understand consumers and more effectively engage them.
Valvoline is in the process of designing and implementing a number of digital platforms that will integrate its operations with customer and consumer data. The successful development and implementation of these digital platforms will depend on Valvoline’s ability to identify an appropriate strategy, dedicate adequate resources and select technologies that will provide it with adequate flexibility to adapt to future developments in the marketplace and changes in consumer and customer behavior. Valvoline has incurred and expects to incur significant upfront investments to develop these digital platforms. There is a risk that once implemented, these

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digital platforms will not deliver all or part of the expected benefits, including additional sales. As Valvoline develops and implements its digital platforms, it may elect to modify, replace or abandon certain technology initiatives, which could result in asset write-downs.
Valvoline’s success depends upon its ability to attract and retain key employees and the identification and development of talent to succeed senior management.
Valvoline’s success depends on its ability to attract and retain key personnel, and it relies heavily on its senior management team. The inability to recruit and retain key personnel or the unexpected loss of key personnel may adversely affect Valvoline’s operations. This risk of unwanted employee turnover is substantial in positions that require certain technical expertise. This risk is also substantial in developing international markets Valvoline has targeted for growth and in North America, where attracting marketing and technical expertise to geographies necessary to support its management is important to its success. In addition, because of Valvoline’s reliance on its senior management team, its future success depends, in part, on its ability to identify and develop or recruit talent to succeed its senior management and other key positions throughout the organization. If Valvoline fails to identify and develop or recruit successors, it is at risk of being harmed by the departures of these key employees.
Valvoline faces significant competition from other companies, which places downward pressure on prices and margins and may adversely affect Valvoline’s business and results of operations.
Valvoline operates in highly competitive markets, competing against a number of domestic and foreign companies. Competition is based on several key criteria, including brand recognition, product performance and quality, product price, product availability and security of supply, ability to develop products in cooperation with customers and customer service, as well as the ability to bring innovative products or services to the marketplace. Certain key competitors, including Shell/Pennzoil, BP/Castrol and Exxon/Mobil, are significantly larger than Valvoline and have greater financial resources and more diverse portfolios of products and services, leading to greater operating and financial flexibility. As a result, these competitors may be better able to withstand adverse changes in conditions within the relevant industry, the prices of raw materials and energy or general economic conditions. In addition, competitors’ pricing decisions could compel Valvoline to decrease its prices, which could negatively affect Valvoline’s margins and profitability. Additional competition in markets served by Valvoline could adversely affect margins and profitability and could lead to a reduction in market share. Also, Valvoline competes in certain markets that are flat to declining, such as the U.S. passenger car motor oil market. If Valvoline’s strategies for dealing with declining markets and leveraging market opportunities are not successful, its results of operations could be negatively affected.

Because of the concentration of Valvoline’s sales to a small number of retailers, the loss of one or more, or a significant reduction in, orders from, its top retail customers could adversely affect its financial results, as could the loss of one of its distributor relationships.
Valvoline’s Core North America segment’s sales represented approximately 48% of Valvoline’s total sales in fiscal 2017. NAPA Auto Parts, AutoZone, Advance Auto Parts, O’Reilly Auto Parts and another large national retailer together accounted for 47% of Core North America’s fiscal 2017 sales and 44% of Core North America’s outstanding trade accounts receivable as of September 30, 2017. NAPA Auto Parts accounted for greater than 16% of Core North America’s fiscal 2017 sales. Valvoline’s volume of sales to these customers fluctuates and can be influenced by many factors, including product pricing, purchasing patterns and promotional activities. The loss of, or significant reduction in orders from, one of Valvoline’s top five retail customers or any other significant customer could have a material adverse effect on its business, financial condition, results of operations or cash flows, as could customer disputes regarding shipments, fees, merchandise condition or related matters. Valvoline’s inability to collect accounts receivable from one of its major customers, or a significant deterioration in the financial condition of one of these customers, including a bankruptcy filing or a liquidation, could also have a material adverse effect on Valvoline’s financial condition, results of operations or cash flows. Valvoline also relies on independent distributors to sell and deliver its products. Disagreements or the loss of Valvoline’s relationship with a distributor could also have a material adverse effect on its financial condition, results of operations or cash flows.

Valvoline’s marketing activities may not be successful.
Valvoline invests substantial resources in advertising, consumer promotions and other marketing activities in order to maintain and strengthen its brand image and product awareness. The Valvoline name and brand image are integral to the growth of its business and its expansion into new markets. Failure to adequately market and differentiate its products and services from competitive products and services could adversely affect Valvoline’s business. There can be no assurances that Valvoline’s marketing strategies will be effective or that its investments in advertising activities will result in a corresponding increase in sales of its products. If Valvoline’s marketing initiatives are not successful, it will have incurred significant expenses without the benefit of higher sales of its products.

Valvoline’s business exposes it to potential product liability claims and recalls, false advertising claims and other claims, which could adversely affect its financial condition and performance.
The development, manufacture and sale of automotive, commercial and industrial lubricants and automotive chemicals and the provision of automotive maintenance services involve an inherent risk of exposure to product liability claims, false advertising

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claims, product recalls, workplace exposure, product seizures and related adverse publicity. A product liability claim, false advertising claim or related judgment against the Company could also result in substantial and unexpected expenditures, affect consumer or customer confidence in Valvoline’s products and services, and divert management’s time and attention from other responsibilities. Although Valvoline maintains product and general liability insurance, there can be no assurance that the type or level of coverage it has is adequate or that it will be able to continue to maintain its existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured product liability, false advertising or other judgment against Valvoline could have a material adverse effect on its reputation, results of operations and financial condition.

Failure to develop and market new products and production technologies could impact Valvoline’s competitive position and have an adverse effect on its business and results of operations.
The lubricants industry is subject to periodic technological change and ongoing product improvements. In order to maintain margins and remain competitive, Valvoline must successfully develop and introduce new products or improvements that appeal to its customers and ultimately to global consumers. Changes in additive technologies, base oil production techniques and sources, and the demand for improved performance by OEMs and consumers place particular pressure on Valvoline to continue to improve its product offerings. Valvoline’s efforts to respond to changes in consumer demand in a timely and cost-efficient manner to drive growth could be adversely affected by difficulties or delays in product development and service innovation, including the inability to identify viable new products, successfully complete research and development, obtain regulatory approvals, obtain intellectual property protection or gain market acceptance of new products or service techniques. Due to the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products Valvoline is currently developing, or could develop in the future, will achieve substantial commercial success. The time and expense invested in product development may not result in commercial products or provide revenues. Valvoline could be required to write-off its investments related to a new product that does not reach commercial viability. Moreover, Valvoline may experience operating losses after new products are introduced and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand.
The impact of changing laws or regulations or the manner of interpretation or enforcement of existing laws or regulations could adversely impact Valvoline’s financial performance and restrict its ability to operate its business or execute its strategies.
New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could increase Valvoline’s cost of doing business and restrict its ability to operate its business or execute its strategies. This risk includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, the possible taxation under foreign laws of certain income Valvoline reports in other jurisdictions, regulations related to the protection of private information of its employees and customers, regulations issued by the U.S. Federal Trade Commission (and analogous non-U.S. agencies) affecting Valvoline and its customers, compliance with the REACH regulation (and analogous non-EU initiatives). In addition, compliance with laws and regulations is complicated by Valvoline’s substantial and growing global footprint, which will require significant and additional resources to ensure compliance with applicable laws and regulations in the approximately 140 countries where Valvoline conducts business.

Valvoline’s global operations expose it to trade and economic sanctions and other restrictions imposed by the United States, the European Union and other governments and organizations. The U.S. Departments of Justice, Commerce, State and Treasury and other federal agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for violations of economic sanctions laws, export control laws, the Foreign Corrupt Practices Act (the “FCPA”) and other federal statutes and regulations, including those established by the Office of Foreign Assets Control (“OFAC”). Under these laws and regulations, as well as other anti-corruption laws, anti-money-laundering laws, export control laws, customs laws, sanctions laws and other laws governing Valvoline’s operations, various government agencies may require export licenses, may seek to impose modifications to business practices, including cessation of business activities in sanctioned countries or with sanctioned persons or entities and modifications to compliance programs, which may increase compliance costs, and may subject Valvoline to fines, penalties and other sanctions. A violation of these laws or regulations could adversely impact Valvoline’s business, results of operations and financial condition.

Although Valvoline has implemented policies and procedures in these areas, it cannot assure you that its policies and procedures are sufficient or that directors, officers, employees, representatives, distributors, consultants and agents have not engaged and will not engage in conduct for which Valvoline may be held responsible, nor can Valvoline assure you that its business partners have not engaged and will not engage in conduct that could materially affect their ability to perform their contractual obligations to Valvoline or even result in its being held liable for such conduct. Violations of the FCPA, OFAC restrictions or other export control, anti-corruption, anti-money-laundering and anti-terrorism laws or regulations may result in severe criminal or civil sanctions, and Valvoline may be subject to other liabilities, which could have a material adverse effect on its business, financial condition, cash flows and results of operations.




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Imposition of new taxes, disagreements with tax authorities or additional tax liabilities could adversely affect Valvoline’s business, financial condition, reputation or results of operations.

Valvoline’s products are made, manufactured, distributed or sold in approximately 140 countries and territories. As such, Valvoline is subject to a myriad of tax laws and regulations applicable in those countries and territories, as well as those of the United States and its various state and local governments. Economic and political pressure to increase tax revenues in jurisdictions where Valvoline operates or does business, or the adoption of new or reformed tax regulations, may make resolving tax disputes more difficult, and the final resolution of tax audits and any related litigation may differ from historical provisions and accruals resulting in an adverse impact on Valvoline’s business, financial condition, reputation or results of operations. In addition to tax reform being considered in the United States, many other countries are actively considering changes to existing tax laws. Changes in how United States multinational corporations are taxed on earnings, including changes to currently enacted tax rates, could adversely affect Valvoline’s business, financial condition or results of operations. There exists the potential for comprehensive tax reform in the United States that may significantly change the tax rules applicable to U.S. domiciled corporations. Valvoline cannot assess what the overall effect of such potential legislation could be on its results of operations or cash flows.

Valvoline’s substantial global operations subject it to risks of doing business in foreign countries, which could adversely affect its business, financial condition and results of operations.
Sales from Valvoline’s International business segment accounted for 26% of its sales for fiscal 2017. Valvoline expects sales from international markets to continue to represent an even larger portion of its sales in the future. Also, a significant portion of Valvoline’s manufacturing capacity is located outside of the United States. Accordingly, its business is subject to risks related to the differing legal, political, cultural, social and regulatory requirements and economic conditions of many jurisdictions.

The global nature of Valvoline’s business presents difficulties in hiring and maintaining a workforce in certain countries. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided in foreign countries. In addition, foreign countries may impose additional withholding taxes or otherwise tax Valvoline’s foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls. The imposition of tariffs is also a risk that could impair Valvoline’s financial performance. In addition, joint ventures, particularly Valvoline’s existing joint ventures with Cummins in India and China, are an important part of its growth strategy internationally. If Valvoline’s relationship with one of its joint venture partners were to deteriorate, it could negatively impact Valvoline’s ability to achieve its growth goals internationally.

Certain legal and political risks are also inherent in the operation of a company with Valvoline’s global scope. For example, it may be more difficult for Valvoline to enforce its agreements or collect receivables through foreign legal systems. There is a risk that foreign governments may nationalize private enterprises in certain countries where Valvoline operates. Terrorist activities and the response to such activities may threaten Valvoline’s operations. Social and cultural norms in certain countries may not support compliance with Valvoline’s corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions in countries where Valvoline operates are a risk to Valvoline’s financial performance and future growth. For example, Valvoline exited its Venezuelan joint venture in 2015 due in part to the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar and other Venezuelan regulations. In addition, in executing its global growth strategies, Valvoline has entered into several important strategic relationships with joint venture partners, such as Cummins, unaffiliated distributors, toll manufacturers and others. The need to identify financially and commercially strong partners to fill these roles who will comply with the high manufacturing and legal compliance standards Valvoline requires is a risk to Valvoline’s financial performance.

As Valvoline continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to Valvoline’s multinational operations will not have an adverse effect on its business, financial condition or results of operations.

The competitive nature of Valvoline’s markets or other factors may delay or prevent it from passing increases in raw material costs on to its customers. In addition, certain of Valvoline’s suppliers may be unable to deliver products or raw materials or may withdraw from contractual arrangements. The occurrence of either event could adversely affect Valvoline’s results of operations.
Rising and volatile raw material prices, especially for base oil and lubricant additives, may negatively impact Valvoline’s costs, results of operations and the valuation of its inventory. Valvoline is not always able to raise prices in response to increased costs of raw materials, and its ability to pass on the costs of such price increases is dependent upon market conditions. Likewise, reductions in the valuation of Valvoline’s inventory due to market volatility may not be recovered and could result in losses.

Valvoline purchases certain products and raw materials from suppliers, often pursuant to written supply contracts. If those suppliers are unable to meet Valvoline’s orders in a timely manner or choose to terminate or otherwise avoid contractual arrangements, Valvoline may not be able to make alternative supply arrangements. For base oils, Valvoline’s suppliers are primarily large oil

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producers, many of whom operate oil lubricant production and sales businesses as part of their enterprise. There are risks inherent in obtaining important raw materials from actual or potential competitors, including the risk that applicable antitrust laws may be inadequate to mitigate Valvoline’s exposure to these risks. Valvoline purchases substantially all of its lubricant additives from the following four suppliers: Afton Chemical Corporation, Chevron Oronite Company LLC, the Infineum group of companies and Lubrizol Corporation. Because the industry is characterized by a limited number of lubricant additives suppliers, there are a limited number of alternative suppliers with whom Valvoline could transact in the event of a disruption to its existing supply relationships; for example, due to disruptions to its suppliers' operations caused by natural disasters or severe weather conditions. The inability of Valvoline’s suppliers to meet its supply demands could also have a material adverse effect on its business.

Also, domestic and global government regulations related to the manufacture or transport of certain raw materials may impede Valvoline’s ability to obtain those raw materials on commercially reasonable terms. If Valvoline is unable to obtain and retain qualified suppliers under commercially acceptable terms, its ability to manufacture and deliver products in a timely, competitive and profitable manner or grow its business successfully could be adversely affected.

Valvoline may be unable to execute its growth strategy, and acquisitions, joint ventures, strategic alliances and investments could result in operating difficulties, dilution and other harmful consequences that may adversely impact Valvoline’s business and results of operations.

Acquisitions, particularly for Valvoline’s VIOC business, and building strategic alliances for distribution and manufacturing, particularly in international markets, including through joint venture partnerships, product distribution and toll manufacturing arrangements, are important elements of its overall growth strategy. Valvoline expects to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions, and to continue to grow its VIOC business organically and through acquisitions. An inability to execute these plans could have a material adverse impact on Valvoline’s financial condition and results of operations. In addition, the process of integrating an acquired company, business, or product may create unforeseen operating difficulties or expenditures. The areas where Valvoline faces risks include:

the possible inability to fully execute plans to add stores to Valvoline's VIOC network, due to lack of desirable real estate sites, regulatory or municipal hurdles, a lack of viable acquisition targets, or other factors;
diversion of management’s time and attention from operating Valvoline’s business to acquisition integration challenges;
failure to successfully grow the acquired business or product lines;
inability to implement adequate controls, procedures and policies at the acquired company;
integration of the acquired company’s accounting, human resources and other administrative systems, and coordination of product, engineering and sales and marketing functions;
transition of operations, users and customers onto Valvoline’s existing platforms;
reliance on the expertise of Valvoline’s strategic partners with respect to market development, sales, local regulatory compliance and other operational matters;
failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval under competition and antitrust laws which could, among other things, delay or prevent Valvoline from completing a transaction, or otherwise restrict its ability to realize the expected financial or strategic goals of an acquisition;
in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address economic, currency, political and regulatory risks associated with specific countries;
cultural challenges associated with integrating employees from the acquired company into Valvoline’s organization, and retention of employees from the companies that Valvoline acquires;
liability for, or reputational harm from, activities of the acquired company before the acquisition or from Valvoline’s strategic partners; and
litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former security holders or other third parties.

Valvoline’s failure to address these risks or other problems encountered in connection with its past or future acquisitions, investments or strategic alliances could cause Valvoline to fail to realize the anticipated benefits of such acquisitions, investments or strategic alliances, incur unanticipated liabilities and harm Valvoline’s business generally.

Valvoline’s acquisitions, investments and strategic alliances could also result in dilutive issuances of its equity securities, the incurrence of debt, contingent liabilities or amortization expenses, impairment of goodwill or purchased long-lived assets and restructuring charges, any of which could harm its financial condition, results of operations and cash flows. Also, the anticipated benefits of Valvoline’s acquisitions may not be realized. Valvoline’s balance sheet includes goodwill primarily related to acquisitions and future acquisitions may result in Valvoline’s recognition of additional goodwill. The impairment of a significant portion of this goodwill would negatively affect its financial results.

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Valvoline shares in ownership of joint ventures, which may limit its ability to manage third-party risks associated with these projects.

For financial or strategic reasons, Valvoline conducts a portion of its business through joint ventures. In these joint ventures, Valvoline shares influence over the operation of the joint venture and its assets. Therefore, joint ventures may involve risks such as the possibility that a co-venturer in an investment might become bankrupt, be unable to meet its capital contribution obligations, have economic or business interests or goals that are inconsistent with Valvoline's business interests or goals, or take actions that are contrary to Valvoline's direction or to applicable laws and regulations. In addition, joint venture partners could take actions binding on the joint venture without Valvoline's consent, or Valvoline may be unable to take action without the concurrence of its joint venture partners. Consequently, actions by the joint venture, co-venturer or other third-party could expose Valvoline to claims for damages, financial penalties and reputational harm, any of which could have an adverse effect on its business and operations. Although joint ventures may generate positive cash flow, in some cases they may be unable or unwilling to distribute that cash to the joint venture partners.

The business model for Valvoline’s VIOC business, including its dependence on franchised oil change centers, presents a number of risks.

VIOC is made up of a nationwide network of both company-owned and franchised stores. Valvoline’s success relies in part on the financial success and cooperation of its franchisees. However, Valvoline has limited influence over their operations. Valvoline’s franchisees manage their businesses independently and are responsible for the day-to-day operations of approximately 66% of VIOC stores as of September 30, 2017. Valvoline’s revenue and income growth from franchised stores are largely dependent on the ability of its franchisees to grow their sales. Valvoline’s franchisees may have limited or no sales growth, and Valvoline’s revenues and margins could be negatively affected as a result. In addition, if sales or business performance trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, VIOC store closures, delayed or reduced payments to Valvoline and reduced growth in the number of VIOC stores.

Valvoline’s success also depends on the willingness and ability of its independent franchisees to implement major initiatives, which may require additional investment by them, and remain aligned with Valvoline on operating, promotional and capital-intensive reinvestment plans. The ability of Valvoline’s franchisees to contribute to the achievement of Valvoline’s overall plans is dependent in large part on the availability of funding to its franchisees at reasonable interest rates and may be negatively impacted by the financial markets in general or the creditworthiness of individual franchisees.

Valvoline’s operating performance and reputation could also be negatively impacted if its independent franchisees experience service failures or otherwise operate in a manner that projects a brand image inconsistent with Valvoline’s values, particularly if Valvoline’s contractual and other rights and remedies are limited, costly to exercise or subject to litigation. If Valvoline’s franchisees do not successfully operate VIOC stores in a manner consistent with Valvoline’s standards, Valvoline’s brand, image and reputation could be harmed, which in turn could negatively impact its business and operating results.

The ownership mix of company-owned and franchised VIOC stores also affects Valvoline’s results and financial condition. The decision to own stores or to operate under franchise or license agreements is driven by a large number of factors with a complex and changing interrelationship. The size of Valvoline’s largest franchisees creates additional risk due to Valvoline’s dependence on their particular growth, financial and operating performance and cooperation and alignment with Valvoline’s initiatives.

Valvoline is the primary supplier of products to all VIOC stores. The growth and performance of Valvoline’s lubricants and other product lines depends in large part on the performance of its VIOC business, potentially amplifying the negative effect of the other risks related to the VIOC business model. Poor performance by VIOC stores would negatively impact revenues and income for other Valvoline reporting segments.
Adverse developments in the global economy or in regional economies and potential disruptions of financial markets could negatively impact Valvoline’s customers and suppliers, and therefore have a negative impact on its results of operations.
A global or regional economic downturn may reduce customer demand or inhibit Valvoline’s ability to produce and sell products. Valvoline’s business and operating results are sensitive to global and regional economic downturns, credit market tightness, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, changes in interest rates, sovereign debt defaults and other challenges, including those related to international sanctions and acts of aggression or threatened aggression that can affect the global economy. With 74% of Valvoline’s sales coming from North America in fiscal 2017, Valvoline is particularly sensitive to the risk of an economic slowdown or downturn in that region. In the event of adverse developments or stagnation in the economy or financial markets, Valvoline’s customers may experience deterioration of their businesses, reduced demand for their products, cash flow shortages and difficulty obtaining financing. As a result, existing or potential customers might delay or cancel plans to purchase products and may not be able to fulfill their obligations to Valvoline in a timely fashion. Further, suppliers may

16


experience similar conditions, which could impact their ability to fulfill their obligations to Valvoline. A weakening or reversal of the global economy or a substantial part of it could negatively impact Valvoline’s business, results of operations, financial condition and ability to grow.
Valvoline uses information technology systems to conduct business, and these systems are at risk from cyber security threats.
Despite steps Valvoline takes to mitigate or eliminate them, cyber-security threats to its systems are increasing and becoming more advanced and breaches could occur as a result of the activity of hackers, employee error or employee misconduct. A breach of Valvoline’s information technology systems could lead to the loss and destruction of trade secrets, confidential information, proprietary data, intellectual property, customer and supplier data and employee personal information, and could disrupt business operations which could adversely affect Valvoline’s relationships with business partners and harm its brands, reputation and financial results. Valvoline’s customer data may include names, addresses, phone numbers, email addresses and payment account information, among other information. Depending on the nature of the customer data that is compromised, Valvoline may also have obligations to notify users, law enforcement or payment companies about the incident and may need to provide some form of remedy, such as refunds for the individuals affected by the incident.
Valvoline may fail to adequately protect its intellectual property rights or may be accused of infringing the intellectual property rights of third parties.
Valvoline relies heavily upon its trademarks, domain names and logos to market its brands and to build and maintain brand loyalty and recognition, as well as upon trade secrets. Valvoline also relies on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others, to establish and protect its various intellectual property rights. For example, Valvoline has generally registered and continues to register and renew, or secure by contract where appropriate, trademarks and service marks as they are developed and used, and reserve, register and renew domain names as appropriate. Effective trademark protection may not be available or may not be sought in every country in which Valvoline’s products are made available and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available.

Valvoline generally seeks to apply for patents or for other similar statutory protections as and if it deems appropriate, based on then-current facts and circumstances, and will continue to do so in the future. No assurances can be given that any patent application Valvoline has filed or will file will result in a patent being issued, or that any existing or future patents will afford adequate or meaningful protection against competitors or against similar technologies. In addition, no assurances can be given that third parties will not create new products or methods that achieve similar results without infringing upon patents Valvoline owns.

Despite these measures, Valvoline’s intellectual property rights may still not be protected in a meaningful manner, challenges to contractual rights could arise or third parties could copy or otherwise obtain and use Valvoline’s intellectual property without authorization. The occurrence of any of these events could result in the erosion of Valvoline’s brands and limit its ability to market its brands using its various trademarks, as well as impede its ability to effectively compete against competitors with similar products and services, any of which could adversely affect its business, financial condition and results of operations.

From time to time, Valvoline has been subject to legal proceedings and claims, including claims of alleged infringement of trademarks, copyrights, patents and other intellectual property rights held by third parties. In the future, third parties may sue Valvoline for alleged infringement of their proprietary or intellectual property rights. Valvoline may not be aware of whether its products do or will infringe existing or future patents or the intellectual property rights of others. In addition, litigation may be necessary to enforce Valvoline’s intellectual property rights, protect its trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect Valvoline’s business, financial condition and results of operations.
Valvoline’s pension and other postretirement benefit plan obligations are currently underfunded, and Valvoline may have to make significant cash payments to some or all of these plans, which would reduce the cash available for its businesses.
In connection with Valvoline’s separation from Ashland, Valvoline assumed certain of Ashland’s historical pension and other postretirement benefit plans and related liabilities. The funded status of Valvoline's pension plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates and the discount rate used to determine pension obligations. Though Valvoline has taken a number of actions in fiscal 2017 to reduce the risk and volatility associated with the most significant of these plans, the U.S. qualified plan, changing market conditions or laws and regulations could require material increases in our expected cash contributions to our pension plans in future years. Specifically, unfavorable returns on plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for Valvoline’s businesses. In addition, a decrease in the discount rate used to determine pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funded status of Valvoline’s pension plans and future contributions. Similarly, an increase in discount rates could increase the periodic pension cost in subsequent fiscal years. Valvoline’s policy to recognize changes in the fair value of the pension assets and liabilities annually and

17


as otherwise required through mark to market accounting could result in volatility in Valvoline’s results of operations, which could be material. In addition, Valvoline’s pension and other postretirement benefit plan obligations are currently underfunded, and Valvoline may have to make significant cash payments to some or all of these plans, which would reduce the cash available for its businesses.

Under the Employee Retirement Income Security Act of 1974, as amended, the Pension Benefit Guaranty Corporation (“PBGC”) has the authority to terminate an underfunded tax-qualified pension plan under limited circumstances. In the event Valvoline’s tax-qualified pension plans are terminated by the PBGC, Valvoline could be liable to the PBGC for some portion of the underfunded amount.
Business disruptions from natural, operational and other catastrophic risks could seriously harm Valvoline’s operations and financial performance. In addition, a catastrophic event at one of Valvoline’s facilities or involving its products or employees could lead to liabilities that could further impair its operations and financial performance.
Business disruptions, including those related to operating hazards inherent in the production of lubricants, natural disasters, severe weather conditions, supply or logistics disruptions, increasing costs for energy, temporary plant and/or power outages, information technology systems and network disruptions, cyber-security breaches, terrorist attacks, armed conflicts, war, pandemic diseases, fires, floods or other catastrophic events, could seriously harm Valvoline’s operations, as well as the operations of Valvoline’s customers and suppliers, and may adversely impact Valvoline’s financial performance. Although it is impossible to predict the occurrence or consequences of any such events, they could result in reduced demand for Valvoline’s products, make it difficult or impossible for Valvoline to manufacture its products or deliver products and services to its customers or to receive raw materials from suppliers, may lead to increased costs of raw materials, or create delays and inefficiencies in the supply chain. In addition to leading to a serious disruption of Valvoline’s businesses, a catastrophic event at one of Valvoline’s facilities or involving its products or employees could lead to substantial legal liability to or claims by parties allegedly harmed by the event.

While Valvoline maintains business continuity plans that are intended to allow it to continue operations or mitigate the effects of events that could disrupt its business, Valvoline cannot provide assurances that its plans would fully protect it from all such events. In addition, insurance maintained by Valvoline to protect against property damage, loss of business and other related consequences resulting from catastrophic events is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of Valvoline’s damages or damages to others in the event of a catastrophe. In addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.
Valvoline has incurred, and will continue to incur, costs as a result of environmental, health and safety (“EHS”), and hazardous substances liabilities and related compliance requirements. These costs could adversely impact Valvoline’s cash flow, its results of operations or financial condition.
Valvoline is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and human health and safety, as well as the generation, storage, handling, treatment, disposal and remediation of hazardous substances and waste materials. Valvoline has incurred, and will continue to incur, costs and capital expenditures to comply with these laws and regulations.

EHS regulations change frequently, and such regulations and their enforcement have tended to become more stringent over time. Accordingly, changes in EHS laws and regulations and the enforcement of such laws and regulations could interrupt Valvoline’s operations, require modifications to its facilities or cause it to incur significant liabilities, costs or losses that could adversely affect its profitability. Actual or alleged violations of EHS laws and regulations could result in restrictions or prohibitions on plant operations as well as substantial damages, penalties, fines, civil or criminal sanctions and remediation costs.

Valvoline’s business involves the production, storage and transportation of hazardous substances. Under some environmental laws, Valvoline may be strictly liable and/or jointly and severally liable for environmental damages caused by releases of hazardous substances and waste materials into the environment. For instance, under relevant laws and regulations Valvoline may be deemed liable for soil and/or groundwater contamination at sites it currently owns and/or operates even though the contamination was caused by a third party such as a former owner or operator, and at sites it formerly owned and operated if the release of hazardous substances or waste materials was caused by it or by a third party during the period it owned and/or operated the site. Valvoline also may be deemed liable for soil and/or groundwater contamination at sites to which it sent hazardous wastes for treatment or disposal, notwithstanding that the original treatment or disposal activity accorded with all applicable regulatory requirements.
Valvoline is responsible for, and has financial exposure to, liabilities from pending and threatened claims which could adversely impact its results of operations and cash flow.
There are various claims, lawsuits and administrative proceedings pending or threatened against Valvoline. Such actions are with respect to commercial matters, false advertising, product liability, toxic tort liability and other matters that seek remedies or damages, some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable. Valvoline’s results could be adversely affected by financial exposure to these liabilities. Further, as a potential successor to Ashland, Valvoline

18


may be subject to a consent order dated January 5, 1998 with the U.S. Federal Trade Commission arising out of charges that ads for Valvoline’s TM8 Engine Treatment product contained claims that were unsubstantiated. Under the consent order, which expires January 5, 2018, Valvoline may not make unsubstantiated claims about the performance or attributes of any engine treatment in the future or misrepresent results of tests or studies used to support Valvoline’s claims. Valvoline has agreed to indemnify Ashland for any liability arising out of the consent order. Valvoline could also be subject to additional legal proceedings in the future that may adversely affect its business, including administrative proceedings, class actions, employment and personal injury claims, disputes with current or former suppliers, claims by current or former franchisees and intellectual property claims.

Insurance maintained by Valvoline to protect against claims for damages alleged by third parties is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of Valvoline’s liabilities to others. In addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.
Valvoline’s substantial indebtedness may adversely affect its business, results of operations and financial condition.
Valvoline has substantial indebtedness and financial obligations. As of November 10, 2017, Valvoline had outstanding indebtedness of approximately $1.1 billion. In addition, Valvoline has a senior secured revolving credit facility with a borrowing capacity of $436 million. While Valvoline does not currently have any borrowings outstanding under the senior secured revolving credit facility, it may incur indebtedness under this arrangement in the future.
Valvoline may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. Valvoline's substantial indebtedness could adversely affect its business, results of operations and financial condition by, among other things:

requiring Valvoline to dedicate a substantial portion of its cash flow from operations to pay principal and interest on its debt, which would reduce the availability of its cash flow to fund working capital, capital expenditures, acquisitions, execution of its growth strategy and other general corporate purposes;
limiting Valvoline’s ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of its growth strategy and other purposes;
making Valvoline more vulnerable to adverse changes in general economic, industry and regulatory conditions and in its business by limiting its flexibility in planning for, and making it more difficult for it to react quickly to, changing conditions;
placing Valvoline at a competitive disadvantage compared with its competitors that have less debt and lower debt service requirements;
making Valvoline more vulnerable to increases in interest rates since some of its indebtedness is subject to variable rates of interest; and
making it more difficult for Valvoline to satisfy its financial obligations.

In addition, Valvoline may not be able to generate sufficient cash flow from its operations to repay its indebtedness when it becomes due and to meet its other cash needs. If Valvoline is not able to pay its debts as they become due, it could be in default under the terms of its indebtedness. Valvoline might also be required to pursue one or more alternative strategies to repay indebtedness, such as selling assets, refinancing or restructuring its indebtedness or selling additional debt or equity securities. Valvoline may not be able to refinance its debt or sell additional debt or equity securities or its assets on favorable terms, if at all, and if it must sell its assets, it may negatively affect Valvoline’s ability to generate revenues.
If Valvoline is unable to access the capital markets or obtain bank credit, its financial position, growth plans, liquidity and results of operations could be negatively impacted.
Valvoline is dependent on a stable, liquid, and well-functioning financial system to fund its operations and capital investments. In particular, Valvoline may rely on the public and private debt and equity markets to fund portions of its capital investments and the commercial paper market and bank credit facilities to fund seasonal needs for working capital. Valvoline’s access to these markets depends on multiple factors including the condition of the capital markets, Valvoline’s operating performance and credit ratings. If rating agencies lower Valvoline’s credit ratings, it could adversely impact Valvoline’s ability to access the debt markets, its cost of funds and other terms for new debt issuances. Each of the credit rating agencies reviews its rating periodically, and there is no guarantee Valvoline’s current credit rating will remain the same.
Valvoline is subject to payment-related risks for company-owned and franchised VIOC stores.
At company-owned and franchised VIOC stores, Valvoline accepts a variety of payment methods, including credit cards and debit cards. Accordingly, Valvoline is, and will continue to be, subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs, reduce the ease of use of certain payment methods and expand liability for Valvoline. For certain payment methods, including credit and debit

19


cards, Valvoline pays interchange and other fees, which may increase over time. Valvoline relies on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to Valvoline, or if the cost of using these providers increases, Valvoline’s business could be harmed. Valvoline is also subject to payment card association operating rules, including data security rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for Valvoline to comply. If Valvoline fails to comply with these rules or requirements, or if its data security systems are breached or compromised, Valvoline may be liable for losses incurred by card issuing banks or consumers, subject to fines and higher transaction fees, lose its ability to accept credit and debit card payments from its customers or process electronic fund transfers or facilitate other types of payments and its brand, business and results of operations could be significantly harmed.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes- Oxley could have a material adverse effect on Valvoline’s business and stock price.
As a public company, Valvoline is subject to Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which, beginning with this Annual Report on Form 10-K, requires annual assessments by Valvoline’s management of the effectiveness of Valvoline’s internal control over financial reporting and annual reports by Valvoline’s independent registered public accounting firm that address the effectiveness of internal control over financial reporting. During the course of annual testing, Valvoline may identify deficiencies or material weaknesses which it may not be able to remediate in time to meet its deadline for compliance with Section 404. Testing and maintaining internal control can divert management’s attention from other matters that are important to the operation of Valvoline’s business. Valvoline may not be able to conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with Section 404 or Valvoline’s independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of Valvoline’s internal control over financial reporting. If Valvoline concludes that its internal control over financial reporting is not effective in any annual assessment, Valvoline cannot be certain as to the timing of completion of its evaluation, testing and remedial actions or their effect on its operations. If either Valvoline is unable to conclude that it has effective internal control over financial reporting or its independent auditors are unable to provide it with an unqualified report as required by Section 404 in any annual assessment, then investors could lose confidence in Valvoline’s reported financial information, which could have a negative effect on the trading price of Valvoline's stock.
Risks Related to Valvoline’s Separation from Ashland
The Distribution could result in significant tax liability to Ashland, and in certain circumstances, Valvoline could be required to indemnify Ashland for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.
Ashland obtained a written opinion of counsel to the effect that the Distribution should qualify for non-recognition of gain and loss under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”). The opinion of counsel does not address any U.S. state or local or foreign tax consequences of the Distribution. The opinion assumes that the Distribution is completed according to the terms of the Separation Agreement entered into between Ashland and Valvoline (“Separation Agreement”) and relies on the facts as described in the Separation Agreement, the Tax Matters Agreement, other ancillary agreements, the information statement distributed to Ashland’s shareholders in connection with the Distribution and a number of other documents. In addition, the opinion is based on certain representations as to factual matters from, and certain covenants by, Ashland and Valvoline. The opinion cannot be relied on if any of the assumptions, representations or covenants is incorrect, incomplete or inaccurate or is violated in any material respect.
The opinion of counsel is not binding on the Internal Revenue Service (the “IRS”) or the courts, and thus there can be no assurance that the IRS or a court will not take a contrary position. Ashland has not requested, and does not intend to request, a ruling from the IRS regarding the U.S. federal income tax consequences of the Distribution.

If the Distribution were determined not to qualify for non-recognition of gain and loss, then Ashland would recognize a gain as if it had sold its Valvoline common stock in a taxable transaction in an amount up to the fair market value of the common stock it distributed in the Distribution. In addition, certain reorganization transactions undertaken in connection with the separation and the Distribution could be determined to be taxable, which could result in additional taxable gain. Under certain circumstances set forth in the Tax Matters Agreement, Valvoline could have a substantial indemnification obligation to Ashland with respect to the tax associated with some or all of such gain, which could have a material adverse impact on Valvoline's financial condition.
Valvoline could have an indemnification obligation to Ashland if events or actions subsequent to the Distribution cause the Distribution to be taxable.
If, due to breaches of covenants that Valvoline has agreed to in connection with the Separation Agreement or the Distribution, it were determined that the Distribution did not qualify for non-recognition of gain and loss, Valvoline could be required to indemnify Ashland for the resulting taxes (and reasonable expenses). In addition, Section 355(e) of the Code generally creates a presumption that the Distribution would be taxable to Ashland, but not to its shareholders, if Valvoline or its shareholders were to engage in transactions that result in a 50% or greater change (by vote or value) in the ownership of Valvoline’s stock during the four-year period beginning on the date that begins two years before the date of the Distribution, unless it were established that such

20


transactions and the Distribution were not part of a plan or series of related transactions. If the Distribution were taxable for U.S. federal income tax purposes to Ashland due to a breach of Valvoline’s covenants or a 50% or greater change in the ownership of Valvoline’s stock during the aforementioned four-year period, Ashland would recognize gain as if it had sold Valvoline common stock in a taxable transaction in an amount up to the fair market value of the stock held by it immediately before the Distribution, and Valvoline generally would be required to indemnify Ashland for the tax on such gain and related expenses, as well as any additional gain in connection with certain reorganization transactions undertaken to effect the separation and the Distribution. Any such obligation could have a material impact on Valvoline’s operations.
Valvoline has agreed to numerous restrictions to preserve the tax-free nature of the Distribution, which may reduce its strategic and operating flexibility.
Valvoline has agreed in the Tax Matters Agreement to covenants and indemnification obligations designed to preserve the tax-free nature of the Distribution. These covenants and indemnification obligations may limit Valvoline’s ability to pursue strategic transactions or engage in new businesses or other transactions that might be beneficial and could discourage or delay a strategic transaction that its shareholders may consider favorable.
Valvoline will have joint and several liability with Ashland for the consolidated U.S. federal income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland consolidated group. In addition, Valvoline has agreed to indemnify Ashland for certain pre-IPO U.S. taxes that arise on audit and are directly attributable to neither the Valvoline business nor Ashland’s specialty ingredients and performance materials businesses (collectively, the “Chemicals business”).
Valvoline and Ashland as well as their respective subsidiaries were part of U.S. federal consolidated group tax returns and certain combined or similar group tax returns (together, “Combined Tax Returns”) through the date of the Distribution. Therefore, Valvoline has joint and several liability with Ashland to the respective taxing authorities for the Combined Tax Returns for the periods up to and including the date of the Distribution.

Pursuant to the Tax Matters Agreement, Valvoline is required to indemnify Ashland for: (a) certain U.S. federal, state or local taxes of Ashland and/or its subsidiaries for any tax period ending on or prior to the Distribution that arise on audit or examination and are (i) directly attributable to Valvoline or (ii) prior to the IPO that arise on audit or examination and are directly attributable to neither the Valvoline business nor the Chemicals business; and (b) certain foreign taxes of Ashland and/or its subsidiaries for any tax period ending on or prior to the Distribution that arise on audit or examination and are directly attributable to Valvoline.

The Tax Matters Agreement also requires Valvoline to indemnify Ashland for any taxes (and reasonable expenses) resulting from the failure of the Distribution to qualify for non-recognition of gain and loss or certain reorganization transactions related to the separation or the IPO and Distribution to qualify for their intended tax treatment (“Transaction Taxes”), where the taxes result from (1) breaches of representations or covenants that Valvoline made or agreed to in connection with these transactions, (2) the application of certain provisions of U.S. federal income tax law to the Distribution with respect to acquisitions of Valvoline common stock or (3) any other actions that Valvoline knows or reasonably should expect would give rise to such taxes.

The Tax Matters Agreement also requires Valvoline to indemnify Ashland for a portion of certain other taxes arising from the separation allocated to Valvoline generally based on Valvoline’s market capitalization relative to the market capitalization of Ashland at the time of the Distribution.

Valvoline has only been a stand-alone public company since September 2016, and its financial results are not necessarily representative of the results it would have achieved as a stand-alone public company prior to September 2016 and may not be a reliable indicator of its future results.
The historical financial information Valvoline has included in this Annual Report on Form 10-K include certain expenses of Ashland that were allocated to Valvoline as an unincorporated business unit of Ashland for corporate functions, which included treasury, legal, accounting, insurance, information technology, payroll administration, human resources, stock incentive plans and other services. Valvoline believes the assumptions underlying the consolidated financial statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received during those periods. However, these shared expenses may not represent what Valvoline’s financial position, results of operations or cash flows would have been had it operated autonomously or independently from Ashland during those periods. Actual costs that would have been incurred if Valvoline had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions in various areas, such as information technology and infrastructure.

In addition, the historical financial information Valvoline has included in this Annual Report on Form 10-K does not reflect what its financial position, results of operations or cash flows would have been had it been a stand-alone entity during the historical periods presented, or what its financial position, results of operations or cash flows will be in the future as an independent entity.


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Valvoline’s ability to operate its business effectively may suffer if it is unable to cost-effectively establish its own administrative and other support functions in order to operate as a stand-alone company after the expiration of its shared services and other intercompany agreements with Ashland.

As a business segment of Ashland, Valvoline relied on administrative and other resources of Ashland, including information technology, accounting, finance, human resources and legal, to operate Valvoline’s business. In connection with the IPO, Valvoline entered into various service agreements to retain the ability for specified periods to use these Ashland resources. These services may not be provided at the same level as when Valvoline was a business segment within Ashland, and Valvoline may not be able to obtain the same benefits that it received prior to the IPO. These services may not be sufficient to meet Valvoline’s needs, and after Valvoline’s agreements with Ashland expire (which will generally occur within 24 months following the closing of the IPO), Valvoline may not be able to replace these services at all or obtain these services at prices and on terms as favorable as it currently has with Ashland. Valvoline will need to continue to create its own administrative and other support systems or contract with third parties to replace Ashland’s systems. In addition, Valvoline has received informal support from Ashland which may not be addressed in the agreements it has entered into with Ashland, and the level of this informal support has not been available after the Distribution.

Ashland has agreed to indemnify Valvoline for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure Valvoline against the full amount of such liabilities, or that Ashland’s ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the Separation Agreement and certain other agreements with Ashland, Ashland has agreed to indemnify Valvoline for certain liabilities. However, third parties could also seek to hold Valvoline responsible for any of the liabilities that Ashland has agreed to retain, and there can be no assurance that the indemnity from Ashland will be sufficient to protect Valvoline against the full amount of such liabilities, or that Ashland will be able to fully satisfy its indemnification obligations in the future. Even if Valvoline ultimately succeeded in recovering from Ashland any amounts for which Valvoline is held liable, Valvoline may be temporarily required to bear these losses. Each of these risks could negatively affect Valvoline’s business, financial position, results of operations and cash flows.
Valvoline’s inability to resolve favorably any disputes that arise between Valvoline and Ashland with respect to their past and ongoing relationships may adversely affect its operating results.
Disputes may arise between Ashland and Valvoline in a number of areas relating to their past and ongoing relationships, including:

labor, tax, employee benefit, indemnification and other matters arising from Valvoline’s separation from Ashland;
employee retention and recruiting;
business combinations involving Valvoline; and
the nature, quality and pricing of services that Valvoline and Ashland have agreed to provide each other.

Valvoline may not be able to resolve potential conflicts, and even if it does, the resolution may not be favorable. The agreements Valvoline entered into with Ashland may be amended upon agreement between the parties.

Valvoline may have received better terms from unaffiliated third parties than the terms it received in the agreements it entered into with Ashland.

The agreements Valvoline entered into with Ashland in connection with the separation, including the Separation Agreement, the Tax Matters Agreement, the Employee Matters Agreement, the Transition Services Agreement, the Reverse Transition Services Agreement, a shared environmental liabilities agreement and certain commercial agreements, were prepared in the context of the separation while Valvoline was still a wholly owned subsidiary of Ashland. Accordingly, during the period in which the terms of those agreements were prepared, Valvoline did not have an independent board of directors or a management team that was independent of Ashland. As a result, Valvoline may have received better terms from negotiations between unaffiliated third parties than the terms of those agreements.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.  PROPERTIES

Valvoline’s corporate headquarters is located in Lexington, Kentucky. Valvoline owns or leases approximately 40 facilities throughout North America, Europe, Australia, and Asia that comprise over 2 million square feet of blending, packaging, distribution, warehouse, research and development and office space. In addition, Valvoline owns or leases the property associated with 384 quick lubes stores under the VIOC brand throughout the United States. The properties leased by Valvoline have expiration dates ranging from less than one year to more than 25 years (including certain renewal options).

The following table provides a summary of Valvoline’s principal owned and leased facilities:
 
 
Approx. Area
 
 
Location
  
(Sq. Ft.)         
  
Principal Use
Lexington, Kentucky
  
 
 
187,000
 
  
Corporate Headquarters and Research & Development
West Chester, Ohio
 
 
 
320,000
 
 
Warehouse and Distribution
Dordrecht, Netherlands
  
 
 
150,000
 
  
Blending, Packaging & Warehouse
Leetsdale, Pennsylvania
  
 
 
125,000
 
  
Warehouse & Distribution
Cincinnati, Ohio
  
 
 
125,000
 
  
Blending, Packaging & Warehouse
Santa Fe Springs, California
  
 
 
100,000
 
  
Blending, Packaging & Warehouse
Willow Springs, Illinois
  
 
 
95,000
 
  
Blending, Packaging & Warehouse
Freedom (Rochester), Pennsylvania
  
 
 
90,000
 
  
Blending, Packaging & Warehouse
Deer Park, Texas
  
 
 
87,000
 
  
Blending, Packaging & Warehouse
St. Louis, Missouri
  
 
 
78,000
 
  
Blending, Packaging & Warehouse
Mississauga, Canada
  
 
 
63,000
 
  
Blending, Packaging & Warehouse
Sydney, Australia
  
 
 
60,000
 
  
Blending, Packaging & Warehouse
Atlanta, Georgia
 
 
 
60,000
 
 
Blending, Packaging & Warehouse

In addition, throughout North America, Valvoline contracts with third parties to provide blending and packaging and warehousing and distribution services. Valvoline believes its physical properties are suitable and adequate for the Company’s business, and none of the property owned by Valvoline is subject to any major known encumbrances. Additional information regarding certain lease obligations may be found in Note 12 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

ITEM 3.  LEGAL PROCEEDINGS
For a description of Valvoline's legal proceedings, refer to Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information
Valvoline common stock is listed on the NYSE and trades under the symbol “VVV.” Valvoline’s common stock also has trading privileges on NASDAQ. Prior to September 23, 2016, the pricing date of the initial public offering (“IPO”), there was no public market for Valvoline’s common stock. As a result, Valvoline has not provided quarterly information with respect to the high and low prices of its common stock for the first three quarters in the fiscal year ended September 30, 2016. The following table presents the high and low per share prices for Valvoline common stock as reported on the NYSE for each quarter of fiscal 2017 and the fourth quarter of fiscal 2016 following the Company's IPO.
 
High
 
Low
Fiscal 2016
 
 
 
Fourth Quarter
$
24.51

 
$
23.00

Fiscal 2017
 
 
 
First Quarter
$
23.68

 
$
18.30

Second Quarter
$
24.98

 
$
21.00

Third Quarter
$
24.84

 
$
21.91

Fourth Quarter
$
23.87

 
$
20.99

 
 
 
 
As of November 10, 2017, there were approximately 11,130 holders of Valvoline common stock.
Dividend Policy
Valvoline paid quarterly cash dividends to the holders of its common stock for the year ended September 30, 2017; cash dividends paid quarterly were $0.049 per share for a total of $0.20 for the year. There were no dividends paid for the year ended September 30, 2016. Refer to Note 18 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 dividend activity for the year ended September 30, 2017.

Valvoline expects to continue to pay quarterly cash dividends to the holders of its common stock; however, the declaration and payment of dividends to holders of Valvoline common stock will be at the discretion of the Board in accordance with applicable law after taking into account various factors, including Valvoline’s financial condition, operating results, current and anticipated cash needs, cash flows, impact on Valvoline’s effective tax rate, indebtedness, legal requirements and other factors that the Board considers relevant. In addition, the instruments governing Valvoline’s indebtedness may limit its ability to pay dividends. Therefore, no assurance is given that Valvoline will pay any dividends to its stockholders, or as to the amount of any such dividends if the Board determines to do so.

Stock Performance Graph

The following graph compares the cumulative total stockholder return on a $100 investment in Valvoline common stock, the S&P Mid Cap 400 Index and the S&P Mid Cap 400 Consumer Staples Index for the period from September 30, 2016 (following the IPO) to September 30, 2017. This graph assumes an investment in the Valvoline common stock and each index were $100 on September 30, 2016 and that all dividends were reinvested.


24


performancegrapha01.jpg

Comparison of cumulative total returns
9/30/2016

 
12/31/2016

 
3/31/2017

 
6/30/2017

 
9/30/2017

Valvoline Inc.
$
100

 
$
92

 
$
105

 
$
102

 
$
101

S&P Mid Cap 400 Index
$
100

 
$
107

 
$
112

 
$
114

 
$
118

S&P Mid Cap 400 Consumer Staples Index
$
100

 
$
102

 
$
105

 
$
101

 
$
100


Purchases of Company Common Stock

On April 24, 2017, the Company's Board of Directors approved and authorized a Share Repurchase Program, under which Valvoline may repurchase up to $150 million of the Company's common stock with the authorization through December 31, 2019. Under this program, shares may be repurchased on the open market, through Rule 10b5-1 trading plans, Rule 10b-18 repurchase programs and accelerated share acquisition programs. As of September 30, 2017, $100 million remains available for repurchase under this authorization.

Share repurchase activity during the three months ended September 30, 2017 was as follows:
Issuer Purchases of Equity Securities (a)
Monthly Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share, including commission
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions)(a)
July 1, 2017 to July 31, 2017
 

 
$

 

 
$
100

August 1, 2017 to August 31, 2017
 

 
$

 

 
$
100

September 1, 2017 to September 30, 2017
 

 
$

 

 
$
100

Total
 

 
 
 
 

 
$
100

 
 
 
 
 
 
 
 
 
 
 
(a) Further information regarding the Company's share repurchases can be found in Note 18 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.



25


ITEM 6.  SELECTED FINANCIAL DATA

Valvoline Inc. and Consolidated Subsidiaries
 
 
 
 
 
 
Five-Year Selected Financial Information (a)
 
For the years ended September 30
(In millions)
2017
 
2016
 
2015
 
2014
 
2013
Summary of operations
 
 
 
 
 
 
 
 
 
Sales
$
2,084

 
$
1,929

 
$
1,967

 
$
2,041

 
$
1,996

Gross profit
$
778

 
$
761

 
$
685

 
$
632

 
$
658

Operating income
$
532

 
$
431

 
$
323

 
$
264

 
$
381

Net income
$
304

 
$
273

 
$
196

 
$
173

 
$
246

 
 
 
 
 
 
 
 
 
 
Common stock information
 
 
 
 
 
 
 
 
 
Basic earnings per share (b)
$
1.49

 
$
1.60

 
$
1.15

 
$
1.02

 
$
1.45

Diluted earnings per share (b)
$
1.49

 
$
1.60

 
$
1.15

 
$
1.02

 
$
1.45

Dividends per common share
$
0.20

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Cash flow information
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
(130
)
 
$
311

 
$
330

 
$
170

 
$
273

Less: Additions to property, plant and equipment
(68
)
 
(66
)
 
(45
)
 
(37
)
 
(41
)
Plus: Discretionary contributions to pension plans
394

 

 

 

 

Free cash flow (c)
$
196

 
$
245

 
$
285

 
$
133

 
$
232

 
As of September 30
(In millions)
2017
 
2016
 
2015
 
2014
 
2013
Balance sheet information
 
 
 
 
 
 
 
 
(unaudited)
Total assets
$
1,915

 
$
1,825

 
$
978

 
$
1,083

 
$
1,062

Long-term debt and capital lease obligations (including current portion)
$
1,075

 
$
749

 
$
4

 
$
4

 
$
3

Stockholders' (deficit) equity
$
(117
)
 
$
(330
)
 
$
617

 
$
725

 
$
684


 
For the years ended September 30
Unaudited (In millions)
2017
 
2016
 
2015
 
2014
 
2013
Other financial data
 
 
 
 
 
 
 
 
 
Lubricant sales volume (gallons)
179.7

 
174.5

 
167.4

 
162.6

 
158.4

Company-owned same-store sales growth (d)
7.0
%
 
6.2
%
 
7.5
%
 
4.5
%
 
1.9
%
Franchisee same-store sales growth (d)(e)
7.5
%
 
8.0
%
 
7.8
%
 
5.5
%
 
2.2
%
EBITDA (f)
$
574

 
$
468

 
$
335

 
$
301

 
$
416

Adjusted EBITDA (f)
$
517

 
$
457

 
$
421

 
$
368

 
$
342

 
 
 
 
 
 
 
 
 
 

(a)
During the periods presented, Valvoline experienced certain changes in the composition of its assets and liabilities affecting the comparability of financial information between years. These changes include, but are not limited to, the transfer of assets and liabilities from Ashland in 2016, separation from Ashland in 2017, an IPO in 2016, establishing a stand-alone capital structure in 2016, and the impact of immediately recognizing actuarial gains and losses for defined benefit pension and other postretirement benefit plan remeasurements. During the five years ended September 30 presented above, Valvoline recognized a remeasurement gain of $68 million in 2017, a gain of $18 million in 2016, a loss of $46 million in 2015, a loss of $61 million in 2014, and a gain of $74 million in 2013.
(b)
The Company corrected an immaterial error in the net earnings per share (“EPS”) calculations for periods prior to and including September 30, 2016, and the amounts included in the table above reflect the revised EPS calculations for the prior year periods. EPS was originally reported based on a weighted average common shares outstanding of 204.5 million, which reflected both the 170 million shares issued to Ashland in the reorganization as well as the 34.5 million shares issued in the IPO on September 28, 2016. EPS for the periods prior to and including September 30, 2016 have been revised based on an adjusted weighted average common shares outstanding amount that includes the IPO shares only for the period they were outstanding. The impact of this change resulted in an increase in previously reported EPS of $0.27, $0.19, $0.18, and $0.25 for the years ended September 30, 2016, 2015, 2014, and 2013, respectively. Refer to Note 17 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information.
(c)
In addition to cash flows from operating activities determined in accordance with U.S. GAAP, Valvoline uses free cash flow as a non-GAAP metric of cash flow generation. By deducting capital expenditures from operating cash flows and adding discretionary contributions to pension plans, the Company is able to provide a better indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Unlike cash flow from operating activities, free cash flow includes the impact of capital expenditures, providing a more complete picture of cash generation. Free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as allocated costs, and includes the pension and other postretirement plan remeasurement losses and gains. The amount of mandatory versus discretionary expenditures can vary significantly between periods. Valvoline’s results of operations are presented based on its management structure and internal accounting practices. The structure and practices are

26


specific to Valvoline; therefore, its financial results and free cash flow are not necessarily comparable with similar information for other comparable companies. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, or more meaningful than, cash flows provided by operating activities as determined in accordance with U.S. GAAP. In evaluating free cash flow, be aware that in the future Valvoline may incur expenses similar to those for which adjustments are made in calculating free cash flow. Valvoline’s presentation of free cash flow should not be construed as a basis to infer that its future results will be unaffected by unusual or nonrecurring items. Because of these limitations, one should rely primarily on cash flows provided by operating activities as determined in accordance with U.S. GAAP and use free cash flow only as a supplement.
(d)
Valvoline determines same-store sales growth on a fiscal year basis, with new stores excluded from the metric until the completion of their first full fiscal year in operation.
(e)
Valvoline franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.
(f)
In addition to net income determined in accordance with U.S. GAAP, Valvoline evaluates operating performance using certain non-GAAP measures including EBITDA, which Valvoline defines as net income, plus income tax expense (benefit), net interest and other financing expenses, and depreciation and amortization, and Adjusted EBITDA, which Valvoline defines as EBITDA adjusted for losses (gains) on pension and other postretirement plans remeasurements, impairment of equity investment, and other items, which can include costs related to the separation from Ashland, impact of significant acquisitions or divestitures, restructuring costs, or other income/costs related to corporate or non-operational matters not directly attributable to the underlying business. Valvoline believes the use of non-GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance of its business by presenting comparable financial results between periods. The non-GAAP information provided is used by management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA provide a supplemental presentation of Valvoline’s operating performance on a consolidated and reportable segment basis. Adjusted EBITDA generally includes adjustments for unusual, non-operational or restructuring-related activities.

The consolidated financial statements include actuarial gains and losses for defined benefit pension and other postretirement benefit plans recognized annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. Actuarial gains and losses occur when actual experience differs from the estimates used to allocate the change in value of pension and other postretirement benefit plans to expense throughout the year or when assumptions change, as they may each year. Significant factors that can contribute to the recognition of actuarial gains and losses 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. Management believes Adjusted EBITDA provides investors with a meaningful supplemental presentation of Valvoline’s operating performance, which includes the expected return on pension plan assets and excludes both the actual return on pension plan assets and the impact of actuarial gains and losses. Though classified in operating income, management believes these actuarial gains and losses are more reflective of changes in current conditions in global financial markets (and in particular interest rates) that are not directly related to the operations of the underlying business and that do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees and retirees.

EBITDA and Adjusted EBITDA each have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, net income as determined in accordance with U.S. GAAP. Because of these limitations, one should rely primarily on net income as determined in accordance with U.S. GAAP and use EBITDA and Adjusted EBITDA only as supplements. In evaluating EBITDA and Adjusted EBITDA, one should be aware that in the future Valvoline may incur expenses similar to those for which adjustments are made in calculating EBITDA and Adjusted EBITDA. Valvoline’s presentation of EBITDA and Adjusted EBITDA should not be construed as a basis to infer that future results will be unaffected by unusual or nonrecurring items.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the periods presented.
 
For the years ended September 30
(In millions)
2017
 
2016
 
2015
 
2014
 
2013
Net income
$
304

 
$
273

 
$
196

 
$
173

 
$
246

Income tax expense
186

 
148

 
101

 
91

 
135

Net interest and other financing expense
42

 
9

 

 

 

Depreciation and amortization
42

 
38

 
38

 
37

 
35

EBITDA
574

 
468

 
335

 
301

 
416

Separation costs
32

 
6

 

 

 

Adjustment associated with Ashland tax indemnity
(16
)
 

 

 

 

Change in estimate - insurance reserves
(5
)
 

 

 

 

(Gain) loss on pension and other postretirement plan remeasurements
(68
)
 
(18
)
 
46

 
61

 
(74
)
Net loss on acquisition and divestiture

 
1

 
26

 

 

Impairment of equity investment

 

 
14

 

 

Restructuring

 

 

 
6

 

Adjusted EBITDA
$
517

 
$
457

 
$
421

 
$
368

 
$
342




27


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

Valvoline is a worldwide producer, marketer and supplier of engine and automotive maintenance products and services. In the United States and Canada, Valvoline's products and services are sold to retailers with over 30,000 retail outlets, to installer customers with over 12,000 locations, and through 1,127 Valvoline branded franchised and company-owned stores. Valvoline also has a strong international presence with products sold in approximately 140 countries. Valvoline serves its customer base through an extensive sales force and technical support organization, allowing Valvoline to leverage its technology portfolio and customer relationships globally, while meeting customer demands locally. This combination of scale and strong local presence is critical to the Company’s success.
Valvoline is one of the most recognized and respected premium consumer brands in the global automotive lubricant industry, known for high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed powerful name recognition across multiple product and service channels. Valvoline also has a history of leading innovation with revolutionary products such as All Climate, DuraBlend, and MaxLife. In addition to the iconic Valvoline-branded passenger car motor oils and other automotive lubricant products, Valvoline provides a wide array of lubricants used in heavy duty equipment, as well as automotive chemicals and fluids designed to improve engine performance and lifespan. Valvoline’s premium branded product offerings enhance its high quality reputation and provide customers with solutions that address a wide variety of needs.
Valvoline's fiscal year ends on September 30 of each year, and Valvoline has three reportable segments: Core North America, Quick Lubes, and International, with certain corporate and non-operational items included in Unallocated and Other to reconcile to consolidated results. Refer to Item 1 included in Part I of this Annual Report on Form 10-K for a description of Valvoline's reportable segments.
2017 OVERVIEW

Separation from Ashland

On May 12, 2017, Ashland completed the distribution of 170 million shares of common stock of 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. Based on the shares of Ashland common stock outstanding as of May 5, 2017, each share of Ashland common stock received 2.745338 shares of Valvoline common stock in the Distribution, marking the completion of Valvoline's separation from Ashland. Effective upon the Distribution, Ashland no longer owned any shares of Valvoline common stock, and Valvoline was no longer a controlled and consolidated subsidiary of Ashland.

Valvoline incurred certain costs related to the separation from Ashland, which are recorded within Separation costs in the Consolidated Statements of Comprehensive Income included in Item 8 of Part II of this Annual Report on Form 10-K. During the years ended September 30, 2017 and 2016, Valvoline recognized separation costs of $32 million and $6 million, respectively, which were primarily related to nonrecurring expenses, including legal, consulting, accounting, and other professional fees, including a success fee related to completing the Distribution, as well as employee costs and expenses to separate information technology platforms. Valvoline expects to incur nominal costs related to the separation from Ashland in fiscal 2018.

Quick Lubes Acquisitions

During the year ended September 30, 2017, Valvoline acquired 43 company-owned stores within the Quick Lubes reportable segment, including 28 stores related to the acquisition of the business assets from Time-It Lube LLC and Time-It Lube of Texas, LP (“Time-It Lube”) in the second fiscal quarter of 2017. Refer to Note 4 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information on the acquisitions completed during fiscal 2017.







28



Pension De-Risking Actions

During the fourth fiscal quarter of 2017, the Company took a number of actions to reduce the risk and volatility associated with the U.S. qualified pension plan that was transferred from Ashland to Valvoline in fiscal 2016 prior to Valvoline's IPO.

Valvoline made a discretionary contribution of $394 million to the U.S. qualified pension plan funded by the net proceeds from the issuance of 4.375% senior unsecured notes due 2025 (the “2025 Notes”) with an aggregate principal amount of $400 million as described further in Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

In addition, Valvoline purchased a non-participating annuity contract using plan assets for an insurer to pay and administer future pension benefits for approximately 6,000 participants within the qualified U.S. pension plan. As a result, Valvoline transferred $585 million of pension benefit obligations in exchange for a similar amount of plan assets.

Finally, given the impact these actions had on the funded status of the U.S. qualified pension plan, the Company also shifted its target asset allocation toward more fixed income securities to better match asset duration to that of the pension plan liabilities.

These actions have been leverage neutral to the Company and as a result of improved funded status, management does not expect significant required cash contributions to the U.S. qualified pension plan for several years and expects administrative costs to be reduced. These actions resulted in meaningful cash tax savings due to the Company's ability to reduce U.S. taxable income for these contributions. These significant cash tax savings will continue in future periods as the Company utilizes the net operating loss carryforward in 2017 to offset future U.S. taxable income generated from operations. At the end of fiscal 2017, total pension benefit and other postretirement obligations were $2.4 billion compared to $3.2 billion at the end of fiscal 2016 and total funded status improved to 85% in 2017 from 72% in 2016. For further information regarding these actions and the Company's pension and other postretirement obligations, refer to Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

BUSINESS STRATEGY

Valvoline’s key business and growth strategies include:

growing and strengthening Valvoline’s quick lube network through organic store expansion, opportunistic, high-quality acquisitions in both core and new markets within the VIOC system and strong sales efforts to partner with new Express Care operators, in addition to continued same-store sales growth and profitability within Valvoline’s existing VIOC system stores by attracting new customers and increasing customer satisfaction, customer loyalty and average transaction size;

accelerating international growth across key markets where demand for premium lubricants is growing, such as China, India and select countries in Latin America, by building strong distribution channels in under-served geographies, replacing less successful distributors and improving brand awareness among installer customers in those regions; and

leveraging innovation, both in terms of product development, packaging, marketing and the implementation of Valvoline’s new digital infrastructure, to strengthen market share and profitability.
Use of Non-GAAP Measures
Valvoline has included within this document several non-GAAP measures, on both a consolidated and reportable segment basis, which are not defined within U.S. GAAP and do not purport to be alternatives to net income or cash flows from operating activities as measures of operating performance or cash flows. The following are the non-GAAP measures management has included and how management defines them:
EBITDA, which management defines as net income, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;
EBITDA margin, which management defines as EBITDA divided by sales;
Adjusted EBITDA, which management defines as EBITDA adjusted for losses/gains on pension and other postretirement plan remeasurements, impairment of equity investment, and other items (which can include costs related to the separation from Ashland, impact of significant acquisitions or divestitures, restructuring costs, or other non-operational income/costs not directly attributable to the underlying business);

29


Adjusted EBITDA margin, which management defines as Adjusted EBITDA divided by sales; and
Free cash flow, which management defines as operating cash flows less capital expenditures and certain other adjustments as applicable.
These measures are not prepared in accordance with U.S. GAAP, contain management’s best estimates of cost allocations and shared resource costs. Management believes the use of non-GAAP measures on a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance of Valvoline’s business by presenting comparable financial results between periods. The non-GAAP information provided is used by Valvoline’s management and may not be comparable to similar measures disclosed by other companies, because of differing methods used by other companies in calculating EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA provide a supplemental presentation of Valvoline’s operating performance on a consolidated and reportable segment basis.

Adjusted EBITDA generally includes adjustments for unusual, non-operational or restructuring-related activities. Valvoline’s consolidated financial statements include actuarial gains and losses for defined benefit pension and other postretirement benefit plans recognized annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. Actuarial gains and losses occur when actual experience differs from the estimates used to allocate the change in value of pension and other postretirement benefit plans to expense throughout the year or when assumptions change, as they may each year. Significant factors that can contribute to the recognition of actuarial gains and losses 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. Management believes Adjusted EBITDA provides investors with a meaningful supplemental presentation of Valvoline’s operating performance, which includes the expected return on pension plan assets and excludes both the actual return on pension plan assets and the impact of actuarial gains and losses. Though classified in operating income, management believes these actuarial gains and losses are more reflective of changes in current conditions in global financial markets (and in particular interest rates) that are not directly related to the underlying business and that do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees and retirees. For further information on the actuarial assumptions and plan assets referenced above, see “Critical Accounting Policies-Employee benefit obligations” within this Item 7 and Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.
Management uses free cash flow as an additional non-GAAP metric of cash flow generation. By deducting capital expenditures and adding discretionary contributions to pension plans, management is able to provide a better indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Unlike cash flow from operating activities, free cash flow includes the impact of capital expenditures, providing a more complete picture of cash generation. Free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as allocated costs and mandatory debt repayments. The amount of mandatory versus discretionary expenditures can vary significantly between periods.
Valvoline’s results of operations are presented based on Valvoline’s management structure and internal accounting practices. The structure and practices are specific to Valvoline; therefore, Valvoline’s financial results, EBITDA, Adjusted EBITDA and free cash flow are not necessarily comparable with similar information for other comparable companies. EBITDA, Adjusted EBITDA and free cash flow each have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, net income and cash flows from operating activities as determined in accordance with U.S. GAAP. Because of these limitations, you should rely primarily on net income and cash flows from operating activities as determined in accordance with U.S. GAAP and use EBITDA, Adjusted EBITDA, and free cash flow only as supplements. In evaluating EBITDA, Adjusted EBITDA, and free cash flow, you should be aware that in the future Valvoline may incur expenses similar to those for which adjustments are made in calculating EBITDA, Adjusted EBITDA, and free cash flow. Valvoline’s presentation of EBITDA, Adjusted EBITDA, and free cash flow should not be construed as a basis to infer that Valvoline’s future results will be unaffected by unusual or nonrecurring items.

30


The following table reconciles EBITDA and Adjusted EBITDA to net income for the three annual periods presented.
 
 
 
For the years ended September 30
(In millions) 
 
2017
 
2016
 
2015
Net income
 
$
304

 
$
273

 
$
196

Income tax expense
 
186

 
148

 
101

Net interest and other financing expense
 
42

 
9

 

Depreciation and amortization
 
42

 
38

 
38

EBITDA
 
574

 
468

 
335

Separation costs
 
32

 
6

 

Adjustment associated with Ashland tax indemnity
 
(16
)
 

 

Change in estimate - insurance reserves
 
(5
)
 

 

(Gain) loss on pension and other postretirement plan remeasurements
 
(68
)
 
(18
)
 
46

Net loss on acquisition and divestiture
 

 
1

 
26

Impairment of equity investment
 

 

 
14

Adjusted EBITDA (a)
 
$
517

 
$
457

 
$
421

 
 
 
 
 
 
 

(a)
Includes recurring net periodic pension and other postretirement cost/income, which consists of service cost, interest cost, expected return on plan assets and amortization of prior service credit. Fiscal 2017 included income of $68 million, fiscal 2016 included income of $7 million, and the impact in fiscal 2015 was less than $1 million. Net periodic pension and other postretirement income is disclosed in further detail in Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

EBITDA and Adjusted EBITDA

The increase in Adjusted EBITDA of $60 million in 2017 was primarily due to an increase in pension and other postretirement non-service income of $53 million in 2017, solid performance by the reportable segments led by Quick Lubes, and offset by investments in the Company's stand-alone public company infrastructure. The increase in Adjusted EBITDA of $36 million from 2015 to 2016 is primarily attributed to strong performance of the reportable segments, notably the mix and volume gains in Core North America and Quick Lubes as well as improved raw materials cost, partially offset by International primarily due to the negative impact of foreign currency exchange.

RESULTS OF OPERATIONS

Consolidated Review

A comparative analysis of the Consolidated Statements of Comprehensive Income by caption is provided as follows for the years ended September 30, 2017, 2016 and 2015.
 
(In millions)
 
2017
 
2016
 
2015
 
2017 Change
 
2016 Change
Sales
 
$
2,084

 
$
1,929

 
$
1,967

 
$
155

 
$
(38
)

31



The following table provides a reconciliation of the change in sales between fiscal years 2017 and 2016 and between fiscal years 2016 and 2015.
 
 
 
2017 Change
 
2016 Change
(In millions)
 
 
Pricing
 
$
37

 
$
(94
)
Volume
 
57

 
68

Product mix
 
29

 
29

Currency exchange
 
2

 
(31
)
Divestiture and acquisition, net
 
30

 
(10
)
Change in sales
 
$
155

 
$
(38
)


 2017 compared to 2016
Sales increased $155 million, or 8%, to $2,084 million in 2017. The primary drivers of this increase were higher volume levels and higher product pricing, which increased sales by $57 million, or 3% and $37 million, or 2%, respectively. Favorable changes in product mix with increases in the percentage of sales for premium lubricants in Core North America and Quick Lubes and favorable foreign currency exchange increased sales by $29 million, or 2%, and $2 million, respectively. During 2017, lubricant gallons sold increased 3% to 179.7 million. Acquisitions within the Quick Lubes reportable segment increased sales by $30 million, or 2% during 2017.
2016 compared to 2015
Sales decreased $38 million, or 2%, to $1,929 million in 2016. Lower product pricing and unfavorable foreign currency exchange decreased sales by $94 million, or 5%, and $31 million, or 2%, respectively. Unfavorable foreign currency exchange was due to the U.S. dollar strengthening compared to various foreign currencies, primarily the Australian dollar, Euro and the Chinese Yuan. Higher volume levels and changes in product mix increased sales by approximately $68 million, or 3%, and approximately $29 million, respectively. During 2016, lubricant gallons sold increased 4% to 174.5 million. The net $10 million decrease due to divestitures and acquisitions is due to the divestiture of car care products within the Core North America reportable segment during fiscal 2015 which decreased sales by $45 million in 2016, net of increased sales of $35 million during 2016 from acquisitions within the Quick Lubes reportable segment.

(In millions)
 
2017
 
2016
 
2015
 
2017 Change
 
2016 Change
Cost of sales
 
$
1,306

 
$
1,168

 
$
1,282

 
$
138

 
$
(114
)
Gross profit as a percent of sales
 
37.3
%
 
39.5
%
 
34.8
%
 
 
 
 

The following table provides a reconciliation of the changes in cost of sales between fiscal years 2017 and 2016 and between fiscal years 2016 and 2015.

 
 
2017 Change
 
2016 Change
(In millions) 
 
 
Product cost
 
$
54

 
$
(114
)
Volume and product mix
 
50

 
65

Divestiture and acquisition, net
 
24

 
(14
)
Pension benefit plans income (including remeasurements)
 
9

 
(28
)
Currency exchange
 
1

 
(23
)
Change in cost of sales
 
$
138

 
$
(114
)

32



2017 compared to 2016

Cost of sales increased $138 million during 2017 compared to 2016. Higher raw material costs increased cost of sales by $54 million primarily due to base oil prices increases in 2017. Changes in volume and product mix combined to increase cost of sales by $50 million. Additional sales generated by acquisitions of Quick Lubes locations increased cost of sales by $24 million. In addition, during 2017, cost of sales increased compared to 2016 due to a $9 million decrease in income related to the Company's pension benefit plans. Due to the freeze of U.S. pension benefits effective September 30, 2016, the only significant pension costs that are included in Cost of sales beginning in fiscal 2017 include the ongoing service costs and remeasurement adjustments related to certain international pension benefits. As a result, service costs in Cost of sales decreased $3 million year over year, and non-service income and remeasurement gains in Cost of sales decreased by $12 million. As a result of these matters, gross profit as a percent of sales declined driven largely by higher raw materials costs during 2017 as compared to 2016.

2016 compared to 2015

Cost of sales decreased $114 million during 2016 compared to 2015. Lower raw material costs decreased cost of sales by $114 million primarily due to declining base oil prices in 2016. Favorable foreign currency exchange decreased cost of sales by $23 million, while changes in volume and product mix combined to increase cost of sales by $65 million. The divestiture of car care products during fiscal 2015 decreased cost of sales by $38 million in 2016 and was partially offset by increased cost of sales of $24 million from the acquisition of OCH International Inc. (“Oil Can Henry’s”) during 2016. During 2016, cost of sales decreased compared to 2015 due to increased income of $28 million primarily related to pension and other postretirement benefit plan remeasurements. Gross profit as a percent of sales increased due to lower cost of sales driven largely by lower raw material costs during 2016 as compared to 2015.

(In millions)
 
2017
 
2016
 
2015
 
2017 Change
 
2016 Change
Selling, general and administrative expense
 
$
375

 
$
365

 
$
348

 
$
10

 
$
17

Pension and other postretirement plan non-service income and remeasurement adjustments, net
 
(136
)
 
(22
)
 
22

 
(114
)
 
(44
)
Separation costs
 
32

 
6

 

 
26

 
6

Total operating expense
 
$
271

 
$
349

 
$
370

 
$
(78
)
 
$
(21
)
As a percent of sales
 
13.0
%
 
18.1
%
 
18.8
%
 
 
 
 

2017 compared to 2016

Total operating expense decreased $78 million, or 22%, during 2017 as compared to 2016. Key drivers of this decrease were:
a decrease of $114 million related to pension and other postretirement plan non-service income and remeasurement adjustments. Specifically, during 2017, remeasurement gains of $66 million were recognized along with pension and other postretirement plan non-service income of $70 million. This compared to remeasurement gains of $11 million and non-service income of $11 million in 2016;
a $16 million benefit 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 income tax returns; and
a $5 million benefit related to a change in estimate for insurance reserves.

These decreases were partially offset by increased separation costs of $26 million and approximately $3 million in costs from acquisitions. Additionally, overall spend compared to the prior year increased primarily as a result of establishing Valvoline as a stand-alone public company. The spend for people and professional assistance necessary to operate independently more than offset a decrease in allocated corporate costs from the Company's former parent.
2016 compared to 2015
Operating expense decreased $21 million, or 6%, during 2016 as compared to 2015. Key drivers of this decrease were:
a decrease of $44 million related to the pension and other postretirement costs. Specifically, during 2016, remeasurement gains of $11 million were recognized along with pension and other postretirement plan non-service income of $11 million. This compared to remeasurement losses of $28 million and non-service income of $6 million in 2015;


33


a decrease in spending of $6 million due to the divestiture of car care products; and
a decrease of $5 million due to favorable currency exchange impacts.
These decreases were partially offset by the following significant increases:
separation costs of $6 million;
increased labor-related costs of $6 million related to the Company's investments in its infrastructure and teams;
increased spend of $4 million related to operating costs associated with the acquisition of Oil Can Henry’s;
increased consultant and technology cost of $4 million attributable to the Company's digital initiatives;
increased advertising and sales promotion expenses of $4 million;
increased research and development costs of $2 million; and
increased bad debt related expense of $2 million.

(In millions)
 
2017
 
2016
 
2015
 
2017 Change
 
2016 Change
Equity and other income
 
 
 
 
 
 
 
 
 
 
Equity income (loss)
 
$
12

 
$
12

 
$
(2
)
 
$

 
$
14

Other income
 
13

 
7

 
10

 
6

 
(3
)
 
 
$
25

 
$
19

 
$
8

 
$
6

 
$
11


2017 compared to 2016

Equity and other income increased by $6 million during 2017 compared to 2016. Equity income was flat compared to 2016, while other income increased by $6 million primarily due to an increase in income generated by research and development testing and royalties from the Company's investments in joint ventures, which had increased volumes and revenues.

2016 compared to 2015

Equity income (loss) increased by $14 million during 2016 compared to 2015, primarily due to the $14 million impairment of a joint venture equity investment within Venezuela in 2015. For additional information, refer to Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K. Other income decreased by $3 million primarily due to a decrease in income due to divestitures and unfavorable currency impacts.

(In millions)
 
2017
 
2016
 
2015
 
2017 Change
 
2016 Change
 
Net interest and other financing expense
 
$
42

 
$
9

 
$

 
$
33

 
$
9

 

2017 compared to 2016

Net interest and other financing expense increased by $33 million during 2017 compared to 2016. This increase was largely driven by the timing of Valvoline's debt structure that was put into place in the fourth fiscal quarter of 2016, which included the term loan borrowing and issuance of 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million (“2024 Notes”), that drove higher year over year interest costs. In addition, there was an increase in interest associated with higher outstanding debt in 2017 primarily related to $75 million in new borrowings on the accounts receivable securitization facility entered into in the first fiscal quarter of 2017 and the 2025 Notes issuance in the aggregate principal amount of $400 million senior unsecured notes in the fourth fiscal quarter of 2017.

2016 compared to 2015

Net interest and other financing expense increased by $9 million during 2016 compared to 2015 due to Valvoline's debt structure that was put into place in the fourth fiscal quarter of 2016, including the issuance of the 2024 Notes and term loan borrowing. There was no outstanding debt in 2015.


34


(In millions)
 
2017
 
2016
 
2015
 
2017 Change
 
2016 Change
 
Net loss on acquisition and divestiture
 
$

 
$
1

 
$
26

 
$
(1
)
 
$
(25
)
 

The loss on acquisition and divestiture in 2016 represents costs to complete the acquisition of Oil Can Henry's while the 2015 amount represents the loss on the disposition of car care products. This loss was a result of the book value exceeding the sales price of the assets sold. There was no loss on acquisition and divestiture for 2017.

(In millions)
 
2017
 
2016
 
2015
 
2017 Change
 
2016 Change
Income tax expense
 
$
186

 
$
148

 
$
101

 
$
38

 
$
47

Effective tax rate
 
38.0
%
 
35.2
%
 
34.0
%
 
 
 
 
The effective tax rates in each year are generally in line with the U.S. statutory rate. The increase in the 2017 and 2016 effective tax rates is partially due to the increase in income from pension and other postretirement benefits that generated significant income amounts in higher tax rate jurisdictions. Additionally, in fiscal 2017, the effective tax rate was impacted by income tax expense resulting from the Tax Matters Agreement activity with Ashland, certain non-deductible separation costs, and the partial loss of certain tax deductions as a result of the $394 million voluntary contribution to the U.S. qualified pension plan, partially offset by a benefit from a state valuation allowance release. During fiscal years 2017, 2016 and 2015, the effective tax rate was impacted favorably by the lower tax rate on foreign earnings and net favorable permanent items. These favorable items are offset by the unfavorable impact of state taxes, and these adjustments net to an immaterial overall impact to the effective tax rate for each year.

Reportable Segment Review
Valvoline’s business is managed within three reportable segments: Core North America, Quick Lubes and International. Results of Valvoline’s reportable segments are presented based on how operations are managed internally, including how the results are reviewed by the chief operating decision maker. The structure and practices are specific to Valvoline; therefore, the financial results of its reportable segments are not necessarily comparable with similar information for other comparable companies. Valvoline allocates all costs to its reportable segments except for certain significant corporate and non-operational matters, including, but not limited to, company-wide restructuring activities and costs or adjustments that relate to former businesses that Valvoline no longer operates. The service cost component of pension and other postretirement benefit costs is allocated to each reportable segment on a ratable basis, while the remaining non-service and remeasurement components of pension and other postretirement benefits costs are recorded to Unallocated and other. Valvoline refines its expense allocation methodologies to the reportable segments from time to time as internal accounting practices are improved, more refined information becomes available and the industry or market changes. Revisions to Valvoline’s methodologies that are insignificant are applied on a prospective basis.
The EBITDA and Adjusted EBITDA amounts presented within this section are provided as a means to enhance the understanding of financial measurements that Valvoline has internally determined to be relevant measures of comparison for each reportable segment. Each of these non-GAAP measures is defined as follows: EBITDA (operating income plus depreciation and amortization), Adjusted EBITDA (EBITDA adjusted for key items, which may include adjustments for significant acquisitions or divestitures, as applicable), and Adjusted EBITDA margin (Adjusted EBITDA divided by sales). Valvoline does not generally allocate items to each reportable segment below operating income, such as interest expense and income taxes. As a result, reportable segment EBITDA and Adjusted EBITDA are reconciled directly to operating income since it is the most directly comparable Consolidated Statements of Comprehensive Income caption.


35


The following table shows sales, operating income and statistical operating information by reportable segment for the years ended September 30, 2017, 2016 and 2015.
 
 
For the years ended September 30
(In millions)
 
2017
 
2016
 
2015
Sales
 
 
 
 
 
 
Core North America
 
$
1,004

 
$
979

 
$
1,061

Quick Lubes
 
541

 
457

 
394

International
 
539

 
493

 
512

 
 
$
2,084

 
$
1,929

 
$
1,967

 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
Core North America
 
$
199

 
$
212

 
$
200

Quick Lubes
 
130

 
117

 
95

International
 
76

 
74

 
65

Total operating segments
 
405

 
403

 
360

Unallocated and other
 
127

 
28

 
(37
)
 
 
$
532

 
$
431

 
$
323

 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
Core North America
 
$
15

 
$
16

 
$
17

Quick Lubes
 
22

 
17

 
16

International
 
5

 
5

 
5

 
 
$
42

 
$
38

 
$
38

 
 
 
 
 
 
 
Operating information
 
 
 
 
 
 
Core North America
 
 
 
 
 
 
Lubricant sales gallons
 
99.4

 
101.2

 
99.9

Premium lubricants (percent of U.S. branded volumes)
 
45.8
%
 
41.4
%
 
36.6
%
Gross profit as a percent of sales (a)
 
39.5
%
 
41.2
%
 
36.6
%
Quick Lubes
 
 
 
 
 
 
Lubricant sales gallons
 
22.5

 
20.2

 
17.4

Premium lubricants (percent of U.S. branded volumes)
 
59.9
%
 
57.1
%
 
54.5
%
Gross profit as a percent of sales (a)
 
40.3
%
 
41.6
%
 
39.8
%
International
 
 
 
 
 
 
Lubricant sales gallons (b)
 
57.8

 
53.1

 
50.1

Lubricant sales gallons, including unconsolidated joint ventures
 
94.7

 
85.3

 
80.1

Premium lubricants (percent of lubricant volumes)
 
27.6
%
 
29.0
%
 
30.9
%
Gross profit as a percent of sales (a)
 
29.8
%
 
31.4
%
 
30.2
%
 
 
 
 
 
 
 
 
(a)
Gross profit is defined as sales, less cost of sales.
(b)
Excludes volumes from unconsolidated joint ventures.

Core North America
2017 compared to 2016
Core North America sales increased $25 million, or 3%, to $1,004 million in 2017. Higher product pricing and favorable changes in product mix increased sales by $21 million, or 2%, and $20 million, or 2%, respectively. Lower volume levels decreased sales by $16 million, or 2%.


36


Gross profit decreased $6 million during 2017 compared to 2016. Higher raw material costs, partially offset by higher product pricing and decreased gross profit by $14 million, while changes in volume and product mix combined for a net increase in gross profit by $8 million. Gross profit as a percent of sales (or gross profit margin) during the year decreased 1.7 percentage points to 39.5% driven largely by higher raw materials costs during 2017 as compared to 2016.

Selling, general and administrative expense increased $7 million during the current period, primarily as a result of $2 million of increased employee costs, and an $8 million increase of shared expenses partially due to stand-alone public company costs, net of a $3 million decrease in bad debts.

Operating income totaled $199 million in the current period as compared to $212 million in the prior year period. EBITDA decreased $14 million to $214 million in 2017. EBITDA margin decreased 2.0 percentage points to 21.3% in 2017.

2016 compared to 2015
Core North America sales decreased $82 million, or 8%, to $979 million in 2016. Lower product pricing and the disposition of car care products decreased sales by $68 million, or 6%, and $45 million, or 4%, respectively. Changes in product mix and higher volume levels increased sales by $27 million, or 3%, and $7 million, respectively. Unfavorable foreign currency exchange decreased sales by $3 million primarily due to the U.S. dollar strengthening compared to the Canadian dollar.

Gross profit increased $15 million during 2016 compared to 2015. Lower product costs, partially offset by lower product pricing, increased gross profit by $12 million, while changes in volume and product mix combined to increase gross profit by $11 million. The divestiture of car care products and unfavorable foreign currency exchange decreased gross profit by $7 million and $1 million, respectively. Gross profit as a percent of sales (or gross profit margin) during the current period increased 4.6 percentage points to 41.2%.

Selling, general and administrative expense (which, for reportable segment purposes, includes corporate expense allocation costs) increased $3 million during the current period, primarily as a result of $4 million of increased consulting and legal costs, $2 million of increased bad debt expense, $2 million of increased research and development expenses and $1 million of salaries expense. These increases were partially offset by cost savings from the divestiture of car care products of $6 million. Equity and other income remained consistent compared to the prior year.

Operating income totaled $212 million in the current period as compared to $200 million in the prior year period. EBITDA increased $11 million to $228 million in 2016. EBITDA margin increased 2.8 percentage points to 23.3% in 2016.

EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that Valvoline has internally determined to be relevant measures of comparison for the results of Core North America. There were no unusual or key items that affected comparability for Adjusted EBITDA for all periods presented herein.

 
 
For the years ended September 30
(In millions)
 
2017
 
2016
 
2015
Operating income
 
$
199

 
$
212

 
$
200

Depreciation and amortization
 
15

 
16

 
17

EBITDA
 
$
214

 
$
228

 
$
217

Quick Lubes
2017 compared to 2016
Quick Lubes sales increased $84 million, or 18%, to $541 million during 2017. Volume increased sales by $29 million as lubricant sales gallons increased to 22.5 million gallons during 2017. Acquisitions increased sales by $30 million and favorable product pricing increased sales by approximately $17 million. Favorable changes in product mix increased sales $8 million.
Gross profit increased $28 million during 2017 compared to 2016. Increases in volumes and higher premium product mix combined to increase gross profit by approximately $15 million. Favorable product pricing, partially offset by increased raw material costs, increased gross profit by $7 million, while acquisitions increased gross profit by $6 million. Gross profit margin during the current year decreased 1.3 percentage points to 40.3% driven largely by higher raw materials costs.

37


Selling, general and administrative expense increased $15 million during 2017. The increase was primarily a result of a $4 million increase in advertising and sales promotion costs, a $3 million increase in operating costs as a result of acquisitions, and an $8 million increase in shared expenses partially due to stand-alone public company costs. Equity and other income was essentially flat in 2017 compared to 2016.
Operating income totaled $130 million in 2017 as compared to $117 million in 2016. EBITDA increased $18 million to $152 million in 2016. EBITDA margin decreased 1.2 percentage points to 28.1% in 2017.

2016 compared to 2015

Quick Lubes sales increased $63 million, or 16%, to $457 million during 2016. Volume increased sales by $34 million as lubricant sales gallons increased to 20.2 million gallons during 2016. Acquisitions increased sales by $35 million, while unfavorable product pricing decreased sales by $8 million. Changes in product mix increased sales $2 million.
Gross profit increased $33 million during 2016 compared to 2015. Increases in volumes and changes in product mix combined to increase gross profit by $13 million. Lower raw material costs, partially offset by unfavorable product pricing, increased gross profit by $9 million, while the acquisition of Oil Can Henry’s increased gross profit by $11 million. Gross profit margin during the current year increased 1.8 percentage points to 41.6%.
Selling, general and administrative expense increased $11 million during 2016. The increase was primarily a result of a $4 million increase in operating costs as a result of the acquisition of Oil Can Henry’s, $4 million of increased allocated resource costs from Ashland, a $1 million increase in advertising and sales promotion costs and a $1 million increase in salaries and incentive compensation costs. Equity and other income was essentially flat in 2016 compared to 2015.
Operating income totaled $117 million in 2016 as compared to $95 million in 2015. EBITDA increased $23 million to $134 million in 2016. EBITDA margin increased 1.1 percentage points in to 29.3% in 2016.

38


Additional Sales and Growth Information
Quick Lubes sales are influenced by the number of company-owned stores and the business performance of those stores. Through Quick Lubes, Valvoline sells products to and receive royalty fees from VIOC franchisees. As a result, Quick Lubes sales are influenced by the number of units owned by franchisees and the business performance of franchisees. The following table provides supplemental information regarding company-owned stores and franchisees that Valvoline believes is relevant to an understanding of the Quick Lubes business.
 
Company-owned
 
For the years ended September 30
 
2017
 
2016
 
2015
Beginning of period
342

 
279

 
272

Opened
3

 
3

 
1

Acquired
29

 
52

 
3

Conversions between company-owned and franchise
14

 
9

 
3

Closed
(4
)
 
(1
)
 

End of period
384

 
342

 
279

 
 
 
 
 
 
 
Franchise*
 
For the years ended September 30
 
2017
 
2016
 
2015
Beginning of period
726

 
663

 
650

Opened
38

 
33

 
28

Acquired

 
42

 

Conversions between company-owned and franchise
(14
)
 
(9
)
 
(3
)
Closed
(7
)
 
(3
)
 
(12
)
End of period
743

 
726

 
663

 
 
 
 
 
 
Total VIOC Stores
1,127

 
1,068

 
942


The year over year change from 2017 to 2016 is primarily driven by the acquisition of business assets from Time-It Lube in the second quarter of 2017, which added 28 company-owned locations and other smaller acquisitions during 2017, including conversions from franchises that added 15 company-owned locations.

 
For the years ended September 30
 
2017
 
2016
 
2015
Same-Store Sales Growth** - Company-owned
7.0
%
 
6.2
%
 
7.5
%
Same-Store Sales Growth** - Franchisee*
7.5
%
 
8.0
%
 
7.8
%
Same-Store Sales Growth** - Combined*
7.4
%
 
7.5
%
 
7.7
%
 
 
 
 
 
 

* Valvoline’s franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees.
** Valvoline determines same-store sales growth on a fiscal year basis, with new stores excluded from the metric until the completion of their first full fiscal year in operation.


39


EBITDA and Adjusted EBITDA reconciliation
The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that Valvoline has internally determined to be relevant measures of comparison for the results of Quick Lubes. There were no unusual or key items that affected comparability for Adjusted EBITDA for all periods presented herein.

 
 
For the years ended September 30
(In millions) 
 
2017
 
2016
 
2015
Operating income
 
$
130

 
$
117

 
$
95

Depreciation and amortization
 
22

 
17

 
16

EBITDA
 
$
152

 
$
134

 
$
111


International

2017 compared to 2016

International sales increased $46 million, or 9%, to $539 million in 2017. Higher volume levels and changes in product mix combined to increase sales by a net $45 million, or 9%. Favorable foreign currency exchange increased sales by $2 million, while unfavorable product pricing decreased sales by $1 million due to pricing increases being put into place in the latter part of 2017.

Gross profit increased $6 million in 2017 compared to 2016. Increases in volumes and unfavorable changes in product mix combined to increase gross profit by $14 million. Favorable foreign currency exchange increased gross profit by $1 million, while higher product costs resulted in a $9 million decrease in gross profit. Gross profit margin during 2017 decreased 1.6 percentage points to 29.8% largely driven by higher raw materials costs, coupled with the timing of price increases and unfavorable changes in product mix.

Selling, general and administrative expense increased $7 million during the year, primarily as a result of $2 million of employee costs, $2 million of legal reserves and expenses related to the settlement of historical tax matters, $1 million related to foreign currency exchange and a $2 million increase in shared expenses partially due to stand-alone public company costs. Equity and other income increased $3 million compared to 2016 primarily as a result of increased royalty income from joint ventures during 2017.
Operating income totaled $76 million in 2017 as compared to $74 million in the prior year. EBITDA increased $2 million in 2017 to $81 million. EBITDA margin decreased 1.0 percentage points to 15.0% in the current year.
2016 compared to 2015
International sales decreased $19 million, or 4%, to $493 million in 2016. Unfavorable foreign currency exchange, primarily with the Yuan and Australian dollar, decreased sales by $28 million, or 5%. Higher volume levels increased sales by $27 million, or 5%. Lower product pricing decreased sales by $18 million.

Gross profit was essentially unchanged in 2016 compared to 2015. Unfavorable foreign currency exchange decreased gross profit by $7 million, while increases in volumes and changes in product mix combined to increase gross profit by $7 million. Lower product pricing was partially offset by lower product costs resulting in minimal gross profit impact. Gross profit margin during 2016 increased 1.2 percentage points to 31.4%.

Selling, general and administrative expense increased $2 million during the current period, primarily as a result of $1 million of salaries expense, $1 million of advertising and sales promotion costs, and $1 million of cost savings from resource costs allocated from Valvoline’s parent company. Equity and other income (loss) increased $11 million compared to 2015 primarily as a result of the $14 million impairment of the Venezuelan equity method investment in 2015. For additional information, refer to Note 4 of the Notes to Consolidated Financial Statements.
Operating income totaled $74 million in 2016 as compared to $65 million in the prior year. EBITDA increased $9 million in 2016 to $79 million. Adjusted EBITDA decreased $5 million and Adjusted EBITDA margin decreased 0.4 percentage points to 16.0% in the current year.


40


EBITDA and Adjusted EBITDA reconciliation
The following EBITDA and Adjusted EBITDA presentation is provided as a means to enhance the understanding of financial measurements that Valvoline has internally determined to be relevant measures of comparison for the results of International. Adjusted EBITDA results have been prepared to illustrate the ongoing effects of Valvoline’s operations, which exclude certain key items. The $14 million adjustment during the year ended September 30, 2015 is related to the impairment of an equity method investment within Venezuela.
 
 
For the years ended September 30
(In millions)
 
2017
 
2016
 
2015
Operating income
 
$
76

 
$
74

 
$
65

Depreciation and amortization
 
5

 
5

 
5

EBITDA
 
81

 
79

 
70

Impairment of equity investment
 

 

 
14

Adjusted EBITDA
 
$
81

 
$
79

 
$
84

Unallocated and Other
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 corporate and other non-operational matters, such as company-wide restructuring activities and legacy costs, including those associated with the separation from Ashland.

The following table summarizes the key components of the Unallocated and other segment’s operating income (expense) for the fiscal years ended September 30, 2017, 2016, and 2015.

 
 
For the years ended September 30
(In millions)
 
2017
 
2016
 
2015
Gain (loss) on pension and other postretirement plan remeasurements
 
$
68

 
$
18

 
$
(46
)
Non-service pension and other postretirement net periodic income (a)
 
70

 
17

 
9

Separation costs
 
(32
)
 
(6
)
 

Adjustment associated with Ashland tax indemnity
 
16

 

 

Change in estimate - insurance reserves
 
5

 

 

Other
 

 
(1
)
 

Total income (expense)
 
$
127

 
$
28

 
$
(37
)
 
 
 
 
 
 
 

(a)
Amounts exclude service costs of $2 million during 2017, $10 million during 2016 and $9 million during 2015, which are allocated to Valvoline’s reportable segments.
 Fiscal years ended September 30, 2017, 2016, and 2015

Unallocated and other recorded income of $127 million for 2017 and income of $28 million for 2016 compared to expense of $37 million for 2015. Unallocated and other includes pension and other postretirement non-service cost certain other corporate or non-operational costs that have not been allocated to the reportable segments.

In connection with Valvoline’s separation from Ashland, the Company assumed pension and other postretirement benefit obligations and plan assets, of which a substantial portion relates to the U.S. pension and other postretirement plans. Before the transfer, these plans were accounted for by Valvoline as multiemployer plans. In 2015, Valvoline received an allocation of the cost for these benefits based on Valvoline employees’ relative participation in the plans. However, as the responsibility for several of Ashland’s pension and other postretirement plans transferred to Valvoline during 2016, the full amount of any costs or gains related to the transferred plans has been reflected within the Valvoline consolidated financial statements for the month of September 2016 and the year ended September 30, 2017. These pension and other postretirement plan costs include interest cost, expected return on assets and amortization of prior service credit, which resulted in income of $70 million during 2017, $17 million during 2016 and $9 million during 2015. Unallocated and other also includes gains and losses on pension and other postretirement plan remeasurements, which resulted in a gain of $68 million in 2017, a gain of $18 million in 2016 and a loss of $46 million in 2015. Fluctuations in these amounts from year to year result primarily from changes in the discount rate but are also partially affected by differences between the

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expected and actual return on plan assets during each year as well as other changes in other actuarial assumptions such as changes in demographic data or mortality assumptions.

In 2017, Unallocated and other also includes $32 million of separation costs, $16 million of income related to adjustments associated with the Ashland tax indemnity and $5 million of income from the release of previously-estimated insurance reserves. In 2016, Unallocated and other included $6 million of separation costs in 2016 and $1 million of other legacy costs allocated from Ashland to Valvoline.
EBITDA and Adjusted EBITDA reconciliation
The following EBITDA and Adjusted EBITDA presentation is provided as a means to enhance the understanding of financial measurements that Valvoline has internally determined to be relevant measures of comparison for the results of Unallocated and other. Adjusted EBITDA results have been prepared to illustrate the ongoing effects of Valvoline’s operations, which exclude certain key items.

 
 
For the years ended September 30
(In millions)
 
2017
 
2016
 
2015
Operating income
 
$
127

 
$
28

 
$
(37
)
Depreciation and amortization
 

 

 

Net loss on acquisition and divestiture
 

 
(1
)
 
(26
)
EBITDA
 
127

 
27

 
(63
)
(Gain) loss on pension and other postretirement plan remeasurements
 
(68
)
 
(18
)
 
46

Separation costs
 
32

 
6

 

Adjustment associated with Ashland tax indemnity
 
(16
)
 

 

Change in estimate - insurance reserves
 
(5
)
 

 

Net loss on acquisition and divestiture
 

 
1

 
26

Adjusted EBITDA
 
$
70

 
$
16

 
$
9


FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Overview

In periods prior to Valvoline's IPO, the primary source of liquidity for Valvoline’s business was the cash flow provided by operations, which was transferred to Ashland to support its overall centralized cash management strategy. Transfers of cash to and from Ashland’s cash management system have been reflected in Ashland's net investment in the historical Consolidated Balance Sheets, Consolidated Statements of Cash Flows and Consolidated Statements of Stockholders’ Equity (Deficit). In connection with Valvoline’s reorganization and initial separation from Ashland's other businesses in fiscal 2016, the Company received $60 million in cash from Ashland. Since its IPO, Valvoline maintains its own cash management and financing functions for its operations.
Operating activities
The cash generated during each period is primarily driven by net earnings, adjusted for certain non-cash items such as depreciation and amortization and remeasurement adjustments to the pension and other postretirement plans, as well as changes in working capital, which are fluctuations within accounts receivable, inventory, trade payables and other accrued expenses. Valvoline continues to emphasize working capital management as a high priority and focus.


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The following table sets forth the cash flows associated with Valvoline’s operating activities:

 
 
For the years ended September 30
(In millions)
 
2017
 
2016
 
2015
Cash flows from operating activities
 
 
 
 
 
 
Net income
 
$
304

 
$
273

 
$
196

Adjustments to reconcile net income to cash flows from operating activities
 
 
 
 
 
 
Depreciation and amortization
 
42

 
38

 
38

Debt issuance cost amortization
 
3

 
4

 

Deferred income taxes
 
117

 
13

 
(9
)
Equity income from affiliates
 
(12
)
 
(12
)
 
(12
)
Distributions from equity affiliates
 
8

 
16

 
18

Net loss on acquisition and divestiture
 

 
1

 
26

Impairment of equity method investment
 

 

 
14

Pension contributions
 
(412
)
 
(2
)
 

(Gain) loss on Valvoline pension and other postretirement plan remeasurements
 
(68
)
 
(42
)
 
2

Stock-based compensation expense