avatar Valvoline Inc. Services
  • Location: Kentucky 
  • Founded:
  • Website:

Pages

  • Page 1

    2018 Annual Report


  • Page 2

    Contents From Our CEO .....................................................1 We are building the world’s leading engine and Driving Customer Value .....................................2 automotive maintenance business by bringing Financial Highlights ............................................3 Hands-On Expertise Around the Globe ..........4 Hands-On Expertise for the benefit of our Core North America ...........................................6 customers every day. Quick Lubes ........................................................8 International ...................................................... 10 VALUES Governance....................................................... 12 It all starts with our people Shareholder Information ..................Inside Back Safety is always our priority Non-GAAP Measures: We are committed to winning … the right way This Annual Report includes several non-GAAP measures, including EBITDA, Adjusted EBITDA and free cash flow. As We work hard, celebrate success and have fun further described in our 2018 Form 10-K, these measures are not defined in U.S. GAAP and do not purport to be alternatives to net income or cash flows from operating We strive for greatness activities as measures of operating performance or cash flows. However, management believes the use of these non-GAAP measures on both a consolidated and reportable segment basis assists investors in understanding the ongoing operating performance of Valvoline’s business by presenting comparable VOW financial results between periods. The non-GAAP information provided may not be consistent with the methodologies Our vow is to bring “Hands-On Expertise” for the benefit of our used by other companies and should not be construed as an alternative to reported results determined in accordance with customers every day, moving the business forward with speed U.S. GAAP. All non-GAAP information has been reconciled with reported U.S. GAAP results in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and excellence. section of our 2018 Form 10-K, which has been enclosed with this Annual Report and is available online on our website at http://investors.valvoline.com/sec-filings, and on the SEC’s website at http://www.sec.gov. VISION Forward-Looking Statements: Certain statements in this Annual Report, other than We are building the world’s leading engine and automotive maintenance business. We will accelerate growth around the world statements of historical facts, including estimates, projections, statements related to our business plans and operating results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have by increasing our focus and investment in: identified some of these forward-looking statements with words such as “anticipates,” “believes,” “expects,” “estimates,” “is likely,” “predicts,” “projects,” “forecasts,” “may,” “will,” The Valvoline™ brand, built on superior products and service “should,” and “intends” and the negative of these words or other comparable terminology. These forward-looking statements are based on our current expectations, estimates, The industry’s best retail services model projections and assumptions as of the date such statements are made and are subject to risks and uncertainties that Technology that enables speed, innovation and increased may cause results to differ materially from those expressed or implied in the forward-looking statements. Additional information regarding these risks and uncertainties are efficiency in every aspect of our business described in our 10-K, which has been included in this Annual Report and is available on our website at http://investors. valvoline.com/sec-filings, and on the SEC’s website at http:// Strong value-adding relationships with our channel partners www.sec.gov. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.


  • Page 3

    Dear Fellow Stakeholders: Building the world’s leading engine and automotive maintenance business is our vision, and it’s a multi-year plan. In the two years since our IPO, we’ve made significant strides setting the foundation to drive long-term success. We’ve invested in high- return capital projects, as seen in both quick lube acquisitions and new store development. In addition, we’ve added to our capabilities through the launch of innovative products, packaging and digital marketing and services. We’ve also continued to develop our channels to market around the world, with a particular focus on China, India and Latin America. In fiscal 2018, in the face of rising raw material costs, we once again delivered strong profitability and significant cash flow: record adjusted EBITDA of $466 million and $320 million of cash flow from operations. We also continued to deliver against our goal of returning cash to shareholders through share repurchases and dividends, totaling $383 million in the fiscal year. The Quick Lubes business, which carries our strongest operating margins, is quickly moving toward becoming our largest profit generator. Our focus on delivering an exceptional level of customer service is evident in the ongoing success of our Valvoline Instant Oil Change system, where we achieved our 12th consecutive year of systemwide same-store sales growth — and the first time that average sales per store surpassed $1 million. This was the first year that we’ve added a significant number of new newly-constructed company stores; it also marks our first international expansion in the Quick Lubes segment with the acquisition of Great Canadian Oil Change, Canada’s third-largest quick-lube system. We’re now well positioned to continue expanding our retail presence in both the U.S. and Canada through a combination of newly constructed company stores, acquisitions and continued franchise growth. As we move into a new fiscal year, our aim is to continue building capabilities across our business through a combination of outstanding service, great products and cutting-edge technology, amplified by our team’s Hands-On Expertise. As you will see in the following pages, this is our formula for creating value for our customers, channel partners, employees and shareholders — and for winning around the world. Sincerely, Samuel J. Mitchell, Jr. Chief Executive Officer


  • Page 4

    Driving Customer Value Global Product Platforms Product quality and innovation are at the core of the Valvoline brand. As our global footprint grows, we are building broad product platforms to meet the evolving needs of both passenger car and heavy-duty customers. DUCTS PRO LOGY SERV NO IC S H E C TE Services Technology Owning and operating Valvoline is staying one quick-lube stores gives step ahead by developing us unique insights and cutting-edge technology that capabilities in delivering a delivers high-value solutions to our superior customer experience. customers, including: data analytics, Valvoline is continuously improving e-commerce, digital marketing, mobile the installer and retail customer experience applications and engine diagnostics. — innovating unique packaging solutions, providing customized marketing programs and call center services, and investing in employee recruiting and training. 2


  • Page 5

    Financial Highlights1 Fiscal Years Ended September 30 2018 2017 2016 Sales $ 2,285 $ 2,084 $ 1,929 Operating income $ 395 $ 394 $ 396 2 Earnings before interest, taxes, depreciation and amortization (EBITDA) $ 449 $ 574 $ 468 2 Adjusted EBITDA $ 466 $ 447 $ 440 Net income $ 166 $ 304 $ 273 Diluted earnings per share $ 0.84 $ 1.49 $ 1.60 Weighted average diluted common shares outstanding 197 204 170 Cash flows from operating activities $ 320 $ (130) $ 311 Additions to property, plant and equipment $ 93 $ 68 $ 66 Free cash flow2, 3 $ 227 $ 196 $ 245 4 Systemwide same-store sales (SSS) growth 8.3% 7.4% 7.5% Quick Lubes store count 1,242 1,127 1,068 1. In millions, except store counts and per-share amounts. 2. See attached 2018 Form 10-K for a reconciliation of non-GAAP measures. 3. Excludes a nearly $400 million voluntary pension contribution in FY17. 4. Includes company-owned and franchised stores. Systemwide SSS growth determined on a fiscal-year basis with new stores included after the first full fiscal year of operation. Keys to Our Financial Performance Drivers of Strong Profit • 12 consecutive years of systemwide SSS growth in VIOC stores • Addition of new Quick Lubes stores • Mix shift toward premium products1 • Consistent volume and profit growth in international markets • Proactive product pricing and raw material cost management Growth in Adjusted EBITDA2 Fiscal Years Ended September 30 In millions $466 $440 $447 $412 $359 2014 2015 2016 2017 2018 1. Within U.S. branded lubricants. 2. For a reconciliation of net income to adjusted EBITDA, see attached 2018 Form 10-K. 3


  • Page 6

    EUROPE Fast-growing business in a mature market. Continuing to establish meaningful original equipment manufacturer (OEM) selling relationships. Continued to build and strengthen channels to market. NORTH AMERICA Innovation and expansion in the large mature market where Valvoline originated. Expanded Quick Lubes business through key acquisitions and franchisee development agreements. Greatly expanded presence in Canada with acquisition of Great Canadian Oil Change. Launched innovative products and services. LATIN AMERICA Rapid growth and solid market MIDDLE EAST & AFRICA share with high potential for additional growth. Foundational investments tapping into Drove brand awareness with global marketing partner Manchester City an emerging market. Football Club. Continued investments and development of Puerto Rico distributor surpassed supply chain capabilities and product portfolio. 1 million gallons in their sales for FY18. Major Offices Research and Development Centers Lubricant Blending and Packaging Major Third-Party Production Consumer Retail Locations (VIOC, GCOC, Express Care) 4


  • Page 7

    Hands-On Expertise Around the Globe CHINA Rapid growth in one of the world’s largest lubricant markets. Worked with OEM partners to develop an exclusive extended-drain product, driving substantial, rapid growth. Continued to rapidly build channels to serve installers. SOUTHEAST ASIA Continued growth as we make inroads into key emerging market. Acquired remaining ownership interest in Thailand subsidiary to become wholly owned affiliate, INDIA expanding market share and connecting with key influencers. Strong growth and solid share position through our joint venture in an emerging market. JV achieved record sales and profits. Named one of top foreign lubricant brands, according to IHS Markit report. AUSTRALIA Strong business and high share in a mature market. Continued solid growth with installer and commercial customers. 140+ countries where 6,700 $2.3B employees FY18 revenue Valvoline is sold worldwide 5


  • Page 8

    Core North America Innovation Our approach to winning in our Core North America business segment is to offer superior products with clear technical benefits and differentiated services that help our customers build their businesses. One of our strongest competitive advantages is our ability to develop innovations that help both customers and consumers save time, protect vehicles and optimize equipment performance. Our premium mix of U.S. branded volume grew to 49.2 percent in FY18 driven by strong innovation in products and services across multiple channels in Core North America. Core North America sells lubricants and other automotive- and engine-maintenance products across the United States and Canada Premium Mix (percent of U.S. Branded Volume) primarily through three channels. The retail channel reaches do-it- Fiscal Years Ended September 30 yourself (DIY) consumers through auto-parts stores, mass merchants 49.2 45.8 and warehouse-distributor accounts. The installer channel sells to do- 41.4 33.7 36.6 it-for-me (DIFM) outlets, such as auto dealerships, service centers and quick lubes; and heavy-duty fleet accounts in the on-highway freight, transit, vocational, power generation, construction, agricultural, marine and mining industries. Our other channel sells to original equipment 2014 2015 2016 2017 2018 manufacturers (OEMs) and specialty outlets. Innovation: HEAVY-DUTY Heavy-duty engines take a beating. They’re put through intervals between oil drains. The result? It helps reduce the enormous stress, and because they are often literally the total cost of ownership for mixed-vehicle fleet owners. engines that power our customers’ businesses, it is critical that they perform efficiently and without fail. There is Our innovations extend well beyond motor oil. continual need for optimization, which makes our heavy- A leading cause of engine failures is deferred coolant duty product line a source of opportunity, growth and maintenance. We developed Zerex™ Nitrite Free Extended innovation. Life with organic acid technology to provide up to six years Take our Premium Blue One Solution™ 9200, / 600,000 miles / 12,000 hours of service without the need launched in mid-FY18. Developed with for extenders. The long drain interval allows our customers longtime partner Cummins, the lubricant to think about their business, not their coolant. Plus, it helps is the first heavy-duty engine oil to be reduce the total cost of ownership. approved for use in diesel, natural gas or When metal comes into contact with metal, things can gasoline engines. The oil is formulated get risky. Eliminating failures in the heaviest loaded to provide excellent oxidation metal-to-metal areas is the job of our resistance and supports longer innovative Cobalt™ Grease with Pressure Activated Technology™. Launched in 2017, it features a breakthrough viscosity- delivery system that actually responds to increased pressure, reducing friction and handling heat in extreme environments, even saltwater. Customers using Cobalt experience a reduction in parts failures, decreased product usage, and increased asset utilization — which helps improve their bottom line. 6


  • Page 9

    Innovation: NEWER ENGINES Passenger car engines have changed. They’re smaller, more efficient and run hotter. They can also build up significant carbon deposits that affect engine performance. That’s where Valvoline innovation comes in to play with leading- edge products and services. Valvoline Modern Engine Full Synthetic Motor Oil — introduced in early FY18 — is our best formula to specifically fight carbon buildup, an often-ignored issue in newer engines. Exceeding industry standards, it’s formulated to protect against oil oxidation and viscosity breakdown to help extend engine life and against knocking and catastrophic engine failure caused by a condition called low-speed pre-ignition. Moving from prevention to treatment, our First Defense professional service — also launched in FY18 — is a simple, effective fuel-system cleaning process designed to remove harmful carbon buildup. Innovation: CUSTOMER EXPERIENCE Valvoline hands-on expertise and personal service is a cornerstone of our customer experience. In FY18, Valvoline launched DASH (Digital Account Service Hub) to make doing business with us easier and enhance our customer experience. Integrating all customer touchpoints into a single portal, it features a host of capabilities: a best-in-class e-commerce experience for ordering and tracking shipments; business insights; and solutions and promotions to help customers profitably grow their business. Many of our customers have been onboarded, and we will continue to add customers in FY19 while rolling out innovative ways to continually enhance the experience. 7


  • Page 10

    Quick Lubes Expansion Delivering a quick, easy and trusted service experience is our Quick Lubes business segment’s promise for every customer, every day. The business model is driven by the power of our people providing an exemplary customer service experience — along with proprietary tools including our industry-leading point-of-sale technology, talent management and marketing platforms and award-winning SuperPro™ Management System. That’s how we win in the market. Quick Lubes excelled again in FY18. At Valvoline Instant Oil ChangeSM, systemwide same-store sales grew for a 12th consecutive year and average annual unit revenue of existing stores exceeded $1 million for the first time in our history1. Overall, the Quick Lubes business added 115 company-owned and franchised locations. The team has no plans to slow down in FY19. A key part of Valvoline’s growth strategy is expansion of our retail presence, both organically and inorganically, while continuing to deliver superior customer service within our existing store base to drive positive same-store sales growth. Our Quick Lubes business segment serves passenger car and light truck customers through three brands: Valvoline Instant Oil Change (VIOC) in the United States, the newly acquired Great Canadian Oil Change (GCOC) in Canada, and Express Care in both markets. At VIOC and GCOC, customers buy preventive maintenance services, including full-service oil changes. At Express Care, customers are serviced through our platform for independent operators who buy Valvoline products and display our brand. 1. Existing stores are stores included in our same-store sales calculation. Based on all stores within the total VIOC system. Expansion: SUPERIOR BUSINESS MODEL Average Systemwide SSS1 per Store In FY18, the Valvoline Instant Oil Change system generated Fiscal Years Ended September 30 average store revenue that exceeded $1 million on a same-store (000s) basis, 35 percent higher than the National Oil & Lube quick-lube AGR : 5. 8% $1,022 8C industry reported average. In addition, we achieved a remarkable ‘08–’1 $947 $882 $824 overall customer satisfaction rating of 4.6 out of 5, according to $713 $738 $774 $649 $672 post-visit surveys by Service Management Group, demonstrating our $579 $613 ability to retain customers. It’s all evidence of the health and superiority of our Quick Lubes business model. Further differentiating ourselves from our competitors in FY18, our proprietary technology called CarCam 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 — which allows customers to see what is happening under the hood 1. Systemwide same-store sales determined on a fiscal-year basis, and under the car while their vehicle is serviced — was installed at with new stores included after the first full fiscal year of operation. each of our company-owned stores. A unique component of the Quick Lubes franchising model is the vertically integrated product structure. We sell our family of products to our franchisees, providing Valvoline with an additional profit stream that enables us to invest back into the business model more aggressively than traditional franchisers and helps us develop more progressive tools to support organic revenue expansion. At our 347 Express Care locations, our superior business model comes into play by offering independent operators a partnership with our leading premium brand, top-notch operational, business and training support to increase profitability, strong customizable marketing programs, and more. The Express Care model has grown to become one of the largest independent branded quick-lube systems in North America. 8


  • Page 11

    Expansion: UNIT GROWTH Because of the strength of our operating model, we see significant opportunity to increase the number of stores, which we undertake through a highly disciplined and analytical market development approach. Quick Lubes unit expansion includes building new stores or acquiring competitive operators in attractive trade areas where our brand presence may be underdeveloped. In FY18, we added 115 company-owned and franchised quick-lube *map is representative, each store location not shown and/or exact locations, growing the total number of service centers to 1,242 VIOC stores in the United States and GCOC stores in Canada. VIOC & GCOC Stores Per State or Province Looking forward, we have a strong store-development pipeline for new service center openings: In the United States alone, we anticipate opening 1-4 5-9 10-24 25-49 50+ more than 125 company-owned stores over the next five years and have Store Openings secured development agreements with our growth-ready franchisees, which Pre-FY2014 FY14-FY17 FY18 we expect will add an additional 240 stores. In fact, based on our analysis, we project that we will be able to add a significant number of company and franchise stores for years to come in both the United States and Canada. Expansion: NEW MARKETS In late FY18, Valvoline acquired Great Canadian Oil Change, the third-largest quick-lube chain in Canada, driving us into a new market with our first international quick-lube acquisition. With its 73 franchised service centers and established brand and loyal customer base, the acquisition provides us with an excellent foundation to expand our quick- lube footprint outside the United States. Also in late FY18, we announced a definitive agreement to acquire another Canadian quick-lube chain, Oil Changers Inc. When the acquisition closed in early FY19, our footprint in Canada grew to more than 100 franchised stores, setting the stage for further expansion across the Canadian markets. 9


  • Page 12

    International Growth Solid growth is the story in our International business segment. In FY18, we delivered another year of volume growth while focusing on margin management. We continued to aggressively develop our channels across the business segment, but particularly in the emerging markets of China, India and Latin America. In a joint effort with our key partners, we continue to establish Valvoline as a premium brand around the world. We also announced our investment and commitment to our customers in China with our first production facility there, which is expected to open in early FY21. Globally, we strengthened ties with our longtime partner Cummins and other original equipment manufacturers (OEMs), helping us to respond to the rapidly changing landscape of both light- and heavy-duty engine needs. The International business segment sells products for consumer and commercial vehicles and equipment in more than 140 countries, including key markets across Asia-Pacific; Europe, the Middle East and Africa; and Latin America. We make use of wholly owned affiliates, joint ventures and strong relationships with independent distributors to drive opportunities with our products and services. Growth: CHANNEL DEVELOPMENT The opportunity for growth in our International business segment is substantial. Our fast growth strategy for all markets first focuses on solid channel development — building and growing distribution channels throughout the region. In India, our JV is realizing the results of investing in channel development. The team is operating under a route-to-market strategy that builds a high-value relationship with all levels of the channel, distributors, retailers and installers, delivering the value-added services they need to be successful. The region recognized strong growth again in FY18 from leveraging this model. Direct-to-customer markets, like Australia, provide the same valuable customer connections and results. Responding to the momentum in Southeast Asia, we fully acquired another such direct market in Thailand. We are now investing in the market to capitalize on the connection and bring our value-added services to drive future growth. Valvoline Emerging Markets Sales Volume1,2 (lubricant gallons in millions) Fiscal Years Ended September 30 80 60 R: 9.7% CAG 40 20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1. Includes unconsolidated joint ventures. 2. Emerging markets consist of all countries outside of the U.S., Canada, Australia and Europe. 10


  • Page 13

    Growth: CAPABILITIES In FY18, our International business segment continued to invest in the development of world-class platforms for our customers. Delivering a premium product in today’s marketplace is simply not enough. We are differentiating ourselves from the competition by providing those capabilities and services that help meet our customers’ challenges and minimize the total cost of ownership for their equipment. Our hands-on expertise is delivering marketing programs to help drive sales and awareness and a supply chain designed to service our customers in a timely, effective manner. In Australia, we worked with Sydney’s municipal bus operator to significantly cut maintenance and out-of-service time for its fleet. Through a quick-release, closed-loop system, the customer can now complete an oil/filter change in about 15 minutes with no mess. Our customer can work through the maintenance schedule more efficiently and keep the fleet on the road, getting Sydney’s riders to their destination. In Latin America, we have leveraged our marketing partnership with 2017-18 English Premier League champions Manchester City Football Club to increase brand awareness among the region’s small garages. In its second year, the program contributed significant growth, including gaining new Valvoline customers, increasing premium mix and growing overall volume. Growth: OEMs Valvoline has historically been strong in targeted OEM markets. In FY18, we grew our OEM capabilities in multiple geographies, leading to several successes. One of our strongest relationships is with global engine maker Cummins. In FY18, we saw continued growth with our Cummins JVs in China and India, and the deepening relationship in Latin America has led to new customers and volume growth for our Premium Blue products. Riding a wave of more stringent emission standards in emerging markets, a large number of high-tech engines are entering the market in places like China and India. The low-grade motor oils that have dominated these markets won’t work in and are not a good fit for these high-end engines. Valvoline is filling that void with the necessary premium lubricants. 11


  • Page 14

    Governance Valvoline Executive Officers Samuel J. Mitchell, Jr. Craig A. Moughler Chief Executive Officer and Director Senior Vice President, International and Product Supply Mary E. Meixelsperger Julie M. O’Daniel Chief Financial Officer Senior Vice President, Chief Legal Officer and Corporate Secretary Thomas A. Gerrald II Bradley A. Patrick Senior Vice President, Chief People and Core North America Communications Officer Frances E. Lockwood Anthony R. Puckett Senior Vice President, Senior Vice President and Chief Technology Officer President, Quick Lubes Heidi J. Matheys David J. Scheve Senior Vice President, Chief Accounting Officer and Controller Chief Marketing Officer Valvoline Board of Directors Valvoline is governed by an eight-member board of directors, seven of whom are independent directors under New York Stock Exchange (NYSE) guidelines. The board operates the following committees, all of which consist entirely of outside directors: Audit; Compensation; and Governance and Nominating. Valvoline’s Chief Executive Officer (CEO) and Chief Financial Officer have each submitted certifications concerning the accuracy of financial and other information in Valvoline’s annual report on Form 10-K, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications are filed as exhibits to Valvoline’s 2018 annual report on Form 10-K. In addition, the NYSE requires that the CEO of listed companies annually certify that he or she is not aware of any violation by the company of NYSE corporate governance listing standards. Valvoline’s CEO, Samuel J. Mitchell, Jr., submitted Valvoline’s certification on February 9, 2018. Stephen F. Kirk 2, 3 Vada O. Manager 1, 2a, 3 Chairman of the Board; Retired Senior Vice President and Chief President and Chief Executive Officer, Manager Global Consulting Operating Officer, The Lubrizol Corporation Group, and Senior Counselor, APCO Worldwide Richard Freeland 2, 3 Samuel J. Mitchell, Jr. President and Chief Operating Officer and Director, Cummins Inc. Chief Executive Officer, Valvoline Inc. Carol H. Kruse 2, 3 Charles M. Sonsteby 1a, 2, 3 Senior Vice President and Chief Marketing Officer, Cambia Health Retired Vice Chairman, The Michaels Companies Solutions Mary Twinem 1, 2, 3a Stephen E. Macadam 2, 3 Retired Executive Vice President and Chief Financial Officer, Chief Executive Officer and President and Director, EnPro Industries Inc. Buffalo Wild Wings Inc. Committees 1. Audit; 2. Governance and Nominating; 3. Compensation; a. Committee Chair 12


  • Page 15

    UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2018 OR 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. Kentucky 30-0939371 (State or other jurisdiction of incorporation or organization) (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 No 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 No 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 No Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No 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. Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth 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 Accelerated Filer Non-Accelerated Filer Smaller Reporting Company Emerging Growth Company 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. Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of voting common stock held by non-affiliates at March 31, 2018 was approximately $4.4 billion. At November 16, 2018, there were 188,163,312 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement (“Proxy Statement”) for its 2019 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.


  • Page 16

    TABLE OF CONTENTS Page PART I Item 1. Business 4 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 24 Item 2. Properties 25 Item 3. Legal Proceedings 25 Item 4. Mine Safety Disclosures 25 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26 Item 6. Selected Financial Data 28 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 30 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 50 Item 8. Financial Statements and Supplementary Data 52 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 104 Item 9A. Controls and Procedures 104 Item 9B. Other Information 106 PART III Item 10. Directors, Executive Officers and Corporate Governance 107 Item 11. Executive Compensation 107 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 107 Item 13. Certain Relationships and Related Transactions and Director Independence 107 Item 14. Principal Accountant Fees and Services 107 PART IV Item 15. Exhibits and Financial Statement Schedule 108 2


  • Page 17

    Forward-Looking Statements Certain statements in this Annual Report on Form 10-K, other than statements of historical facts, including estimates, projections, statements related to the Company’s business plans and operating results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. These forward-looking statements are based on Valvoline’s current expectations, estimates, projections and assumptions as of the date such statements are made and are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed under the headings “Risk Factors” in Part I, Item 1A of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Part II, Item 7 of this Form 10-K and “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this Form 10-K. Valvoline assumes no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. 3


  • Page 18

    A PART I ITEM 1. BUSINESS Overview Valvoline Inc., a Kentucky corporation, is a worldwide 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 innovative, high quality products and superior levels of service. Established in 1866, Valvoline’s heritage spans over 150 years, during which it was the petroleum industry’s first U.S. trademarked motor oil brand and has developed powerful name recognition across multiple product and service channels. 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 automotive and engine needs. Valvoline has a strong international presence with products sold in more than 140 countries. 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 1,242 company-owned and franchised stores. Company background Valvoline was incorporated in May 2016 as a subsidiary of Ashland Global Holdings Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). Prior to this time, Valvoline operated as an unincorporated commercial unit of Ashland. Following a series of restructuring steps prior to the IPO, the Valvoline business was transferred from Ashland to Valvoline such that the Valvoline business included substantially all of the historical Valvoline business reported by Ashland, as well as certain other legacy Ashland assets and liabilities transferred to Valvoline from Ashland (the “Contribution”). In connection with the IPO, 34.5 million shares of Valvoline common stock were sold to investors and Ashland retained 170 million shares representing 83% of the total outstanding shares of Valvoline common stock. On May 12, 2017, Ashland distributed all of its remaining interest in Valvoline to Ashland stockholders (the “Distribution”) through a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017, which marked the completion of Valvoline’s separation from Ashland. Effective upon the Distribution, Ashland no longer owned any shares of Valvoline common stock, and Valvoline was no longer a controlled and consolidated subsidiary of Ashland. 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 ground-breaking products such as its all climate motor oil and the first high mileage motor oil. 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. Valvoline products are used in a broad range of vehicles and engines, including light-duty (passenger cars, light trucks and two wheelers) and heavy duty (heavy trucks, agricultural, mining and construction equipment) as well as electric vehicles. 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: 4


  • Page 19

    % of 2018 Product categories Sales Description Comprehensive assortment meeting the needs of passenger car, Passenger car / Light duty motorcycle and other light duty engines, including motor oil, transmission fluid, greases and gear oil Lubricants 86% Lubricating solutions for a wide range of heavy duty Heavy duty applications ranging from on-road (Class 4 – Class 8 vehicles) to off-road construction, mining, agricultural and power generation equipment Antifreeze/coolants for original equipment manufacturers Antifreeze / (“OEMs”); full assortment of additive technologies and Antifreeze Coolants 5% 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 Functional and maintenance chemicals ranging from brake Maintenance chemicals fluids and power steering fluids to chemicals specifically designed to clean and maintain optimal performance of fuel, Chemicals 3% cooling and drive train systems Coatings Specialty coatings designed to target rust prevention, and sound absorption for automotive and industrial applications Filters Filters 4% Oil and air filters meeting the needs of light-duty vehicles Other complementary Windshield wiper blades, light bulbs, serpentine belts, drain Other 2% products and royalties plugs, and franchisee royalties Industry overview Valvoline participates primarily in the global finished lubricants market. In total, global annual lubricants demand is estimated to be approximately 12 billion gallons. Demand for passenger car motor oil and motorcycle oil is estimated to account for approximately 24% of global lubricant demand, while the remaining 76% of demand is estimated for commercial and industrial products. The United States has historically accounted for the largest portion 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 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 to address changing specifications for lubricants. Trends back to 2006 indicate that the North American transport lubes market has experienced relatively flat average annual volumes due in part to an increase in oil change intervals, which have resulted from changing OEM recommendations and advancements in engine technology, offset by 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. 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: 5


  • Page 20

    Core North America The Core North America segment sells Valvoline™ and other branded and private label engine and automotive maintenance products in the United States and Canada to retailers for consumers to perform their own automotive and engine maintenance, as well as to installers that service vehicles and equipment for consumers. Sales of Valvoline products for consumers to perform their own automotive and engine maintenance are referred to as “Do-It-Yourself” or “DIY” consumers, and sales of Valvoline products for consumers to have their vehicles and equipment serviced are referred to as “Do-It-For-Me” or “DIFM” consumers. Sales for DIY consumers are primarily branded products sold through the retail channel to customers such as retail auto parts stores, as well as to leading mass merchandisers and independent auto part stores. Sales through the retail channel also include non-branded packaged goods to warehouse distributors that resell to both DIY consumers and to installers for DIFM consumers. Sales for DIFM consumers are generally sold through the installer channel to customers such as car dealers, general repair shops and third-party quick lube locations directly as well as through a network of approximately 200 distributors. Valvoline also sells products to heavy duty fleet customers, such as on-highway fleets and construction companies through the installer distributor network. Valvoline has a strategic relationship with Cummins Inc. (“Cummins”), a leading supplier of heavy duty engines, for co-branding products for heavy duty consumers. Other sales within Core North America include OEM and specialty consumers. Quick Lubes The Quick Lubes segment services the passenger car and light truck quick lube market in the United States and Canada through Valvoline’s owned and operated quick lube service center stores, quick lube service center stores franchised to independent operators, and Express Care™ stores where independent operators service vehicles with Valvoline products. Valvoline operates the second largest quick lube service chain by number of stores in the United States with Valvoline Instant Oil ChangeSM (“VIOC”) and the third largest quick lube service chain in Canada with Great Canadian Oil Change. Valvoline’s quick lube service center stores 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 with customers. The Express Care™ platform supports smaller operators that do not fit Valvoline’s franchise model and generally offer other services in addition to quick lubes, such as automotive repairs and car washes. As of September 30, 2018, the Quick Lubes system consisted of 462 company-owned and 780 franchised locations and operated in 46 states in the U.S. and five provinces in Canada. As of September 30, 2018, there were 347 Express Care™ locations. International Valvoline’s International segment sells Valvoline™ and other branded engine and automotive maintenance products through wholly- owned affiliates, joint ventures, licensees and independent distributors in more than 140 countries outside of the United States and Canada for the maintenance of consumer and commercial vehicles and equipment. Key international regions include Europe, Middle East, and Africa (“EMEA”); Latin America (which includes Mexico, Central and South America); and Asia Pacific (which includes Australia, India and China). Valvoline has a growing presence in a number of emerging markets, including China, India and Latin America. International sales include products for both light duty and heavy duty. 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 has 50/50 joint ventures with Cummins in India, China and Argentina, and joint ventures with other partners in Latin America. Unallocated and other Unallocated and other generally includes items such as certain corporate and non-operational matters, including company-wide restructuring activities and adjustments related to legacy businesses that are no longer attributed to Valvoline. 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 strength of 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 leverages its multi-channel model to deliver solid margins, generate high free cash flow, and provide significant growth opportunities. Valvoline’s key business and growth strategies include: Accelerating Quick Lube unit growth through organic service center expansion and opportunistic acquisitions, while enhancing service center store-level performance; Improving execution and continuing to focus investment in key emerging markets where demand is growing; 6


  • Page 21

    Strengthening and expanding Valvoline’s existing business by improving distribution channels and increasing penetration of Valvoline’s full product portfolio; Broadening electric vehicle (“EV”) capabilities by developing relationships with OEMs and leveraging innovation in the development of future EV products and light services in direct and adjacent markets; and Investing in talent and technology to develop Valvoline’s global hands-on expert capabilities and culture to drive speed and efficiency in both customer-facing and back-office critical processes. Quick Lubes store development During fiscal 2018, Valvoline acquired 136 service center stores, which included 73 franchise service center stores, 60 former franchise service center stores, and 3 service center stores acquired in single and multi-store transactions. These acquisitions included the Company’s first international quick lube service center store acquisition and expansion into Canada. During fiscal 2017, the Company acquired 43 service center stores that included 14 former franchise service center stores and 29 service center stores acquired in single and multi-store transactions. During fiscal 2016, 104 service center stores were acquired that included 42 franchise service center stores, 9 former franchise service center stores and 53 service center stores acquired in single and multi-store transactions. As of September 30, 2018, Valvoline operated, either directly or through its franchisees, 1,242 quick lube service center stores, an increase of 115 over the prior year. In addition to the 76 acquired stores added to the Quick Lubes system described above, a combined 39 net new company-owned and franchised service center stores were added to the system during fiscal 2018. The Quick Lubes system consisted of 462 company-owned and 780 franchised locations and operated in 46 states in the U.S. and five provinces in Canada. As of September 30, 2018, there were 347 Express Care™ locations. VIOC delivered system-wide same-store sales growth of 8.3% in fiscal 2018, the 12th consecutive year of system-wide same-store sales growth (determined on a fiscal year basis, with new stores excluded from the metric until the completion of their first full fiscal year in operation). 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. In the Core North America 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. Valvoline currently ranks as the number three passenger car motor oil brand in the DIY market by volume. 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, Express Oil Change and Mr. Lube, as well as national branded companies that offer a professional signage program with limited business model support, similar to Valvoline’s Express Care network, as well as regional players such as Super-Lube and American Lube Fast 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 in the U.S. The Canadian quick lubes market is similarly fragmented with a small number of large players that comprise roughly half of the market, while the remainder is made up of smaller local and regional competitors, automotive dealerships and service stations. Major competitors of Valvoline’s International segment 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. 7


  • Page 22

    Competitive factors in all of these markets include price, innovation of solutions, brand awareness and loyalty, customer service, and sales and marketing. Valvoline’s Core North America and International reportable segments also compete at retailers on the basis of shelf space and product packaging. Marketing and sales 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 a centralized marketing services group as well as 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 1,242 company-owned and franchised stores and 347 Express Care™ locations. Valvoline serves its customer base through its sales force and technical support organization, allowing leverage of the Company’s technology portfolio and customer relationships globally, while meeting customer demands locally. Valvoline also utilizes its digital infrastructure and technology to more efficiently interact with customers, driving customer engagement to deliver growth, customer retention and acquisition. 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 and radio. Valvoline selectively sponsors teams in high performance racing, including a current sponsorship of Hendrick Motorsports, featuring drivers Chase Elliott, Jimmie Johnson, William Byron and Alex Bowman. In addition, Valvoline sponsors other teams and players 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. 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, EMEA 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. Valvoline will continue to incur research and development expenditures in the future to develop innovative, high-quality products and services and to help maintain and enhance Valvoline’s competitive position. Intellectual property Valvoline is continually seeking to develop new technology and enhance its existing technology. Valvoline has been issued 36 U.S. and 62 international patents and has 26 U.S. and 81 international patent applications pending or published. Valvoline also holds over 2,500 trademarks in various countries around the world, which Valvoline believes are some of its most valuable assets, and 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, among others and including those for key products. Valvoline also has a variety of intellectual property licensing agreements. 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 pursue 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. 8


  • Page 23

    Valvoline has a large manufacturing and distribution footprint in the United States, with seven lubricant blending and packaging plants and several packaging and warehouse locations. Additional blending and packaging plants are located in Australia, Canada and the Netherlands. In May 2018, Valvoline announced plans to build its first blending and packaging plant in China, which when complete is expected to have annual capacity in excess of 30 million gallons of lubricants. Valvoline also uses numerous third-party toll manufacturers and warehouses and is part of a joint venture that operates a blending and packaging facility in India. Valvoline seeks to actively manage fluctuations in supply costs, product selling prices and the timing thereof to preserve 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. Given that base oil, a derivative of crude, is highly correlated to the global oil market, there can be volatility in base oil prices. The amount of volatility is related to the world crude price as well as to the global supply and demand balance of base oil. 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 works diligently to adjust product selling prices to react to changes in base oil costs and protect 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 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 little 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 federal, state, local and non-U.S. 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 dedicated EHS resources that are responsible for ensuring its business maintains compliance with applicable laws and regulations. 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. While such matters 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. 9


  • Page 24

    Employees As of September 30, 2018, Valvoline had approximately 6,700 employees worldwide (excluding contract employees). Available information More information about Valvoline is available on the Company’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 Amended and Restated Articles of Incorporation, By-Laws, Corporate Governance Guidelines, Board Committee Charters, Director Independence Standards and the Global Standards of Business Conduct that apply to Valvoline’s directors, officers and employees. These documents are also available in print to any shareholder who requests them. The 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. References to website addresses are provided as inactive textual references only. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers, including Valvoline, that file electronically with the SEC. 10


  • Page 25

    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 57) 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 58) 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 51) is Senior Vice President, Chief Legal Officer and Corporate Secretary of Valvoline since January 2017. Ms. O’Daniel served as General Counsel and Corporate Secretary from September 2016 to January 2017. She served as Lead Commercial Counsel of Valvoline from April 2014 to September 2016 and as Litigation Counsel of Valvoline from July 2007 to April 2014. THOMAS A. GERRALD II (age 54) 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 68) is Senior Vice President and 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 46) is Senior Vice President and Chief Marketing Officer of Valvoline since September 2016. Ms. Matheys served as Senior Vice President, Do-It-Yourself Channels, of Valvoline from August 2013 to September 2016 and as Vice President, Global Brands, of Valvoline from September 2012 to August 2013. CRAIG A. MOUGHLER (age 61) is Senior Vice President, International & Product Supply of Valvoline since September 2016. Mr. Moughler served as Senior Vice President, International of Valvoline from October 2002 to September 2016. BRAD A. PATRICK (age 54) is Chief People and Communication Officer of Valvoline since January 2018. Prior to joining Valvoline, Mr. Patrick was Executive Vice President and Chief Human Resources Officer of Shearer’s Snacks from November 2015 to January 2018 and held the role of Executive Vice President and Chief Human Resources Officer at Tempur Sealy International, Inc. from December 2010 to November 2015. ANTHONY R. PUCKETT (age 56) is Senior Vice President and President, Quick Lubes of Valvoline since September 2016. He served as President of Valvoline Instant Oil Change from August 2007 to September 2016. DAVID J. SCHEVE (age 43) is Chief Accounting Officer and Controller of Valvoline since October 2016. Prior to joining Valvoline, Mr. Scheve was Chief Financial Officer and Vice President of Finance of Southern Graphic Systems from March 2014 to October 2016 and its Global Corporate Controller from June 2007 to March 2014. 11


  • Page 26

    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 The competitive nature of Valvoline’s markets or other factors may delay or prevent it from passing-through 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, have in the past and may in the future, negatively impact Valvoline’s costs, results of operations and the valuation of its inventory. Valvoline may not always be able to raise prices in response to increased costs of raw materials or may experience a lag in passing-through such cost increases, as the ability to pass on the costs of such price increases is largely 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 or may face increased costs from alternative suppliers. For base oils, Valvoline’s suppliers are primarily large oil 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, severe weather conditions, climate change or significant changes in trade regulations. 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 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 international 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, such as the entry of new private label competitors, 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 flat to declining markets and leveraging market opportunities are not successful, its results of operations could be negatively affected. Demand for Valvoline’s products and services could be adversely affected by consumer spending trends, declining economic conditions, industry trends 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 12


  • Page 27

    technology, including the adoption rate of electric or other alternative engine technologies, changing automotive 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 vehicle 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. Valvoline has set aggressive growth goals for its business, including increasing sales, cash flow, market share, margins and number of Quick Lubes stores, 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 to meet its long-term strategic objectives and improve shareholder value. Valvoline’s failure to meet one or more of these goals or objectives could 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, entry of new competitors, 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. 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 Valvoline and 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 uses information technology systems to conduct business, and a cyber security threat, privacy/data breach, or failure of a key information technology system could adversely affect Valvoline’s business and reputation. Valvoline relies on its information technology systems, including systems which are managed or provided by third-party service providers, to conduct its business. Despite steps Valvoline takes to mitigate or eliminate them, cyber-security threats to its information technology systems are increasing and becoming more advanced and breaches could occur as a result of the activity of hackers or error or misconduct by our employees, contractors or third-party service providers. A breach of or failure 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 could also face fines and penalties should it fail to adequately notify affected parties pursuant to new and evolving privacy laws in various jurisdictions in which it does business. Valvoline’s significant global operations subject it to risks, which could adversely affect its business, financial condition and results of operations. Sales from the International business segment accounted for 26% of Valvoline’s sales for fiscal 2018. Valvoline expects sales from international markets to continue to grow and 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 13


  • Page 28

    provided in other countries. In addition, other countries may impose additional withholding taxes or otherwise tax Valvoline’s income, or adopt other restrictions on trade or investment, including currency exchange controls. The imposition of new or additional tariffs or other significant changes in trade regulations are also risks that could impair Valvoline’s financial performance. For example, the United States, China and the European Union (“EU”) have all recently imposed or indicated the possibility of imposing new or additional tariffs on foreign goods. If Valvoline is subject to new or additional tariffs, such as, in China, where Valvoline products became subject to additional tariffs in fiscal 2018, operating costs could increase and Valvoline may not be able to recapture those costs. In addition, if Valvoline is unable to successfully grow its brand internationally, it may not be able to achieve its international growth plans, which could negatively impact sales, profitability and cash flow. 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 other legal systems. There is a risk that non-U.S. 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. 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 global operations will not have an adverse effect on its business, financial condition or results of operations. 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 2018, 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 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. 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 45% of Valvoline’s total sales in fiscal 2018. 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 2018 sales and 52% of Core North America’s outstanding trade accounts receivable as of September 30, 2018. NAPA Auto Parts accounted for greater than 17% of Core North America’s fiscal 2018 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. The consolidation of distributors, loss of a relationship with a distributor, significant disagreement with a distributor, or significant deterioration in the financial condition of a distributor could also have a material adverse effect on Valvoline’s financial condition, results of operations or cash flows. 14


  • Page 29

    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. 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. 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 the Quick Lubes business segment are an important element of Valvoline’s overall growth strategy. In addition, building strategic alliances for distribution and manufacturing, particularly in international markets, including through joint venture partnerships, product distribution and toll manufacturing arrangements, are also important element of Valvoline’s 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 Quick Lubes 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: inability to fully execute plans to add stores to Valvoline's Quick Lubes business, 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 achieve expected synergies or realize expected financial or strategic benefits from an acquisition; 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 non-U.S. 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 15


  • Page 30

    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. The success of Valvoline’s growth initiatives depends on its ability to successfully develop and implement digital platforms to better engage customers and consumers. 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 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, retain and develop key personnel, and 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, particularly in the Quick Lubes business. This risk is also substantial in developing international markets that 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, Valvoline relies heavily on its senior management team, and 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. 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, climate change, 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, deliver products and services to its customers, or receive raw materials from suppliers; 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. 16


  • Page 31

    The business model for Valvoline’s Quick Lubes business, including its dependence on franchised oil change centers, presents a number of risks. The Quick Lubes business, VIOC and Great Canadian Oil Change, is made up of an international 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 63% of Quick Lube system stores as of September 30, 2018. 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, store closures, delayed or reduced payments to Valvoline and reduced growth in the number of Quick Lube 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 Quick Lube 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. Although Valvoline should not be liable for the acts of its independently owned franchisees, it is possible that a court may not recognize the legal distinction between Valvoline and its franchisees and hold Valvoline liable for a franchisee’s violation of applicable laws or regulations. The ownership mix of company-owned and franchised Quick Lube 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 Quick Lube stores. The growth and performance of Valvoline’s lubricants and other product lines depends in large part on the performance of its Quick Lubes business, potentially amplifying the negative effect of the other risks related to the Quick Lubes business model. Poor performance by Quick Lube stores would negatively impact revenues and income for other Valvoline reporting segments. 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, regulations related to the protection and use 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 and compliance with the EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals, or 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 more than 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. 17


  • Page 32

    Although Valvoline has implemented policies and procedures in these areas, it cannot be sure 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 be sure 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. Data protection requirements could increase operating costs and requirements and a breach in information privacy or other related risks could negatively impact operations. Valvoline is subject to federal, state, and non-U.S. laws, directives, and regulations relating to the collection, use, retention, disclosure, security and transfer of personal data relating to its customers and employees. These laws, directives and regulations, and their interpretation and enforcement continue to evolve and may be inconsistent from jurisdiction to jurisdiction. For example, the General Data Protection Regulation (“GDPR”), which went into effect in the European Union on May 25, 2018, applies to all of Valvoline’s activities conducted from an establishment in the European Union and may also apply to related products and services that Valvoline offers to customers in the European Union. Complying with the GDPR and similar emerging and changing privacy and data protection requirements may cause Valvoline to incur substantial costs. Noncompliance with these legal obligations relating to privacy and data protection could result in penalties, legal proceedings by governmental entities or others, and significant legal and financial exposure and could affect its ability to retain and attract customers. Any failure or perceived failure by Valvoline or any third parties with which it does business to comply with these laws, rules and regulations, or with other obligations to which Valvoline may be or become subject, may result in actions against Valvoline by governmental entities, private claims and litigation, fines, penalties or other liabilities. Any such action would be expensive to defend, damage Valvoline’s reputation and adversely affect business, operating results, financial position and cash flows. 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. Joint ventures, particularly Valvoline’s existing 50/50 joint ventures with Cummins in India and China, are an important part of its growth strategy internationally. In these joint ventures, Valvoline shares influence over the operation of the joint venture and its assets, but does not have a controlling interest or vote. Therefore, joint ventures may involve risks such as the possibility that a joint venture partner 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. 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. 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, joint venture partner 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. 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 more than 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. Changes in how United States multinational corporations are taxed on earnings, including changes in interpretations and the issuance of additional guidance surrounding recently enacted U.S. tax reform legislation, could adversely affect Valvoline’s business, financial condition or results of operations. 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 18


  • Page 33

    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 to or be registered by Valvoline, 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. Furthermore, the terms of patents are finite and the patents that Valvoline owns will eventually expire after the statutory term of patent protection ends in the jurisdiction where such patents are issued. Despite these measures, Valvoline’s intellectual property rights may still not be protected in a meaningful manner, challenges to contractual rights could arise and third parties could copy or otherwise obtain and use Valvoline’s intellectual property without authorization, including its trade secrets and other confidential intellectual property. 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, cause Valvoline to lose such trade secrets, 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 other 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 or other intellectual property proceedings of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, or loss of rights in Valvoline’s intellectual property, any of which could adversely affect Valvoline’s business, financial condition and results of operations. Valvoline’s substantial indebtedness may adversely affect its business, results of operations and financial condition. Valvoline has substantial indebtedness and financial obligations. As of September 30, 2018, Valvoline had outstanding indebtedness of approximately $1.3 billion, with a borrowing capacity remaining of $328 million. Valvoline may incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other general corporate 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. 19


  • Page 34

    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’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 2018 and 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 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. 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. 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 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 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. 20


  • Page 35

    Valvoline has incurred, and will continue to incur, costs as a result of 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 non-U.S. 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 subject to payment-related risks for company-owned and franchised Quick Lube stores. At company-owned and franchised Quick Lube 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 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 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 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. 21


  • Page 36

    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, local or non-U.S. 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 (the “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, which occurred on May 12, 2017, unless it were established that such 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 financial condition. Valvoline has agreed to numerous restrictions to preserve the tax-free nature of the Distribution, which may reduce its strategic and operating flexibility. Valvoline 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. 22


  • Page 37

    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 (i) Distribution that arise on audit or examination and are directly attributable to Valvoline or (ii) IPO that arise on audit or examination and are directly attributable to neither the Valvoline business nor the Chemicals business; and (b) certain non-U.S. 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 fully separated from Ashland since May 2017, and its financial results are not necessarily representative of the results it would have achieved on a stand-alone basis prior to May 2017 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 or billed 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. 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 agreed to indemnify Valvoline for certain liabilities. However, third parties could also seek to hold Valvoline responsible for any of the liabilities that Ashland 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. 23


  • Page 38

    ITEM 1B. UNRESOLVED STAFF COMMENTS None. 24


  • Page 39

    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 462 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 Santa Fe Springs, California 149,000 Blending, Packaging & Warehouse Leetsdale, Pennsylvania 125,000 Warehouse and Distribution Cincinnati, Ohio 125,000 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, packaging, 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 11 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 From time to time, Valvoline is party to lawsuits, claims and other legal proceedings that arise in the ordinary course of business. Many of these legal matters involve complex issues of law and fact and may proceed for protracted periods of time. The Company’s legal proceedings are reviewed on an ongoing basis to establish liabilities for the outcome of such matters where losses are determined to be probable and reasonably estimable and to provide disclosure of matters for which management believes a material loss is at least reasonably possible. There are certain claims and legal proceedings pending where loss is not determined to be probable or reasonably estimable, and therefore, accruals have not been made. As disclosed within the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K, the Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable. Although the ultimate resolution of these matters cannot be predicted with certainty and there can be no assurances that the actual amounts required to satisfy liabilities from these matters will not exceed the amounts reflected in the consolidated financial statements, based on information available at this time and taking into account established accruals for estimated liabilities, it is the opinion of management that such pending claims or proceedings are not reasonably likely to have a material adverse effect on its financial position, results of operations, or cash flows. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 25


  • Page 40

    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 IPO, there was no public market for Valvoline’s common stock. As of November 16, 2018, there were approximately 10,500 holders of Valvoline common stock. Dividend policy 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, 2018. 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. Valvoline Inc. Comparison of 2-Year Cumulative Total Return Performance 140 120 100 80 60 09/30/16 12/31/16 03/31/17 06/30/17 09/30/17 12/31/17 03/31/18 06/30/18 09/30/18 VVV S&P Mid Cap 400 Index S&P Mid Cap 400 Consumer Staples Index Comparison of cumulative total returns 9/30/2016 9/30/2017 9/30/2018 Valvoline Inc. $ 100 $ 101 $ 94 S&P Mid Cap 400 Index $ 100 $ 118 $ 134 S&P Mid Cap 400 Consumer Staples Index $ 100 $ 100 $ 107 26


  • Page 41

    Purchases of Company common stock During the three months ended September 30, 2018, the Company repurchased 4.6 million shares of its common stock for $101 million pursuant to the Board of Directors authorization on January 31, 2018 to repurchase up to $300 million of common stock through September 30, 2020. As of September 30, 2018, $75 million remains available for share repurchases under this authorization. Share repurchase activity during the three months ended September 30, 2018 was as follows: Dollar value of Total number of shares that may shares purchased a yet be purchased Total number part of publicly under the plans of shares Average price announced plans or programs (in Monthly period purchased (1) paid per share or programs millions) (2) July 1, 2018 to July 31, 2018 1,950,068 $ 21.81 1,935,711 $ 133 August 1, 2018 to August 31, 2018 2,289,122 $ 21.56 2,289,122 $ 84 September 1, 2018 to September 30, 2018 410,666 $ 21.65 410,666 $ 75 Total 4,649,856 $ 21.65 4,635,499 (1) Total number of shares purchased includes both shares repurchased under the Board of Directors authorization described above, as well as vested restricted stock awards purchased to cover withholding taxes. (2) Further information regarding the Company’s share repurchases can be found in Note 17 to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. 27


  • Page 42

    ITEM 6. SELECTED FINANCIAL DATA Valvoline Inc. and Consolidated Subsidiaries Five-Year Selected Financial Information (a) For the years ended September 30 (In millions except per share data) 2018 2017 2016 2015 2014 Summary of operations Sales $ 2,285 $ 2,084 $ 1,929 $ 1,967 $ 2,041 Gross profit $ 806 $ 776 $ 748 $ 700 $ 648 Operating income $ 395 $ 394 $ 396 $ 360 $ 316 Net income (b) $ 166 $ 304 $ 273 $ 196 $ 173 Common stock information Basic earnings per share (c) $ 0.84 $ 1.49 $ 1.60 $ 1.15 $ 1.02 Diluted earnings per share (c) $ 0.84 $ 1.49 $ 1.60 $ 1.15 $ 1.02 Dividends per common share $ 0.30 $ 0.20 $ — $ — $ — Cash flow information Cash flows from operating activities $ 320 $ (130) $ 311 $ 330 $ 170 Less: Additions to property, plant and equipment (93) (68) (66) (45) (37) Plus: Discretionary contributions to pension plans — 394 — — — Free cash flow (d) $ 227 $ 196 $ 245 $ 285 $ 133 As of September 30 (In millions) 2018 2017 2016 2015 2014 Balance sheet information Total assets $ 1,854 $ 1,915 $ 1,825 $ 978 $ 1,083 Long-term debt and capital lease obligations (including current portion) $ 1,342 $ 1,075 $ 749 $ 4 $ 4 Stockholders’ (deficit) equity $ (358) $ (117) $ (330) $ 617 $ 725 For the years ended September 30 Unaudited (In millions) 2018 2017 2016 2015 2014 Other financial and operational data Lubricant sales volume (gallons) 181.9 179.7 174.5 167.4 162.6 Company-owned same-store sales growth (e) 8.7% 7.0% 6.2% 7.5% 4.5% Franchised same-store sales growth (e)(f) 8.0% 7.5% 8.0% 7.8% 5.5% Combined same-store sales growth (e)(f) 8.3% 7.4% 7.5% 7.7% 5.2% EBITDA (g) $ 449 $ 574 $ 468 $ 335 $ 301 Adjusted EBITDA (g) $ 466 $ 447 $ 440 $ 412 $ 359 (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 Contribution of assets and liabilities from Ashland in fiscal 2016, an IPO in fiscal 2016, establishing a stand-alone capital structure in fiscal 2016, and the separation from Ashland in fiscal 2017. (b) Net income includes the impact of immediately recognizing actuarial gains and losses for defined benefit pension and other postretirement plan remeasurements. During the years ended September 30, Valvoline recognized a remeasurement loss of $38 million in 2018, a gain of $68 million in 2017, a gain of $18 million in 2016, a loss of $46 million in 2015, and a loss of $61 million in 2014. (c) The weighted average common shares outstanding for the years ended September 30, 2016, 2015 and 2014 are based on the 170 million shares issued to Ashland in the Contribution. (d) 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 mandatory debt repayments. 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 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 28


  • Page 43

    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. (e) 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. (f) Valvoline franchisees are distinct legal entities and Valvoline does not consolidate the results of operations of its franchisees. (g) In addition to net income determined in accordance with U.S. GAAP, Valvoline evaluates operating performance using certain non-GAAP measures including Earnings before interest, taxes, depreciation and amortization (“EBITDA”), which management defines as net income/loss, 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 key items and net pension and other postretirement plan income/expense. Key items consist of income or expenses associated with certain unusual, infrequent or non-operational income or expenses not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods and are also often related to legacy matters or market-driven events that do not have an immediate, corresponding impact on the Company’s ongoing performance. Key items may consist of adjustments related to: the impairment of an equity investment; legacy businesses, including the separation from Ashland and associated impacts of related indemnities; significant acquisitions or dispositions, restructuring-related matters, and other matters that are non-operational or unusual in nature. Net pension and other postretirement plan income/expense includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global financial markets (in particular, interest rates) and are outside the operational performance of the business and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA will continue to include pension and other postretirement service costs related to current employee service as well as the costs of other benefits provided to employees for current service. 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. 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) 2018 2017 2016 2015 2014 Net income $ 166 $ 304 $ 273 $ 196 $ 173 Income tax expense 166 186 148 101 91 Net interest and other financing expenses 63 42 9 — — Depreciation and amortization 54 42 38 38 37 EBITDA 449 574 468 335 301 Net pension and other postretirement plan (income) expense — (138) (35) 37 52 Legacy and separation-related expenses, net 14 11 6 — — Acquisition and divestiture-related losses 3 — 1 26 — Impairment of equity investment — — — 14 — Restructuring — — — — 6 Adjusted EBITDA $ 466 $ 447 $ 440 $ 412 $ 359 29


  • Page 44

    Index to Management’s Discussion and Analysis of Financial Condition and Results of Operations Page Business Overview 30 Results of Operations - Consolidated Review 33 Results of Operations - Reportable Segment Review 36 Financial Position, Liquidity and Capital Resources 41 Off-Balance Sheet Arrangements 45 New Accounting Pronouncements 45 Critical Accounting Policies 45 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 marketer and supplier of engine and automotive maintenance products and services. Established in 1866, Valvoline’s heritage spans over 150 years, during which it has developed powerful name recognition across multiple product and service channels. 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. 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 1,242 franchised and company-owned stores. Valvoline also has a strong international presence with products sold in more than 140 countries. Valvoline serves its customer base through its 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'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. FISCAL 2018 OVERVIEW The following were the significant events for fiscal 2018, each of which is discussed more fully in this Annual Report on Form 10-K: Growth in both sales and earnings in Quick Lubes was driven by organic same-store sales growth and an overall increase in the number of stores from both acquisitions, including Quick Lubes’ first international acquisition in Canada and new store openings. During fiscal 2018, Quick Lubes grew system-wide same-store sales by 8.3%, marking the 12th consecutive year of system-wide same-store sales growth. This growth was the result of a balanced contribution from both increased average ticket and number of transactions due to effective marketing and customer retention programs, excellent in-store execution, and favorable pricing and premium mix. Additionally, the Quick Lubes system added 115 net new stores in fiscal 2018, which included organic and inorganic growth in company-owned service center stores, as well as expansion in franchised service center stores. In International, volumes were up 2% for the year and income from operations grew 11%, which was driven by joint venture contributions, favorable currency exchange benefits, cost management, as well as the success of passing through raw material inflation. Core North America faced significant raw material cost inflation and competitive pressure during fiscal 2018, but grew premium mix and passed through price increases in response to higher costs. Though the environment was challenging during 30


  • Page 45

    the fiscal year, the Core North America business generated earnings that supported the Company’s growth in both the Quick Lubes and International reportable segments. Valvoline returned $383 million to its shareholders during the year through dividends and share repurchases. During fiscal 2018, the Company paid $58 million, or $0.298 per common share, in cash dividends and repurchased 15 million shares of Valvoline common stock for $325 million. During fiscal 2018, tax reform legislation was enacted in the U.S. and in Kentucky, where Valvoline is incorporated. While this legislation is expected to ultimately benefit Valvoline with a lower effective tax rate and decreased cash taxes, the Company recorded $78 million of additional income tax expense during the fiscal year primarily to remeasure net deferred tax assets at lower corporate tax rates and recognize deemed repatriation taxes as a result of the new tax legislation. BUSINESS STRATEGY Valvoline’s key business and growth strategies include: Accelerating Quick Lube unit growth through organic service center expansion and opportunistic acquisitions, while enhancing service center store-level performance; Improving execution and continuing to focus investment in key emerging markets where demand is growing; Strengthening and expanding Valvoline’s existing business by improving distribution channels and increasing penetration of Valvoline’s full product portfolio; Broadening electric vehicle (“EV”) capabilities by developing relationships with OEMs and leveraging innovation in the development of future EV products and light services in direct and adjacent markets; and Investing in talent and technology to develop Valvoline’s global hands-on expert capabilities and culture to drive speed and efficiency in both customer-facing and back-office critical processes. Use of Non-GAAP Measures To aid in the understanding of Valvoline’s ongoing business performance, certain items within this document are presented on an adjusted, non-GAAP basis. These non-GAAP measures are not defined within U.S. GAAP and do not purport to be alternatives to net income/loss 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/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization; Adjusted EBITDA, which management defines as EBITDA adjusted for key items, as further described below, and net pension and other postretirement plan income; 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, and management believes the use of non-GAAP measures 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, Adjusted EBITDA and free cash flow. EBITDA, Adjusted EBITDA, and free cash flow provide a supplemental presentation of Valvoline’s operating performance. For a reconciliation of non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below. Due to depreciable assets associated with the nature of the Company’s operations and interest costs associated with Valvoline’s capital structure, management believes EBITDA is an important supplemental measure to evaluate the Company’s operating results between periods on a comparable basis. Management believes Adjusted EBITDA provides investors with a meaningful supplemental presentation of Valvoline’s operating performance. Adjusted EBITDA excludes the impact of the following: 31


  • Page 46

    Key items - Key items consist of income or expenses associated with certain unusual, infrequent or non-operational income or expenses not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods. Key items may consist of adjustments related to: the impairment of an equity investment; legacy businesses, including the separation from Ashland and associated impacts of related indemnities; significant acquisitions or dispositions, restructuring-related matters, and other matters that are non-operational or unusual in nature. Key items are considered by management to be outside the comparable operational performance of the business and are also often related to legacy matters or market-driven events that are not directly related to the underlying business and do not have an immediate, corresponding impact on the Company’s ongoing performance. Details with respect to the composition of key items recognized during the respective periods presented herein are set forth below in the “EBITDA and Adjusted EBITDA” section of “Results of Operations” that follows. Net pension and other postretirement plan income - Net pension and other postretirement plan income includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global financial markets (in particular, interest rates) and are outside the operational performance of the business and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA will continue to include pension and other postretirement service costs related to current employee service as well as the costs of other benefits provided to employees for current service. Management uses free cash flow as an additional non-GAAP metric of cash flow generation. By including capital expenditures and certain other adjustments as applicable, 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 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, net income and cash flows from operating activities should primarily be relied upon as determined in accordance with U.S. GAAP and EBITDA, Adjusted EBITDA, and free cash flow should be used only as supplements. In evaluating EBITDA, Adjusted EBITDA, and free cash flow, one should be aware that in the future Valvoline may incur expenses/income 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. 32


  • Page 47

    RESULTS OF OPERATIONS Consolidated review The following table summarizes the results of the Company’s operations for the years ended September 30: 2018 2017 2016 (In millions) % of Sales % of Sales % of Sales Sales $ 2,285 100.0% $ 2,084 100.0% $ 1,929 100.0% Gross profit $ 806 35.3% $ 776 37.2% $ 748 38.8% Net operating expenses $ 411 18.0% $ 382 18.3% $ 352 18.2% Operating income $ 395 17.3% $ 394 18.9% $ 396 20.5% Net income $ 166 7.3% $ 304 14.6% $ 273 14.2% Sales Fiscal 2018 sales increased $201 million, or 10% compared to fiscal 2017, and fiscal 2017 sales increased $155 million, or 8% compared to fiscal 2016. The following table provides a reconciliation of the changes: 2018 2017 (In millions) Change Change Pricing $ 76 $ 37 Volume and mix 63 86 Currency exchange 20 2 Acquisitions 42 30 Change in sales $ 201 $ 155 2018 compared to 2017 Key drivers of the increase in sales from the prior year were increased product pricing, favorable premium mix, acquisitions of Quick Lubes service center stores, as well as overall increased volumes. During fiscal 2018, lubricant gallons sold increased 1% to 181.9 million. In addition, there were favorable changes in product mix, with increases in the percentage of premium lubricant sales within the Core North America and Quick Lubes reportable segments, as well as favorable currency exchange. 2017 compared to 2016 The primary drivers of the increase in sales were higher volumes and increased product pricing. Favorable changes in product mix with increases in the percentage of sales for premium lubricants in Core North America and Quick Lubes and favorable currency exchange increased sales. During fiscal 2017, lubricant gallons sold increased 3% to 179.7 million. Acquisitions within the Quick Lubes reportable segment also increased sales during fiscal 2017. The changes to reportable segment sales and the drivers thereof are discussed in further detail in “Reportable Segment Review” below. Gross profit Gross profit increased $30 million in fiscal 2018 compared to fiscal 2017, and gross profit increased $28 million in fiscal 2017 compared to fiscal 2016. The following table provides a reconciliation of the changes: 2018 2017 (In millions) Change Change Volume and mix $ 19 $ 36 Acquisitions 10 6 Currency exchange 5 1 Price and cost (4) (15) Change in gross profit $ 30 $ 28 33


  • Page 48

    2018 compared to 2017 The increase in gross profit was primarily driven by overall favorable changes in volume and premium mix, acquisitions of Quick Lubes service center stores, and favorable currency exchange. These increases were partially offset by the lag between cost and price increases during fiscal 2018. Overall, gross profit benefited from performance in the Quick Lubes and International reportable segments, which was partially offset by margin pressures driven by raw material cost inflation and competitive pressures in the Core North America reportable segment. Gross profit margin was 35.3% for fiscal 2018 compared to 37.2% for fiscal 2017. The decrease in gross profit margin was primarily due to higher raw material costs, some of which had been passed through pricing, but had a dilutive effect to margin rate. 2017 compared to 2016 The increase in gross profit was primarily driven by overall favorable volume, changes in mix and acquisitions of Quick Lubes service center stores. These increases were partially offset by the lag between cost and price increases primarily due to base oil price increases in fiscal 2017. Overall, gross profit benefited from performance in the Quick Lubes and International reportable segments, which was partially offset by margin pressures driven by raw material inflation in the Core North America reportable segment. Gross profit margin was 37.2% for fiscal 2017 compared to 38.8% for fiscal 2016. The decrease in gross profit margin was primarily due to higher raw material costs during 2017. The changes to reportable segment gross profit and the drivers thereof are discussed in further detail in “Reportable Segment Review” below. Net operating expenses The table below provides details of the components of net operating expenses during the years ended September 30: 2018 2017 2016 (In millions) % of Sales % of Sales % of Sales Selling, general and administrative expenses $ 430 18.8 % $ 396 19.0 % $ 365 18.9 % Legacy and separation-related expenses, net 14 0.6 % 11 0.5 % 6 0.3 % Equity and other income, net (33) (1.4)% (25) (1.2)% (19) (1.0)% Net operating expenses $ 411 18.0 % $ 382 18.3 % $ 352 18.2 % 2018 compared to 2017 Selling, general and administrative expenses increased $34 million during fiscal 2018 compared to 2017. Acquisitions, depreciation and amortization as well as currency exchange contributed $14 million to the year-over-year increase. The remaining increases were primarily the result of planned investments in the Company’s teams and shared infrastructure expenses necessary to operate independently, which were phased in during fiscal 2017 through completion of Valvoline’s separation from Ashland in the third fiscal quarter of 2017. Legacy and separation-related expenses, net increased $3 million during fiscal 2018 compared to 2017. This increase was primarily due to costs recognized related to a legacy Ashland multiemployer pension plan and costs associated with the Tax Matters Agreement with Ashland, offset in part by the decline in separation costs incurred in fiscal 2017 to complete the separation from Ashland in May 2017. Equity and other income, net increased $8 million during fiscal 2018 compared to 2017 and was primarily driven by an increase in equity and royalty income of $3 million related to the strong performance from the Company’s unconsolidated joint ventures. The remaining increase was primarily attributed to the sale of two Quick Lube stores in fiscal 2018 that increased other income by approximately $3 million. 2017 compared to 2016 Selling, general and administrative expenses increased $31 million in fiscal 2017 compared to 2016. This increase was primarily driven by the spend for people and professional assistance necessary to operate independently and establish Valvoline as a stand-alone 34


  • Page 49

    company that more than offset a decrease in allocated corporate costs from the Company’s former parent. In addition, costs increased related to acquisitions and currency exchange. Legacy and separation-related expenses, net increased $5 million during fiscal 2017 compared to 2016. This increase was primarily driven by increased separation costs of $26 million due to the separation from Ashland during 2017. Offsetting this increase was a $16 million benefit for a reduction in amounts due to Ashland under the Tax Matters Agreement as a result of Ashland’s expected utilization of Valvoline tax attributes in the Ashland group income tax returns and a $5 million benefit related to a change in estimate for legacy Ashland insurance reserves. Equity and other income, net increased by $6 million during fiscal 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. Net pension and other postretirement plan income 2018 compared to 2017 Net pension and other postretirement plan income decreased $138 million in fiscal 2018 from the prior year primarily due to a loss on pension and other postretirement plan remeasurement of $38 million compared to a gain of $68 million in fiscal 2017. This change was largely attributed to the lower than expected return on plan assets, which was partially offset by the benefit obligation actuarial gain for increases in discount rates and reduced mortality improvements. In addition, recurring pension and other postretirement plan non-service income declined by $32 million in fiscal 2018 primarily related to the pension de-risking actions taken by the Company in late fiscal 2017 to shift the U.S. qualified pension plan’s target asset allocation toward more fixed income securities and better match the asset duration to that of the pension plan obligations. 2017 compared to 2016 Net pension and other postretirement plan income for fiscal 2017 increased $103 million compared to 2016. Specifically, during 2017, remeasurement gains of $68 million were recognized along with recurring pension and postretirement plan non-service income of $70 million. This compared to remeasurement gains of $18 million and non-service income of $17 million in fiscal 2016. The increased remeasurement gains in fiscal 2017 were largely attributed to the higher than expected return on assets, the benefit obligation actuarial gain for increases in discount rates and reduced mortality improvements, and the effect of the other postretirement benefit plan amendment to reduce retiree medical benefits that was effective in fiscal 2017. Net interest and other financing expenses 2018 compared to 2017 Net interest and other financing expenses increased by $21 million during fiscal 2018 compared to 2017. The increase in interest expense was attributed to higher outstanding debt during 2018 compared to 2017, primarily related to the borrowing to fund contributions to the U.S. qualified pension plan in the aggregate principal amount of $400 million during the fourth fiscal quarter of 2017 and increased borrowings under the trade receivables securitization and revolving credit facilities during 2018. 2017 compared to 2016 Net interest and other financing expenses increased by $33 million during fiscal 2017 compared to 2016. This increase was largely driven by the timing of Valvoline’s debt structure that was put into place in late fiscal 2016 preceding the IPO, which included the term loan borrowing and the issuance of senior unsecured notes with an aggregate principal amount of $375 million that drove higher year over year interest costs. In addition, there was an increase in interest associated with higher outstanding debt in 2017 related to $75 million in new borrowings on the accounts receivable securitization facility entered into in the first fiscal quarter of 2017 and the issuance of notes in the aggregate principal amount of $400 million in the fourth fiscal quarter of 2017. Income tax expense 2018 compared to 2017 Income tax expense was $166 million for fiscal 2018, or an effective tax rate of 50.0%, compared to expense of $186 million, or an effective tax rate of 38.0% for fiscal 2017. The increase in the effective tax rate is primarily due to the enactment of U.S. and Kentucky tax reform legislation in fiscal 2018, which resulted in a net increase in income tax expense of approximately $78 million 35


  • Page 50

    largely related to remeasurement of net deferred tax assets that more than offset benefits of the related reduction in the federal income tax rate for fiscal 2018. 2017 compared to 2016 Income tax expense for fiscal 2017 was $186 million, or an effective tax rate of 38.0%, compared to an expense of $148 million, or an effective tax rate of 35.2% for 2016. In fiscal 2017, the effective tax rate was impacted by increased net pension and other postretirement plan income that generated income in higher tax rate jurisdictions, 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 from the $394 million voluntary contribution to the U.S. qualified pension plan, partially offset by a benefit from a state valuation allowance release. EBITDA and Adjusted EBITDA The following table reconciles net income to EBITDA and Adjusted EBITDA for the years ended September 30: (In millions) 2018 2017 2016 Net income $ 166 $ 304 $ 273 Income tax expense 166 186 148 Net interest and other financing expenses 63 42 9 Depreciation and amortization 54 42 38 EBITDA 449 574 468 Net pension and other postretirement plan income — (138) (35) Legacy and separation-related expenses, net 14 11 6 Acquisition and divestiture-related losses 3 — 1 Adjusted EBITDA (a) $ 466 $ 447 $ 440 (a) Net pension and other postretirement plan income includes remeasurement gains and losses and recurring non-service pension and other postretirement net periodic income, which consists of interest cost, expected return on plan assets and amortization of prior service credit. Refer to Note 13 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further details. The increase in Adjusted EBITDA of $19 million in fiscal 2018 was primarily due to the performance of the Quick Lubes and International reportable segments that had favorable changes in volume, premium mix improvements in Core North America and Quick Lubes, acquisitions in Quick Lubes, as well as the benefits from currency exchange and increased equity and other income, partially offset by higher planned investments in selling, general and administrative expense. The increase in Adjusted EBITDA of $7 million from fiscal 2016 to 2017 was primarily due to solid performance by the reportable segments, led by Quick Lubes, and offset by investments in the Company’s stand-alone public company infrastructure. Reportable Segment Review Valvoline’s business is managed within the following three reportable segments: Core North America - sells engine and automotive maintenance products in the United States and Canada to retailers, installers and heavy-duty customers to service vehicles and equipment. Quick Lubes - services the passenger car and light truck quick lube market in the United States and Canada through company-owned and independent franchised retail quick lube service center stores, as well as Express Care stores where independent operators service vehicles with Valvoline products. International - sells engine and automotive maintenance products in approximately 140 countries outside of the United States and Canada for the maintenance of consumer and commercial vehicles and equipment. 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’s reportable segments are measured for profitability based on operating income; therefore, Valvoline does not generally allocate items to each reportable segment below operating income, such as net pension and other postretirement income, interest expense or income tax expense. Valvoline allocates all items above operating income to its reportable segments except for certain significant corporate and 36

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!