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As filed with the Securities and Exchange Commission on May 31, 2016

Registration No. 333-             

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Valvoline Inc.

(Exact name of registrant as specified in its Charter)

 

 

 

Kentucky   2992   30-0939371

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

3499 Blazer Parkway

Lexington, KY 40509

(859) 357-7777

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

 

 

Samuel J. Mitchell, Jr.

Chief Executive Officer

Valvoline Inc.

3499 Blazer Parkway

Lexington, KY 40509

(859) 357-7777

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With a copy to:

 

Peter J. Ganz

Senior Vice President, General Counsel and Secretary

Ashland Inc.

50 E. RiverCenter Boulevard

P.O. Box 391

Covington, KY 41012-0391

(859) 815-3333

 

Susan Webster

Thomas E. Dunn

Andrew J. Pitts

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, NY 10019

(212) 474-1000

 

Jonathan M. DeSantis

Ilir Mujalovic

Shearman & Sterling LLP

599 Lexington Avenue

New York, NY 10022

(212) 848-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)

 

Large Accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common stock, par value $0.01 per share

  $100,000,000   $10,070

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933.
(2) Includes the aggregate offering price of shares of common stock that the underwriters have the option to purchase.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated May 31, 2016

PROSPECTUS

            Shares

Valvoline Inc.

Common Stock

 

 

This is Valvoline Inc.’s initial public offering. We are selling              shares of our common stock.

We expect the public offering price to be between $          and $          per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol “VVV.”

 

 

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 19 of this prospectus.

 

 

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discount and commissions(1)

   $                    $                

Proceeds, before expenses, to us

   $                    $                

 

(1) See “Underwriting” section beginning on page 167 of this prospectus for additional information regarding total underwriter compensation.

The underwriters may also exercise their option to purchase up to an additional              shares from us, at the public offering price, less the underwriting discount, to cover over allotments for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2016.

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch   Citigroup   Morgan Stanley

 

 

 

 

 

The date of this prospectus is                     , 2016.


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TABLE OF CONTENTS

 

     Page  

For Investors Outside the United States

     ii   

Trademarks, Trade Names and Service Marks

     ii   

Industry and Market Data

     ii   

Prospectus Summary

     1   

Risk Factors

     19   

Cautionary Statement Regarding Forward-Looking Statements

     40   

Use of Proceeds

     41   

Dividend Policy

     42   

Capitalization

     43   

Dilution

     44   

Selected Combined Financial Data

     46   

Unaudited Pro Forma Condensed Combined Financial Statements

     49   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     57   

Business

     89   

Management

     108   

Executive Compensation

     112   

Certain Relationships and Related Party Transactions

     148   

Principal Stockholders

     153   

Description of Indebtedness

     154   

Description of Capital Stock

     155   

Shares Eligible for Future Sale

     162   

Material U.S. Federal Income Tax Consequences for Non-U.S. Holders of Our Common Stock

     164   

Underwriting

     167   

Validity of Common Stock

     175   

Experts

     175   

Where You Can Find More Information

     175   

Index to Financial Statements

     F-1   

We have not and the underwriters have not authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2016 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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FOR INVESTORS OUTSIDE THE UNITED STATES

Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

We use various trademarks, trade names and service marks in our business, including ValvolineTM, Valvoline Instant Oil ChangeSM, MaxLifeTM, SynPowerTM and Premium BlueTM. For convenience, we may not include the SM, ® or ™ symbols, but such omission is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by law. Any other trademarks, trade names or service marks referred to in this prospectus are the property of their respective owners.

INDUSTRY AND MARKET DATA

This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of the included information. Statements as to our ranking, market position and market estimates are based on independent industry publications, third-party forecasts, management’s estimates and assumptions about our markets and our internal research. We have not independently verified such third-party information nor have we ascertained the underlying economic assumptions relied upon in those sources, and we cannot assure you of the accuracy or completeness of such information contained in this prospectus. Such data involve risks and uncertainties and is subject to change based on various factors, including those discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

 

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PROSPECTUS SUMMARY

This summary highlights certain information about us and this offering contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the “Risk Factors” section and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.

As used in this prospectus, the terms “Valvoline,” the “Company,” “we,” “us” and “our” may, depending on the context, refer to Valvoline Inc., to the Valvoline business segment of Ashland Inc. as described more particularly under “Certain Relationships and Related Party Transactions—Relationship with Ashland—Historical Relationship with Ashland” or to Valvoline Inc. and its consolidated subsidiaries after giving effect to the contribution and separation transactions described under “Certain Relationships and Related Party Transactions—Relationship with Ashland—Separation Steps.”

We describe in this prospectus the businesses that will be contributed to us by Ashland as part of our separation from Ashland as if they were our businesses for all historical periods described. Our historical financial results as part of Ashland contained in this prospectus may not reflect our financial results in the future as a standalone company or what our financial results would have been had we been a standalone company during the periods presented.

Immediately prior to the closing of this offering, Ashland Inc. and we will become subsidiaries of Ashland Global Holdings Inc., or “Ashland Global,” a newly formed public holding company. Accordingly, as used in this prospectus, references to “Ashland” in the context of any time prior to the date of this offering refer to Ashland Inc., and references to “Ashland” in the context of any time on or after the date of this offering refer to Ashland Global. At the time of the contribution (as described below), Ashland and certain of its consolidated subsidiaries (other than us) will hold substantially all of the historical assets and liabilities related to the business that Valvoline Inc. and its consolidated subsidiaries will acquire pursuant to the contribution.

Our fiscal year ends on September 30 of each year. We refer to the year ended September 30, 2015 as “fiscal 2015,” the year ended September 30, 2014 as “fiscal 2014” and the year ended September 30, 2013 as “fiscal 2013.”

 

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Our Company

We are one of the most recognized and respected premium consumer brands in the global automotive lubricant industry, known for our high quality products and superior levels of service. Established in 1866, our heritage spans 150 years, during which we have developed powerful name recognition across multiple product and service channels. We have significant positions in the United States in all of the key lubricant sales channels, and also have a strong international presence with our products sold in approximately 140 countries.

In the United States and Canada, our products are sold to consumers through over 30,000 retail outlets, to installer customers with over 12,000 locations, and to approximately 1,050 Valvoline branded franchised and company-owned stores. We serve our customer base through an extensive sales force and technical support organization, allowing us to leverage our technology portfolio and customer relationships globally, while meeting customer demands locally. This combination of scale and strong local presence is critical to our success.

 



 

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We have a history of leading innovation with revolutionary products such as All Climate™, DuraBlend™, and MaxLife™. In addition to our iconic Valvoline-branded passenger car motor oils and other automotive lubricant products, we provide a wide array of lubricants used in heavy duty equipment, as well as automotive chemicals and fluids designed to improve engine performance and lifespan. Our premium branded product offerings enhance our high quality reputation and provide our customers with solutions that address a wide variety of needs.

We deliver products and services to our customers across three business segments:

 

    Core North America: We sell to consumers in the United States and Canada who perform their own automotive maintenance, referred to as “Do-It-Yourself” or “DIY” consumers, through retail outlets, including AutoZone, O’Reilly Auto Parts and Advance Auto Parts. We also sell to installer customers such as car dealers, general repair shops and third-party quick lube locations, including Goodyear, Monro, Express Oil Change, TBC Retail Group and Sears, directly and through distributors. Installers use our products to service vehicles owned by “Do-It-For-Me” or “DIFM” consumers. Our installer channel team also sells branded products and solutions to heavy duty customers, such as on-highway fleets and construction companies, and we have a strategic relationship with Cummins Inc. (“Cummins”), a leading heavy duty engine manufacturer, for co-branding products in the heavy duty business.

 

    Quick Lubes: We operate the second-largest United States retail quick lube service chain by number of stores, Valvoline Instant Oil Change (“VIOC”), which provides fast, trusted service through approximately 720 franchised and 330 company-owned stores. Our VIOC company-owned stores have had nine years of consecutive same-store sales growth,* and consistently outperformed our competitors, delivering on average over 36% more daily oil changes during 2015 than competing quick lube service centers. Our franchisees have also enjoyed strong results, performing on average 22% more daily oil changes in 2015 than competitors. We also sell our products and provide Valvoline branded signage to independent quick lube operators through our Express Care program. In 2015, we estimate that VIOC and Express Care stores performed approximately 13% of the total oil changes in the quick lube market.

 

    International: Our products are sold in approximately 140 countries outside of the United States and Canada, where, like in Core North America, Valvoline is positioned as a high performance, high quality brand. International sales include both passenger car products and heavy duty products used in a wide variety of heavy duty equipment. We sell our passenger car products to installer customers primarily through distributors, and our heavy duty products directly to customers, as well as through distributors.

 

*  We have historically determined 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.

 



 

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Sales and Adjusted EBITDA contribution of each of our segments is as follows:

 

Fiscal 2015 Sales Contribution

 

Fiscal 2015 Adj. EBITDA Contribution

 

LOGO

FY15 Sales: $2.0 Billion

 

 

LOGO

FY15 Adjusted EBITDA: $422 Million

In fiscal 2015, we generated approximately $2.0 billion in sales, $422 million in Adjusted EBITDA and $196 million in net income. During the same period, our Adjusted EBITDA margin, which we define as Adjusted EBITDA as a percentage of sales, was 21.5%. In addition, we generated free cash flow of $285 million and cash flows provided by operating activities of $330 million during fiscal 2015. See “—Summary Historical and Pro Forma Combined Financial Data” for the definition of Adjusted EBITDA and free cash flow, each a non-GAAP measure, and a reconciliation of such measures to net income and cash flows provided by operating activities, as applicable.

Our Value Proposition and Business Model

Founded in 1866, the Valvoline brand stands for high quality and performance, allowing us to command premium pricing for our products. The strength of our business model is our ability to generate profitable sales across multiple channels to market, leveraging the Valvoline brand through effective marketing, innovative product technology and the capabilities of our team. We have delivered strong profits and return on capital, with balanced results across all of our sales channels. Today, Valvoline is a high margin, high free cash flow generating business, with significant growth opportunities across all of our business segments.

Our successful business model is further strengthened by our commitment to partnering with customers and channel partners to drive value-creating solutions. We drive growth by providing cutting edge innovations, high-quality products and dedicated customer service. Our “Hands on Expertise” customer service model, which pairs our deep automotive knowledge with a commitment to developing unparalleled customer solutions, is designed to help us outperform our competitors.

A Rich History of Innovation

 

LOGO

        We have a 150 year history of industry-leading innovation. The company’s history dates back to 1866, when Dr. John Ellis discovered the lubricating properties of crude oil. Valvoline was trademarked six years later, making it the first trademarked motor oil in U.S. history. By 1895 we began to cement our place in American racing culture, when a Valvoline lubricated race car won the first known automotive race in North American history. In the early 1900s, the Valvoline brand gained national prominence as one of the recommended motor oils for the iconic Ford Model T.

 



 

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During the 20th century, we furthered our tradition of innovation, pioneering one of the world’s first aircraft engine motor oils, developing All-Climate Motor Oil, which eliminated the need for seasonal oil changes, and introducing Valvoline Racing Motor Oil, which became, and is to this day, one of the best-selling racing motor oils of all time. In 1987, we expanded into the quick lube market with the acquisition of an 81 store chain. Two years later we franchised our first five VIOC stores. In 1998, we began a partnership with Cummins, a leading global designer, manufacturer and distributor of engines, filtration and power generation products, that includes the sale of Cummins-endorsed Valvoline lubricants such as Premium Blue™ heavy duty engine oil. We have been selling products outside the United States for over 90 years, and now sell products in approximately 140 countries.

We continued to be a leader in the lubricants industry in product innovation with the introduction of DuraBlend™ in 1996, our first synthetic motor oil blend, and MaxLife™ in 2000, the first motor oil specifically engineered for cars with over 75,000 miles. We continue to invest significant resources in our research and development programs and in developing relationships with original equipment manufacturers (“OEMs”) with a goal of creating new and innovative products to meet the current and future needs of our customers. It is this spirit of performance and innovation that has made us into a global business today and that we believe will continue to drive our growth in the future.

Our Market

We participate in the global finished lubricants market, which had demand of over 11.7 billion gallons, or $60 billion, in 2015. For the same period, demand for passenger car motor oil and motorcycle oil accounted for slightly over 24% of global lubricant demand, while the remaining 76% of demand was for commercial and industrial products. The United States has historically accounted for the largest amount of lubricant demand, followed by China and India. The lubricants market is impacted by the following key drivers and trends:

 

    Shift in Demand for High Performance Products: 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. This shift in customer demand requires high-end formulations from lubricant manufacturers and leads to ongoing investment in top tier base stocks (Group II/II+ and Group III/III+ base oils) to support synthetics growth in developed markets, like the United States. Establishing strong product lines of synthetic and bio-based lubricants have become key competitive aspects to attract OEMs focused on equipment efficiency and environmental sustainability. In many non-U.S. markets, older engine technologies remain more prevalent. We believe there will be an opportunity for increased sales of our high performance products as these engines are replaced by newer technology engines.

 

    Environmental Health and Safety Regulations: There has been increasingly stringent regulation, particularly in North America and Europe, aimed at reducing toxic emissions, which has led to a continuous drive for innovation given changing specifications for lubricants. Recent regulatory trends include: European Commission Regulations; the Registration, Evaluation, Authorization, and Restriction of Chemicals (“REACH”) regulation; Euro Regulations; the Clean Air Act; and more stringent vehicle emission requirements.

 



 

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Our Competitive Strengths

We believe the following strengths differentiate us from our competitors and are important to our success:

Iconic Brand with Premium Products

 

Valvoline is a highly recognized and respected premium consumer brand. According to our research, we have a total awareness rate of 90% with consumers in the United States, and in many countries around the globe the Valvoline trademark is a symbol of high quality, which helps us to command premium prices. We are known for our high quality products, market leading technology and superior levels of service.

 

The consistent application of the Valvoline brand across all channels provides us with a significant marketing advantage. We use a variety of marketing techniques to build awareness of our

   LOGO

brand, including social and digital media, search, direct marketing, radio and television. In addition, we selectively sponsor teams in high performance racing series, including a current sponsorship of Hendrick Motorsports, featuring drivers Dale Earnhardt Jr., Chase Elliott, Jimmie Johnson and Kasey Kahne. We believe our iconic brand and strong customer awareness support our ability to grow our retail base in existing and new markets.

Unique Multi-Channel Presence

We operate through multiple automotive maintenance outlets and are committed to delivering an outstanding customer experience against a diverse set of customer expectations, leveraging our strong channel partner and quick lube network. Whether the customer is a consumer driving in for a differentiated VIOC quick lube experience, an installer looking to improve the performance of its business, a heavy duty customer looking to effectively service on-road and off-road vehicles or a DIY consumer looking for high quality products to service their vehicles, we leverage our “Hands on Expertise” to provide a solution to their unique and individual needs.

Within our DIY and DIFM sales channels, we have been successful in driving premium lubricants growth through effective consumer marketing and strong retailer relationships, resulting in Valvoline holding a #3 position by volume in the United States DIY market in 2015. Within our Quick Lubes business, our “Hands on Expertise” approach is a differentiating factor and has led to nine consecutive years of VIOC company-owned same-store sales growth and resulted in VIOC being the #2 quick lube chain by store count in 2015. Internationally, we sell our products in approximately 140 countries and our relationships with leading OEMs have provided us with the opportunity to leverage the Valvoline brand to increase global growth and awareness in key markets. In particular, we have a strong partnership with Cummins, a leading global designer, manufacturer and distributor of engines, filtration and power generation products, that includes joint ventures in India and China and global marketing and product co-branding arrangements.

Industry-Leading, Valvoline-Branded Quick Lube Business

With over 330 company-owned VIOC stores and another 720 franchised locations, we are the largest franchisor of quick lube stores that owns and operates its own oil change centers. VIOC is committed to providing our customers with a quick, easy and trusted oil change experience. We believe that our ability to deliver an outstanding customer experience is based on the quality of our teams and their focus on execution and customer satisfaction. Our proprietary point-of-sale system allows us to leverage data, understand our customers’

 



 

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needs and customize service recommendations for each of our customers. SuperPro, our 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, is designed to deliver a consistently outstanding customer experience.

Operating our own stores allows us to continually improve all aspects of our business model, from store operations to marketing tactics, which enhances the profitability of our company-owned and franchised operations. In addition, our company-owned VIOC locations provide us with first-hand knowledge of the customer experience. We use this knowledge to improve the speed and quality of our services, resulting in performance improvements at our own stores, as well as the stores of our franchisees. Our focus on the total customer experience has resulted in consistently high customer satisfaction rates. We have had nine consecutive years of same-store sales growth, due in part to improved customer service experience and an increase in the number of oil changes per day. In addition, the visibility of approximately 1,050 VIOC and 340 Express Care stores across the United States further strengthens our brand in the markets in which our quick lube stores operate. As seen below, our company-owned VIOC stores have outperformed the competition in oil changes per day since 2009. Our franchisees have also enjoyed strong performance by executing the same business model.

Oil Changes Per Day, Per Store

 

 

 

LOGO

 

 

Note: Represents fiscal years.

Source: National Oil and Lube News.

We believe our vertical integration through our Quick Lubes business is an additional competitive advantage. By selling our own, high-quality motor oil and family of products to our owned stores, our franchisees and other quick lube channel partners, we generate value for the overall enterprise, as well as an additional profit pool.

Strong History of Innovation

We believe that innovation is central to the successful performance of our business. As a result, we invest significant resources in our research and development programs and in developing relationships with OEMs, with a goal of developing new and innovative products to meet the current and future needs of our customers. We have an established track record of pioneering new product categories, such as synthetic blends, high mileage motor oil and racing motor oil. The introduction of MaxLifeTM and Full Synthetic High Mileage has driven significant trade-up to our higher performing synthetic and other premium products, contributing to both retailer and installer profitability.

Innovations in our sales and marketing efforts have been a cornerstone of our success. We place a high priority on sales and marketing, with a focus on the following areas, which we believe yield the highest benefits:

 

    targeted innovative digital marketing, which has allowed us to more efficiently reach our consumers with relevant messaging;

 



 

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    consumer relationship marketing and social media platforms, which provide forums for ongoing dialogue with consumers to increase brand commitment; and

 

    selective investment in national advertising and sponsorships, including our current sponsorship of Hendrick Motorsports, featuring drivers Dale Earnhardt Jr., Chase Elliott, Jimmie Johnson and Kasey Kahne, which builds on our brand’s strong equity with racing fans.

Independent, Focused Organization

Under the leadership of our Chief Executive Officer, Samuel J. Mitchell, Jr., our management team has extensive experience in the consumer products and lubricants industry in the areas of commercial operations, sales, marketing and research and development. Our leadership team has instituted a strong, unified corporate culture focused on speed and “Hands On” customer service. Our efficient global network of businesses and technical, supply chain and product support groups allow us to bring solutions to the market quickly. Our entire business, unlike our largest competitors, is focused on lubricants and automotive maintenance, enabling us to stay customer focused.

Our separation from Ashland will provide us the flexibility to invest in Valvoline’s growth initiatives and to act quickly in making decisions for the benefit of the business, our channel partners, customers and shareholders. We will enhance our strategic focus by aligning corporate support functions, such as information technology, human resources and finance, to the distinct needs of our business, providing greater control over both strategy and execution. As a standalone public company, we will be able to more effectively pursue our distinct operating priorities and strategies and our management will be able to solely focus on our opportunities for long-term growth and profitability.

Strong Financial Performance and Free Cash Flow Generation

Our high margin business is able to generate significant free cash flow. Our premium mix improvements, VIOC same-store sales growth, international volume and profit growth and proactive approach to changes in the base oil market resulted in fiscal 2015 Adjusted EBITDA of $422 million and Adjusted EBITDA margin of 21.5%. Strong earnings combined with efficient working capital management have led to high free cash flow, which grew from $133 million in fiscal 2014 to $285 million in fiscal 2015. This strong free cash flow provides us with significant financial flexibility.

Our Business and Growth Strategy

 

“We are building the world’s leading engine and automotive maintenance business
by bringing “Hands On Expertise” for the benefit of our customers every day.”

 

 

LOGO

 

We intend to achieve sustainable growth and profitability by executing the following strategies:

 



 

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Grow and Strengthen Quick Lube Network

We are committed to growing the footprint of our profitable quick lube network. We expect this growth to be driven by both organic store expansion and opportunistic, high-quality acquisitions in both core and new markets within the VIOC system, as well as strong sales efforts to partner with new Express Care operators. In addition, we plan to continue delivering same-store sales growth within our existing stores.

VIOC Geographic Footprint as of March 31, 2016

 

 

 

LOGO

 

    Organic Store Expansion: We currently operate 330 company-owned and have an additional 720 franchised quick lube centers across 44 states. Given the strength of our brand and new unit economics, we believe we can continue growing our network in both new and existing company and franchise markets. Independently owned Express Care locations display Valvoline branding in exchange for a contractual obligation to purchase Valvoline motor oil and other products. We believe that continued expansion of our Express Care program will continue to provide wider exposure to our brand by penetrating channels, primarily smaller (typically single store) operators, which do not fit our franchised model and typically offer other non-quick lube services such as auto repair and car washes.

 

    Opportunistic Acquisitions: There are over 9,000 known quick lube stores in the United States, the ownership of which, excluding the few largest networks of service centers, is largely fragmented. We believe that the large and fragmented nature of the North American quick lube market creates an opportunity for us to grow. Our distribution relationships in the DIFM installer space can be leveraged along with VIOC’s proprietary modeling tools to execute an acquisition strategy for both the larger, known systems, as well as smaller operators. VIOC’s acquisition of Oil Can Henry’s in February 2016 added 89 stores to our Quick Lube portfolio in the Pacific Northwest, Colorado, Arizona and southern California. We expect to continue to opportunistically look at acquisitions as a way of supplementing our organic store growth.

 



 

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    Continue to Drive Additional Growth and Profitability from Existing Stores: We have generated nine consecutive years of VIOC same-store sales growth. We plan to continue delivering growth through the following strategies:

 

  ¡    Attract New Customers and Increase Customer Satisfaction and Loyalty: We strive to attract new customers through our targeted digital marketing efforts, which allows us to be more efficient and effective in reaching our prospective new customers. Our existing VIOC customers value our proposition as a quick, easy and trusted operator. Our proprietary point-of-sale system allows us to better understand our customers’ needs and develop performance drivers that enhance the productivity of our company-owned and franchised operations. Following the introduction of our enhanced SuperPro 10 in 2006, we have been able to deliver quicker and more consistent service times, and have seen improvements in both our overall customer satisfaction scores and retention. Our “Hands on Expertise” culture and approach has been essential in unifying our 10,000 member team across our approximately 1,050 VIOC company-owned and franchised stores towards delivering a preferred customer experience.

 

  ¡    Increase Average Ticket Size: Between 2007 and 2015, average net ticket at our company-owned VIOC stores increased from $53.22 to $69.07. Given our focus on customer experience, our proprietary point-of-sale system, and our ability to pilot new concepts in our stores, we believe we can continue to strengthen average net ticket through improvements within our selling of premium oils, penetration of extra services, discount efficiency and pricing opportunities.

Company-Owned Store Sales, 2007 – 2015

 

 

 

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Accelerate International Growth across Key Markets

Our International business currently accounts for approximately 26% of combined sales. We plan to accelerate our growth internationally by focusing on key markets where demand for premium lubricants is growing. Our primary targets include China, India and select countries in Latin America. Our strategies for growth vary by market, but generally revolve around building strong distribution channels in underserved geographies, replacing less successful distributors and improving brand awareness among installer customers in those regions.

The sales, marketing and distribution capabilities that we have developed in the United States, combined with the strength of our brand, will assist our international expansion. We believe that large integrated oil brands are more focused on their upstream business in many of our targeted international markets, while local competitors often are not competitive in premium product categories. Operational expertise will allow us to benefit from these market dynamics at the same time that stricter regulations of emissions and fuel economy are increasing demand for more advanced lubricants.

 



 

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We also plan to expand our presence in the heavy duty lubricant space, which is an important channel in our targeted international markets, by developing products that will lower the total cost of ownership for fleet operators and users of other heavy duty equipment, leveraging our existing relationships with leading OEMs and building and strengthening other OEM relationships. These long-term relationships provide credibility to our International business, and we believe they will allow us to leverage the Valvoline brand to increase growth in key markets globally.

Leverage Innovation to Drive Market Share and Profitability in Core North America

Innovations in product development, packaging and marketing have driven improvements in our product mix, with United States premium-branded lubricant sales volume increasing to approximately 40% of total sales volume in 2015, up from approximately 31% in 2011.

We believe that our focus on innovation will continue to drive premium lubricant mix improvement in addition to increasing sales of our broader product portfolio, such as Valvoline Professional Series service chemicals, coolants, filters and other non-lubricant products. We plan to continue to grow higher margin synthetic sales, consistent with increased customer demand for these products due to OEM requirements.

We intend to leverage our expertise to continue to add significantly more value to our installer customers than our more cost-driven competitors. We do this by sharing our knowledge in sales, marketing and supply chain management to help them grow their businesses through improvements in customer acquisition, retention and sales volume. We believe that our differentiated service approach will allow us to continue to charge premium prices while growing our overall business.

We are also investing in e-commerce solutions with our existing business partners and a new digital infrastructure that will be used across our enterprise. We believe that this digital infrastructure will improve the speed, innovation and efficiency of our business, and also drive more effective customer engagement, acquisition and retention. Being able to interact with our customers when they need information will provide accurate real time access to training, marketing programs, product recommendations and order status and will differentiate us from our competition by building a more efficient customer-facing organization.

Ashland Ownership and Our Separation from Ashland

Prior to the completion of this offering, we will be a wholly owned subsidiary of Ashland. Immediately prior to the completion of this offering, we plan to amend and restate our articles of incorporation and by-laws and increase the total number of authorized shares of our common stock. In this prospectus, we refer to these transactions collectively as the “recapitalization.” After the completion of this offering, Ashland will own     % of our outstanding common stock (or     % if the underwriters exercise their overallotment option in full).

In connection with this offering, we and Ashland intend to enter into agreements and take certain actions to transfer to us substantially all of the assets and liabilities related to our business. Except for the nominal assets that we currently hold, Ashland holds all of the historical assets and liabilities related our business. We and Ashland will enter into a separation agreement that provides for the separation of our business from Ashland to take effect no later than the closing of this offering (the “Separation Agreement”). We also intend to enter into a tax matters agreement with Ashland that will govern the respective rights, responsibilities and obligations of Ashland and us after the closing of this offering with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests) (the “Tax Matters Agreement”). In addition, we and Ashland will enter into transition services agreements governing Ashland’s provision of various services to us, and our provision of various services to Ashland, on a transitional basis, and several other ancillary agreements in connection with the contribution and separation. In this prospectus, references to the “contribution” refer to Ashland’s transfer to us

 



 

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(in connection with certain reorganization transactions) of the assets and liabilities related to our business, and the term “separation” refers to the separation of our business from Ashland’s other businesses (including the contribution), along with the effectiveness of various agreements between us and Ashland. See “Certain Relationships and Related Party Transactions.”

Prior to the closing of this offering, we expect to incur new senior term loans (which may be secured or unsecured), new senior unsecured notes or a combination thereof in an aggregate principal amount of approximately $         million. We expect to transfer the proceeds of this indebtedness to Ashland through intercompany transfers. We also plan to obtain an accounts receivable securitization facility with up to $             million of available funding from qualified receivables. We refer to the transactions related to this incurrence of debt collectively as the “related financing transactions.” In addition to this indebtedness, in the event that the net proceeds of this offering are expected to exceed $             million, we may incur certain short-term indebtedness immediately prior to the closing of this offering and transfer the net proceeds thereof to a subsidiary of Ashland Global. See “Description of Indebtedness.” We plan to repay such short-term indebtedness in full from the net proceeds of this offering. We also intend to use the net proceeds of this offering to repay $             million of our indebtedness, with an interest rate of     %. Any remaining proceeds will be used for general corporate purposes. See “Use of Proceeds.”

Ashland has informed us that, at some time in the future, but no earlier than the expiration of the 180-day lock-up period described under “Underwriting,” it intends to effect a tax-free spin-off of its remaining ownership interest in us to its shareholders (the “spin-off”). Ashland has no obligation to effect the spin-off and it may retain its ownership interest in us indefinitely or dispose of all or a portion of its ownership interest in us in a sale or other transaction. Any such spin-off or other disposition by Ashland of its remaining interest in us (an “other disposition”) would be subject to various conditions, including receipt of an opinion of tax counsel in connection with the spin-off, receipt of any necessary regulatory or other approvals and the existence of satisfactory market conditions. The conditions to a spin-off or other disposition by Ashland may not be satisfied. Ashland has no obligation to pursue or consummate any further disposition of its ownership interest in us by any specified date or at all, whether or not these conditions are satisfied.

We believe, and Ashland has advised us that it believes, that the separation, this offering and the spin-off will provide a number of benefits to our business, to Ashland’s business and to Ashland’s shareholders. These potential benefits include improving the strategic and operational flexibility of both companies, increasing the focus of the management teams on their respective business operations, and allowing each company to adopt the capital structure, investment policy and dividend policy best suited to its financial profile and business needs. In addition, as we will be a standalone company, potential investors will be able to invest directly in our business.

Risks Affecting Our Business

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition and results of operations would likely be negatively affected. In such case, the trading price of our common stock would likely decline, and you may lose part or all of your investment. These risks include, but are not limited to:

 

    damage to our reputation or brand;

 

    failure to meet the growth goals for our business;

 

    reduced demand for our products or services as a result of market or other factors;

 

    downward pressure on prices and margins due to competition;

 



 

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    the loss of any of our largest customers;

 

    failure to develop and successfully market new products and implement our digital platforms;

 

    our substantial indebtedness and other liabilities;

 

    failure to achieve the expected benefits and successfully execute the separation;

 

    potential tax liabilities that may be created as a result of the spin-off or the separation;

 

    operating as an independent publicly traded company, including compliance with applicable laws and regulations; and

 

    our status as a controlled company and the possibility that Ashland’s interests may conflict with yours.

Company Information

We were incorporated in Kentucky on May 13, 2016 in connection with our planned separation from Ashland. Our principal executive offices are at 3499 Blazer Parkway, Lexington, Kentucky 40509 and our telephone number is (859) 357-7777. Our website is http://www.valvoline.com. The information and other content contained on our website are not part of this prospectus.

 



 

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The Offering

 

Issuer

Valvoline Inc.

 

Common stock offered by us in this offering

         shares (         shares if the underwriters exercise their overallotment option in full)

 

Common stock to be held by Ashland immediately after this offering

         shares                                                                                                                              

 

Common stock to be outstanding immediately after this offering

         shares (         shares if the underwriters exercise their overallotment option in full)

 

Underwriters’ option

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to          additional shares of common stock solely to cover over allotments.

 

Use of proceeds

We estimate that the net proceeds from this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $         million (or approximately $         million if the underwriters’ overallotment option is exercised in full), assuming that the shares of our common stock to be sold in this offering are sold at $         per share, the midpoint of the price range set forth on the cover page of this prospectus.

 

  We intend to use the net proceeds of this offering to repay $         million of indebtedness, with an interest rate of     %. As described in “Description of Indebtedness,” we may incur certain short-term indebtedness in the amount of $         million, with an interest rate of     %, immediately prior to the closing of this offering. If we incur this short-term indebtedness, we plan to repay such short-term indebtedness in full with the net proceeds of this offering. Any remaining proceeds will be used for general corporate purposes. See “Use of Proceeds.”

 

Dividend policy

We expect to pay quarterly cash dividends to holders of our common stock. The declaration and payment of dividends to holders of our common stock will be at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, cash flows, impact on our effective tax rate, indebtedness, legal requirements and other factors that our board of directors deems relevant. In addition, the instruments governing our indebtedness may limit our ability to pay dividends.

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NYSE symbol

We intend to apply for listing of our common stock on the NYSE under the symbol “VVV.”

 



 

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Unless indicated otherwise, the number of shares of common stock to be outstanding after this offering is based on          shares of common stock outstanding as of                 , 2016 and excludes:

Unless otherwise indicated, the information presented in this prospectus:

 

    gives effect to the transactions described under “Certain Relationships and Related Party Transactions—Relationship with Ashland—Separation Steps;”

 

    assumes that the shares of our common stock to be sold in this offering are sold at $         per share, the midpoint of the price range set forth on the cover page of this prospectus; and

 

    assumes the underwriters will not exercise their overallotment option.

 



 

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Summary Historical and Pro Forma Combined Financial Data

The following financial data should be read in conjunction with our audited and unaudited combined financial statements and the related notes, and our unaudited pro forma condensed combined financial statements and the related notes, included elsewhere in this prospectus.

The following table summarizes our historical and pro forma combined financial data. The summary historical combined balance sheet data as of September 30, 2015 and 2014 and statement of operations data for the years ended September 30, 2015, 2014, and 2013 is derived from our audited combined financial statements included elsewhere in this prospectus. The summary historical combined financial data as of and for the six months ended March 31, 2016 and 2015 is derived from our unaudited interim combined financial statements included elsewhere in this prospectus. The historical combined balance sheet data as of September 30, 2013 is derived from our unaudited annual combined financial statements, which are not included in this prospectus. In the opinion of management, the unaudited combined financial statements include all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and the operating results for these periods. The operating results for the six months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended September 30, 2016 or any other interim periods or any future year or period.

The summary historical combined financial data includes certain expenses of Ashland that were allocated to us for certain corporate functions including, treasury, legal, accounting, insurance, information technology, payroll administration, human resources, stock incentive plans and other services. Management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by us during the periods presented. However, these shared expenses may not represent the amounts that we would have incurred had we operated autonomously or independently from Ashland. Actual costs that would have been incurred if we had been a standalone company would depend on multiple factors, including organizational structure and strategic decisions in various areas, such as information technology and infrastructure. In addition, our summary historical combined financial data does not reflect changes that we expect to experience in the future as a result of our separation from Ashland, including changes in our cost structure, personnel needs, tax structure, capital structure, financing and business operations.

The summary pro forma combined financial data reflects the impact of certain transactions, which comprise the following:

 

    the recapitalization, the contribution and the separation;

 

    the receipt of approximately $         in net proceeds from the sale of shares of our common stock in this offering at an assumed initial offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and commissions and estimated offering expenses payable by us, and the use of approximately $         of these proceeds to repay indebtedness;

 

    the indebtedness to be incurred in the related financing transactions; and

 

    other adjustments described in the notes to the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined balance sheet reflects the separation as if it occurred on March 31, 2016, while the unaudited pro forma condensed combined statements of operations give effect to the separation as if it occurred on October 1, 2014, the beginning of the earliest period presented. The pro forma adjustments, described in “Unaudited Pro Forma Condensed Combined Financial Statements,” are based on currently available information and certain assumptions that management believes are reasonable. Excluded from the pro forma adjustments are items that are non-recurring in nature or are not material.

The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred had

 



 

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the separation from Ashland been completed on March 31, 2016 for the unaudited pro forma condensed combined balance sheet or on October 1, 2014 for the unaudited pro forma condensed combined statements of operations. The unaudited pro forma condensed combined financial statements should not be relied on as indicative of the historical operating results that we would have achieved or any future operating results or financial position that we will achieve after the completion of this offering.

The following summary combined financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Condensed Combined Financial Statements” and accompanying notes and the interim and annual combined financial statements and accompanying notes included elsewhere in this prospectus.

 

    Pro forma     Historical  
(Dollars in millions)   Six months
ended
March 31,
    Year ended
September 30,
    Six months ended
March 31,
    Year ended
September 30,
 
    2016     2015     2016     2015     2015     2014     2013  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)                    

Statement of Operations Data:

             

Sales

  $        $        $ 935.7      $ 973.4      $ 1,966.9      $ 2,041.3      $ 1,996.2   

Cost of sales

        567.9        634.9        1,281.8        1,408.9        1,338.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

        367.8        338.5        685.1        632.4        657.9   

Selling, general and administrative

        137.4        128.4        290.8        302.8        213.4   

Corporate expense allocation

        41.1        39.2        79.5        95.0        88.2   

Equity and other income (loss)

        10.7        (2.0     8.3        30.1        24.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

        200.0        168.9        323.1        264.7        380.6   

Net loss on acquisition and divestiture

        (0.5     (26.0     (26.3     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

        199.5        142.9        296.8        264.7        380.6   

Income tax expense

        66.5        52.4        100.7        91.3        134.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $               $               $ 133.0      $ 90.5      $ 196.1      $ 173.4      $ 246.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Pro forma     Historical  
    As of
March 31,
    As of
March 31,
    As of
September 30,
 
  2016     2016     2015     2015     2014     2013  
    (unaudited)     (unaudited)     (unaudited)           (unaudited)  

Balance Sheet Data:

       

Cash and cash equivalents(1)

  $                   $      —          $      —          $      —          $      —          $      —     

Current assets

      514.4        502.0        477.3        544.7        519.1   

Property, plant and equipment, net

      266.5        248.0        253.5        272.4        270.2   

Total assets

      1,117.4        999.3        977.9        1,082.5        1,062.0   

Current liabilities

      300.6        266.1        298.6        293.5        312.6   

Long-term debt (less current portion)

      —          —          —          —          —     

Total liabilities

      377.8        327.3        360.8        357.7        378.3   

 



 

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     Six months ended
March 31,
     Year ended
September 30,
 
     2016      2015      2015      2014      2013  
     (unaudited)      (unaudited)                       

Cash Flow Data:

              

Cash flow provided by operations

   $ 91.1       $ 160.6       $ 329.8       $ 170.6       $ 272.9   

Capital expenditures

     14.4         17.7         45.0         37.2         40.9   

 

     Six months ended
March 31,
     Year ended
September 30,
 
Unaudited    2016      2015      2015      2014      2013  

Other Financial Data:

              

Free cash flow (2)

   $ 76.7       $ 142.9       $ 284.8       $ 133.4       $ 232.0   

EBITDA (3)

     218.5         161.7         334.8         301.8         416.3   

Adjusted EBITDA (3)

     223.2         204.4         421.8         369.2         342.3   

 

(1) Historically, cash and cash equivalents were held at the Ashland level utilizing Ashland’s centralized approach to cash management.

 

(2) We use free cash flow as an additional non-GAAP metric of cash flow generation. By deducting capital expenditures and certain other adjustments as applicable from operating cash flows, we are 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. Free cash flow does not reflect adjustments for certain non-discretionary cash flows. Our results of operations are presented based on our management structure and internal accounting practices. The structure and practices are specific to us; therefore, our 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, you should be aware that in the future we may incur expenses similar to those for which adjustments are made in calculating free cash. Our presentation of free cash flow should not be construed as a basis to infer that our future results will be unaffected by unusual or non-recurring items. Because of these limitations, you 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.

The following table reconciles free cash flow to cash flows provided by operating activities for the periods presented.

 

     Six months ended
March 31,
     Year ended
September 30,
 
(Dollars in millions)    2016      2015      2015      2014      2013  

Cash flows provided by operating activities

   $ 91.1       $ 160.6       $ 329.8       $ 170.6       $ 272.9   

Less:

              

Additions to property, plant and equipment

     (14.4      (17.7      (45.0      (37.2      (40.9
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

   $ 76.7       $ 142.9       $ 284.8       $ 133.4       $ 232.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) In addition to our net income determined in accordance with U.S. GAAP, we evaluate operating performance using certain non-GAAP measures including EBITDA, which we define as our net income, plus income tax expense (benefit), net interest and other financing expenses, and depreciation and amortization, and Adjusted EBITDA, which we define as EBITDA adjusted for losses (gains) on pension and other postretirement plans remeasurement, net gain (loss) on acquisitions and divestitures, impairment of equity investment, restructuring, other income and (expense) and other items. Management believes the use of non-GAAP measures on a combined and reportable segment basis assists investors in understanding the ongoing operating performance of our business by presenting comparable financial results between periods. The non-GAAP information provided is used by our 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 our operating performance on a combined and reportable segment basis. Adjusted EBITDA generally includes adjustments for unusual, non-operational or restructuring-related activities.

The combined financial statements include actuarial gains and losses for defined benefit pension and other postretirement benefit plans recognized annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. Actuarial gains and losses occur when actual experience differs from the estimates used to allocate the change in value of pension and other postretirement benefit plans to expense throughout the year or when assumptions change, as they may each year.

 



 

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Significant factors that can contribute to the recognition of actuarial gains and losses include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets and other changes in actuarial assumptions, for example the life expectancy of plan participants. Management believes Adjusted EBITDA, which includes the expected return on pension plan assets and excludes both the actual return on pension plan assets and the impact of actuarial gains and losses, provides investors with a meaningful supplemental presentation of our operating performance. Management believes these actuarial gains and losses are primarily financing activities that are more reflective of changes in current conditions in global financial markets (and in particular interest rates) that are not directly related to the underlying business and that do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees and retirees.

EBITDA and Adjusted EBITDA each have limitations as an analytical tool 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, you 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, you should be aware that in the future we may incur expenses similar to those for which adjustments are made in calculating EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as a basis to infer that our future results will be unaffected by unusual or non-recurring items.

The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented.

 

     Six months ended
March 31,
     Year ended
September 30,
 
(Dollars in millions)    2016      2015      2015      2014      2013  

Net income

   $ 133.0       $ 90.5       $ 196.1       $ 173.4       $ 246.1   

Income tax expense

     66.5         52.4         100.7         91.3         134.5   

Depreciation and amortization

     19.0         18.8         38.0         37.1         35.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     218.5         161.7         334.8         301.8         416.3   

Losses (gains) on pension and other postretirement plans remeasurement

     4.7         2.0         46.0         61.1         (74.0

Net loss on divestiture

     —           26.0         26.3         —           —     

Impairment of equity investment

     —           14.3         14.3         —           —     

Restructuring

     —           0.4         0.4         6.3         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 223.2       $ 204.4       $ 421.8       $ 369.2       $ 342.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in shares of our common stock. We describe below what we believe are currently the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business

Damage to our brand and reputation could have an adverse effect on our business.

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

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

We have set aggressive growth goals for our business, including increasing sales, cash flow, market share and margins, in order to achieve our long-term strategic objectives. Execution of our growth strategies and business plans to facilitate that growth involves a number of risks.

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

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

Demand for our products and services may be affected by a number of factors we cannot control, including the number and age of vehicles in current service, regulation and legislation, technological advances in the automotive industry and changes in engine technology, including the adoption rate of electric or other alternative engine technologies. In addition, during periods of declining economic conditions, consumers may defer vehicle

 

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maintenance. Similarly, increases in energy prices may cause miles driven to decline, resulting in less wear and tear and lower demand for maintenance, which may lead to consumers deferring purchases of our 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 our products and services and adversely affect our sales, cash flows and overall financial condition. Between 2007 and 2012, U.S. passenger car motor oil volumes declined. This decline in demand is a result of, among other factors, changing automotive OEM specifications and longer recommended intervals between oil changes. Over the past two years, however, market volume has increased, largely due to the increase in the number of cars on the road and miles driven.

The success of our growth initiatives depends on our ability to successfully develop and implement one or more integrated digital platforms that will help us better understand consumers and more effectively engage them.

We are in the process of designing and implementing a number of digital platforms that will integrate our operations with customer and consumer data. The successful development and implementation of these digital platforms will depend on our ability to identify an appropriate strategy, dedicate adequate resources and select technologies that will provide us with adequate flexibility to adapt to future developments in the marketplace and changes in consumer and customer behavior. We have incurred and expect 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 we develop and implement our digital platforms, we may elect to modify, replace or abandon certain technology initiatives, which could result in write-downs.

Our success depends upon our ability to attract and retain key employees and the identification and development of talent to succeed senior management.

Our success depends on our ability to attract and retain key personnel, and we rely heavily on our senior management team. The inability to recruit and retain key personnel or the unexpected loss of key personnel may adversely affect our operations. This risk of unwanted employee turnover is substantial in positions that require certain technical expertise. This risk is also substantial in developing international markets we have targeted for growth and in North America, where attracting marketing and technical expertise to geographies necessary to support our management is important to our success. This risk is further enhanced by the planned separation from Ashland. In addition, because of our reliance on our senior management team, our future success depends, in part, on our ability to identify and develop or recruit talent to succeed our senior management and other key positions throughout the organization. If we fail to identify and develop or recruit successors, we are at risk of being harmed by the departures of these key employees.

We face significant competition from other companies, which places downward pressure on prices and margins and may adversely affect our business and results of operations.

We operate in highly competitive markets, competing against a number of domestic and foreign companies. Competition is based on several key criteria, including brand recognition, product performance and quality, product price, product availability and security of supply, ability to develop products in cooperation with customers, and customer service, as well as the ability to bring innovative products or services to the marketplace. Certain key competitors, including Shell/Pennzoil and Jiffy Lube, BP/Castrol and Exxon/Mobil, are significantly larger than us 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 us to decrease our prices, which could negatively affect our margins and profitability. Additional competition in markets served by us could adversely affect margins and profitability and could lead to a reduction in market share. Also, we compete in certain markets that are declining, such as the U.S. passenger car motor oil market. If our strategies for dealing with declining markets and leveraging market opportunities are not successful, our results of operations could be negatively affected.

 

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Because of the concentration of our sales to a small number of retailers, the loss of one or more of, or a significant reduction in orders from, our top retail customers could adversely affect our financial results, as could the loss of one of our distributor relationships.

Our Core North America segment’s sales represented approximately 54% of our total sales in fiscal 2015. Napa Auto Parts, AutoZone, Advance Auto Parts, O’Reilly Auto Parts and another large national retailer together accounted for 46% of Core North America’s fiscal 2015 sales and 50% of Core North America’s outstanding trade accounts receivable as of March 31, 2016. The loss of, or significant reduction in orders from, one of our top five retail customers or any other significant customer could have a material adverse effect on our business, financial condition, results of operations or cash flows, as could customer disputes regarding shipments, fees, merchandise condition or related matters. Our inability to collect accounts receivable from one of our 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 our financial condition, results of operations or cash flows. We also rely on independent distributors to sell and deliver our products. Disagreements or the loss of our relationship with a distributor could also have a material adverse effect on our financial condition, results of operations or cash flows.

Our marketing activities may not be successful.

We invest substantial resources in advertising, consumer promotions and other marketing activities in order to maintain and strengthen our brand image and product awareness. The Valvoline name and brand image are integral to the growth of our business and our expansion into new markets. Failure to adequately market and differentiate our products and services from competitive products and services could adversely affect our business. There can be no assurances that our marketing strategies will be effective or that our investments in advertising activities will result in a corresponding increase in sales of our products. If our marketing initiatives are not successful, we will have incurred significant expenses without the benefit of higher sales of our products. In addition, if any party with whom we have a sponsorship relationship were to generate adverse publicity, our brand image could be harmed.

Our business exposes us to potential product liability claims and recalls, which could adversely affect our financial condition and performance.

The development, manufacture and sale of automotive, commercial and industrial lubricants, 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 us could also result in substantial and unexpected expenditures, affect consumer or customer confidence in our products, and divert management’s time and attention from other responsibilities. Although we maintain product liability insurance, there can be no assurance that the type or level of coverage we have is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured product liability judgment against us could have a material adverse effect on our reputation, results of operations and financial condition.

Failure to develop and market new products and production technologies could impact our competitive position and have an adverse effect on our 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, we must successfully develop and introduce new products or improvements that appeal to our 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 us to continue to improve our product offerings. Our 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

 

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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 we are 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. We could be required to write-off our investment in a new product that does not reach commercial viability. Moreover, we may experience operating losses after new products are introduced and commercialized because of high start-up costs, unexpected manufacturing costs or problems, or lack of demand.

The impact of changing laws or regulations or the manner of interpretation or enforcement of existing laws or regulations could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.

New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This risk includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, the possible taxation under foreign laws of certain income we report in other jurisdictions, regulations related to the protection of private information of our employees and customers, regulations issued by the U.S. Federal Trade Commission (and analogous non-U.S. agencies) affecting us and our customers, compliance with the REACH regulation (and analogous non-EU initiatives). In addition, compliance with laws and regulations is complicated by our substantial and growing global footprint, which will require significant and additional resources to ensure compliance with applicable laws and regulations in the approximately 140 countries where we conduct business.

Our global operations expose us 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 our 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 us to fines, penalties and other sanctions. A violation of these laws or regulations could adversely impact our business, results of operations and financial condition.

Although we have implemented policies and procedures in these areas, we cannot assure you that our 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 we may be held responsible, nor can we assure you that our business partners have not engaged and will not engage in conduct that could materially affect their ability to perform their contractual obligations to us or even result in our 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 we may be subject to other liabilities, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.

Our substantial global operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations.

Sales from our International business segment accounted for 26% of our sales for fiscal 2015. We expect sales from international markets to continue to represent an even larger portion of our sales in the future. Also, a significant portion of our manufacturing capacity is located outside of the United States. Accordingly, our

 

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

Certain legal and political risks are also inherent in the operation of a company with our global scope. For example, it may be more difficult for us to enforce our agreements or collect receivables through foreign legal systems. There is a risk that foreign governments may nationalize private enterprises in certain countries where we operate. In certain countries or regions, terrorist activities and the response to such activities may threaten our operations more than in the United States. Social and cultural norms in certain countries may not support compliance with our corporate policies including those that require compliance with substantive laws and regulations. Also, changes in general economic and political conditions in countries where we operate, particularly in Europe, the Middle East and emerging markets, are a risk to our financial performance and future growth. For example, we exited our Venezuelan joint venture in 2015 due in part to the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar and other Venezuelan regulations. In addition, in executing our global growth strategies, we have 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 we require is a risk to our financial performance.

As we continue to operate our business globally, our success will depend, in part, on our 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 our multinational operations will not have an adverse effect on our business, financial condition or results of operations.

The competitive nature of our markets may delay or prevent us from passing increases in raw material costs on to our customers. In addition, certain of our suppliers may be unable to deliver products or raw materials or may withdraw from contractual arrangements. The occurrence of either event could adversely affect our results of operations.

Rising and volatile raw material prices, especially for base oil and lubricant additives, may negatively impact our costs, results of operations and the valuation of our inventory. We are not always able to raise prices in response to increased costs of raw materials, and our ability to pass on the costs of such price increases is dependent upon market conditions. Likewise, reductions in the valuation of our inventory due to market volatility may not be recovered and could result in losses.

We purchase certain products and raw materials from suppliers, often pursuant to written supply contracts. If those suppliers are unable to meet our orders in a timely manner or choose to terminate or otherwise avoid contractual arrangements, we may not be able to make alternative supply arrangements. For base oils, our 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 our exposure to these risks. For lubricant additives, we maintain material relationships with a very limited number of suppliers and there are a limited number of other potential suppliers with whom we could transact in the event of a disruption to our existing supply relationships. The inability of those suppliers to meet their contractual obligations to us could also have a material adverse effect on our business.

 

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

Acquisitions, strategic alliances and investments could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations.

Acquisitions, particularly for our VIOC business, and building strategic alliances for distribution and manufacturing, particularly in international markets, including through joint venture partnerships, product distribution and toll manufacturing arrangements, are important elements of our overall growth strategy. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. These transactions and agreements could be material to our 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 we face risks include:

 

    diversion of management’s time and attention from operating our business to acquisition integration challenges;

 

    failure to successfully grow the acquired business or product lines;

 

    implementation or remediation of 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 our existing platforms;

 

    reliance on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational matters;

 

    failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;

 

    in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

 

    cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the companies we acquire;

 

    liability for, or reputational harm from, activities of the acquired company before the acquisition or from our strategic partners, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and

 

    litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former securityholders or other third parties.

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

Our acquisitions, investments and strategic alliances could also result in dilutive issuances of our 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 our financial condition, results of operations and cash flows. Also, the anticipated benefits of our acquisitions may not be realized. In addition,

 

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our balance sheet includes goodwill primarily related to acquisitions and future acquisitions may result in our recognition of additional goodwill. The impairment of a significant portion of this goodwill would negatively affect our financial results.

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

VIOC is made up of a nation-wide network of both company-owned and franchised stores. Our success relies in part on the financial success and cooperation of our franchisees. However, we have limited influence over their operations. Our franchisees manage their businesses independently and are responsible for the day to day operations of approximately 69% of VIOC stores as of March 31, 2016. Our revenue and income growth from franchised stores are largely dependent on the ability of our franchisees to grow their sales. Our franchisees may have limited or no sales growth, and our revenues and margins could be negatively affected as a result. In addition, if sales or business performance trends worsen for franchisees, their financial results may deteriorate, which could result in, among other things, VIOC store closures, delayed or reduced payments to us, and reduced growth in the number of VIOC stores.

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

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

The ownership mix of company-owned and franchised VIOC stores also affects our 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. In addition, the size of our largest franchisees creates additional risk due to our dependence on their particular growth, financial and operating performance and cooperation and alignment with our initiatives.

In addition, we are the primary supplier of products to all VIOC stores. The growth and performance of our lubricants and other product lines depends in large part on the performance of our VIOC business, potentially amplifying the negative affect of the other risks related to the VIOC business model. Poor performance by VIOC stores would negatively impact revenues and income for other Valvoline reporting segments.

Adverse developments in the global economy or in regional economies and potential disruptions of financial markets could negatively impact our customers and suppliers, and therefore have a negative impact on our results of operations.

A global or regional economic downturn may reduce customer demand or inhibit our ability to produce and sell products. Our 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

 

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74% of our sales coming from North America in fiscal 2015, we are 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, our 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 us in a timely fashion. Further, suppliers may experience similar conditions, which could impact their ability to fulfill their obligations to us. A weakening or reversal of the global economy or a substantial part of it could negatively impact our business, results of operations, financial condition and ability to grow.

We use information technology (“IT”) systems to conduct business, and these IT systems are at risk from cyber security threats.

The nature of our business, the markets we serve and the geographic profile of our operations make us a target of cyber security threats. Despite steps we take to mitigate or eliminate them, cyber security threats to our systems are increasing and becoming more advanced and could occur as a result of the activity of hackers, employee error or employee misconduct. A breach of our IT 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 our relationships with business partners and harm our brands, reputation and financial results. Our 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, we 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. We do not currently carry insurance for breaches of our IT systems.

We may fail to adequately protect our intellectual property rights or may be accused of infringing the intellectual property rights of third parties.

We rely heavily upon our trademarks, domain names and logos to market our brands and to build and maintain brand loyalty and recognition, as well as upon trade secrets. We also rely on a combination of laws and contractual restrictions with employees, customers, suppliers, affiliates and others, to establish and protect our various intellectual property rights. For example, we have generally registered and continue to register and renew, or secure by contract where appropriate, trademarks and service marks as they are developed and used, and reserve, register and renew domain names as appropriate. Effective trademark protection may not be available or may not be sought in every country in which our products are made available and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available.

We generally seek to apply for patents or for other similar statutory protections as and if we deem 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 we have 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 we own.

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

 

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From time to time, we have 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 addition, in the future, third parties may sue us for alleged infringement of their proprietary or intellectual property rights. We may not be aware of whether our products do or will infringe existing or future patents or the intellectual property rights of others. In addition, litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business, financial condition and results of operations.

Our pension and postretirement benefit plan obligations are currently underfunded, and we may have to make significant cash payments to some or all of these plans, which would reduce the cash available for our businesses.

In connection with the separation, we will assume certain of Ashland’s historical U.S. postretirement benefit plans and qualified and non-qualified pension liabilities, including liabilities for multiemployer plans for certain employees covered by collective bargaining agreements. The funded status of our 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. 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 our 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 funding status of our pension plans and future contributions. Similarly, an increase in discount rates could increase the periodic pension cost in subsequent fiscal years. Our policy to recognize these variances annually through mark to market accounting could result in volatility in our results of operations, which could be material. In addition, our pension and postretirement benefit plan obligations are currently underfunded, and we may have to make significant cash payments to some or all of these plans, which would reduce the cash available for our businesses.

Under the Employee Retirement Income Security Act of 1974 (“ERISA”), 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 our tax-qualified pension plans are terminated by the PBGC, we could be liable to the PBGC for some portion of the underfunded amount.

Business disruptions from natural, operational and other catastrophic risks could seriously harm our operations and financial performance. In addition, a catastrophic event at one of our facilities or involving our products or employees could lead to liabilities that could further impair our operations and financial performance.

Business disruptions, including those related to operating hazards inherent with the production of lubricants, natural disasters, severe weather conditions, supply or logistics disruptions, increasing costs for energy,

temporary plant and/or power outages, information technology systems and network disruptions, cyber-security breaches, terrorist attacks, armed conflicts, war, pandemic diseases, fires, floods or other catastrophic events, could seriously harm our operations, as well as the operations of our customers and suppliers, and may adversely impact our financial performance. Although it is impossible to predict the occurrence or consequences of any such events, they could result in reduced demand for our products, make it difficult or impossible for us to manufacture our products or deliver products and services to our customers or to receive raw materials from suppliers, or create delays and inefficiencies in the supply chain. In addition to leading to a serious disruption of our businesses, a catastrophic event at one of our facilities or involving our products or employees could lead to substantial legal liability to or claims by parties allegedly harmed by the event.

While we maintain business continuity plans that are intended to allow us to continue operations or mitigate the effects of events that could disrupt our business, we cannot provide assurances that our plans would fully

 

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protect us from all such events. In addition, insurance maintained by us 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 our 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.

We have incurred, and will continue to incur, substantial costs as a result of environmental, health and safety (“EHS”), and hazardous substances liabilities and related compliance requirements. These costs could adversely impact our cash flow, and, to the extent they exceed our established reserves for these liabilities, our results of operations or financial condition.

We are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and human health and safety, as well as the generation, storage, handling, treatment, disposal and remediation of hazardous substances and waste materials. We have incurred, and will continue to incur, significant 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 our operations, require modifications to our facilities or cause us to incur significant liabilities, costs or losses that could adversely affect our 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.

Our business involves the production, storage and transportation of hazardous substances. Under some environmental laws, we 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 we may be deemed liable for soil and/or groundwater contamination at sites we currently own and/or operate even though the contamination was caused by a third party such as a former owner or operator, and at sites we formerly owned and operated if the release of hazardous substances or waste materials was caused by us or by a third party during the period we owned and/or operated the site. We also may be deemed liable for soil and/or groundwater contamination at sites to which we sent hazardous wastes for treatment or disposal, notwithstanding that the original treatment or disposal activity accorded with all applicable regulatory requirements.

We are responsible for, and have financial exposure to, liabilities from pending and threatened claims which could adversely impact our results of operations and cash flow.

There are various claims, lawsuits and administrative proceedings pending or threatened against us. 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. Our results could be adversely affected by financial exposure to these liabilities. We could also be subject to additional legal proceedings in the future that may adversely affect our 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 us 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 our 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.

 

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Our substantial indebtedness may adversely affect our business, results of operations and financial condition.

After giving effect to the separation and the contribution transactions, we expect to have indebtedness of approximately $         . Our substantial indebtedness could adversely affect our business, results of operations and financial condition by, among other things:

 

    requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;

 

    limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

 

    making us more vulnerable to adverse changes in general economic, industry and regulatory conditions and in our business by limiting our flexibility in planning for, and making it more difficult for us to react quickly to, changing conditions;

 

    placing us at a competitive disadvantage compared with our competitors that have less debt and lower debt service requirements;

 

    making us more vulnerable to increases in interest rates since some of our indebtedness is subject to variable rates of interest; and

 

    making it more difficult for us to satisfy our financial obligations.

In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our debts as they become due, we could be in default under the terms of our indebtedness. We might also be required to pursue one or more alternative strategies to repay indebtedness, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, we may negatively affect our ability to generate revenues.

If we are unable to access the capital markets or obtain bank credit, our financial position, growth plans, liquidity and results of operations could be negatively impacted.

We are dependent on a stable, liquid, and well-functioning financial system to fund our operations and capital investments. In particular, we may rely on the public or private debt markets to fund portions of our capital investments and the commercial paper market and bank credit facilities to fund seasonal needs for working capital. Our access to these markets depends on multiple factors including the condition of debt capital markets, our operating performance and our credit ratings. If rating agencies lower our credit ratings, it could adversely impact our ability to access the debt markets, our 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 our current credit rating will remain the same.

We are subject to payment-related risks for owned VIOC stores.

At our owned VIOC stores, we accept a variety of payment methods, including credit cards and debit cards. Accordingly, we are, 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 us. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these

 

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independent service providers become unwilling or unable to provide these services to us or if the cost of using these providers increases, our business could be harmed. We are 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 us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or consumers, subject to fines and higher transaction fees, lose our ability to accept credit and debit card payments from our customers or process electronic fund transfers or facilitate other types of payments and our brand, business and results of operations could be significantly harmed.

Risks Related to Our Separation from Ashland

The spin-off may not occur and the separation may not be successful.

Upon completion of this offering, we will be a standalone public company, although we will continue to be controlled by Ashland. Ashland has announced its intention to consummate the spin-off approximately six months after the closing of this offering. However, Ashland may abandon or change the structure of the spin-off if it determines, in its sole discretion, that the spin-off is not in the best interest of Ashland or its shareholders. Such determination may take into account, without limitation, the potential impact on the spin-off of a change in control of Ashland.

In addition, the process of becoming a standalone public company may distract our management from focusing on our business and strategic priorities. Further, although we expect to have direct access to the debt and equity capital markets following this offering, we may not be able to issue debt or equity on terms acceptable to us or at all. Moreover, even with equity compensation tied to our business, we may not be able to attract and retain employees as desired. We also may not fully realize the anticipated benefits of being a standalone public company if any of the risks identified in this “Risk Factors” section, or other events, were to occur. If we do not realize these anticipated benefits for any reason, our business may be negatively affected. In addition, the separation could adversely affect our operating results and financial condition.

As long as Ashland controls us, your ability to influence matters requiring shareholder approval will be limited.

After this offering, Ashland will own          shares of our common stock, representing approximately     % of the total outstanding shares of our common stock (or     % if the underwriters exercise their overallotment option in full). For so long as Ashland beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of our outstanding common stock, Ashland will be able to elect all of the members of our board of directors. Currently,          members of our board of directors, William A. Wulfsohn and         , are members of the Ashland board of directors, and Mr. Wulfsohn is the Chairman and Chief Executive Officer of Ashland.

The spin-off could result in significant tax liability to Ashland, and in certain circumstances, we could be required to indemnify Ashland for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.

Ashland expects to obtain a written opinion of counsel to the effect that the spin-off 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 would not address any U.S. state or local or foreign tax consequences of the spin-off. The opinion will assume that the spin-off will be completed according to the terms of the Separation Agreement and will rely on the facts as described in the Separation Agreement, the Tax Matters Agreement, other ancillary agreements, the information statement to be distributed to Ashland’s shareholders in connection with the spin-off and a number of other documents. In addition, the opinion will be based on certain representations as to factual matters from, and certain covenants by, Ashland and us. 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.

 

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The opinion of counsel will not be binding on the Internal Revenue Service (the “IRS”) or the courts, and 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 spin-off.

If the spin-off were determined not to qualify for non-recognition of gain and loss, then Ashland would recognize gain as if it had sold our common stock in a taxable transaction in an amount up to the fair market value of our common stock it distributed in the spin-off. In addition, certain reorganization transactions undertaken in connection with the separation and the spin-off could be determined to be taxable, which could result in additional taxable gain. Under certain circumstances, as described in “Certain Relationships and Related Party Transactions—Relationship with Ashland—Tax Matters Agreement,” we could have an indemnification obligation to Ashland with respect to tax on some or all of such gain.

We could have an indemnification obligation to Ashland if events or actions subsequent to the spin-off cause the spin-off to be taxable.

If, due to any of our covenants in the Tax Matters Agreement being breached, it were determined that the spin-off did not qualify for non-recognition of gain and loss, we could be required to indemnify Ashland for the resulting taxes and related expenses. In addition, Section 355(e) of the Code generally creates a presumption that the spin-off would be taxable to Ashland, but not to its shareholders, if we or our shareholders were to engage in transactions that result in a 50% or greater change (by vote or value) in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the spin-off, unless it were established that such transactions and the spin-off were not part of a plan or series of related transactions. If the spin-off were taxable for U.S. federal income tax purposes to Ashland due to a breach of our covenants or a 50% or greater change in the ownership of our stock, Ashland would recognize gain as if it had sold our common stock in a taxable transaction in an amount up to the fair market value of our stock held by it immediately before the spin-off, and we 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 spin-off. Any such obligation could have a material impact on our operations. See “Certain Relationships and Related Party Transactions—Relationship with Ashland—Tax Matters Agreement” for more information.

We intend to agree to numerous restrictions to preserve the non-recognition treatment of the spin-off, which may reduce our strategic and operating flexibility.

We intend to agree in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with Section 355(e) of the Code. These covenants and indemnification obligations may limit our 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 our shareholders may consider favorable. See “Certain Relationships and Related Party Transactions—Relationship with Ashland—Tax Matters Agreement” for more information.

Although we expect to enter into the Tax Matters Agreement with Ashland under which our tax liabilities effectively will be determined as if we were not part of any consolidated, combined or unitary tax group of Ashland and/or its subsidiaries, we nonetheless could be held liable for the tax liabilities of other members of these groups.

Our operations have been included in the tax returns filed by Ashland’s consolidated group for U.S. federal income tax purposes (the “consolidated group”). In addition, our operations have been included in certain consolidated, combined or unitary groups that include Ashland and/or certain of its subsidiaries for taxes other than U.S. federal income taxes (each, a “combined group”). We intend to continue to be included in the consolidated group and certain combined groups immediately following this offering until the spin-off. Pursuant

 

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to the Tax Matters Agreement, for any taxable period in which we or any of our subsidiaries are included in the consolidated group or any combined group, we and Ashland generally will make payments to each other such that the amount of taxes payable by us will be determined as if we and each of our subsidiaries included in such consolidated group or combined group filed our own consolidated, combined, unitary or separate tax return.

Each member of the consolidated group during any part of a consolidated return year is jointly and severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency. Similarly, in some jurisdictions, each member of a combined group is jointly and severally liable for the state, local or foreign tax liability of each other member of such group. Accordingly, for any prior period in which we were included in the consolidated group or any combined group, we could be liable for taxes incurred by Ashland and/or its subsidiaries included in such group even if we are no longer a member of such consolidated group or combined group.

We have no operating history as a standalone public company, and our historical and pro forma financial information is not necessarily representative of the results we would have achieved as a standalone public company and may not be a reliable indicator of our future results.

The historical financial information we have included in this prospectus does not reflect, and the pro forma financial information included in this prospectus may not reflect, what our financial position, results of operations or cash flows would have been had we been a standalone entity during the historical periods presented, or what our financial position, results of operations or cash flows will be in the future as an independent entity.

The pro forma financial information included in this prospectus includes adjustments based upon available information we believe to be reasonable. However, the assumptions may change and actual results may differ. In addition, we have not made pro forma adjustments to reflect many significant changes that will occur in our cost structure, funding and operations as a result of our transition to becoming a public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with being a publicly traded, standalone company. For additional information about the basis of presentation of our pro forma financial information and historical financial information included in this prospectus, see “Selected Combined Financial Data” and “Unaudited Pro Forma Condensed Combined Financial Statements.”

If Ashland experiences a change in control, our current plans and strategies could be subject to change.

As long as Ashland controls us, it will have significant influence over our plans and strategies, including strategies relating to marketing and growth. In the event Ashland experiences a change in control, a new Ashland owner may attempt to cause us to revise or change our plans and strategies, as well as the agreements between Ashland and us, described in this prospectus. A new owner may also have different plans with respect to the contemplated spin-off of our common stock to Ashland shareholders, including not affecting such a spin-off.

Our ability to operate our business effectively may suffer if we are unable to cost-effectively establish our own administrative and other support functions in order to operate as a standalone company after the expiration of our shared services and other intercompany agreements with Ashland.

As a business segment of Ashland, we relied on administrative and other resources of Ashland, including information technology, accounting, finance, human resources and legal, to operate our business. In connection with this offering, we have entered into various service agreements to retain the ability for specified periods to use these Ashland resources. See “Certain Relationships and Related Party Transactions.” These services may not be provided at the same level as when we were a business segment within Ashland, and we may not be able to obtain the same benefits that we received prior to this offering. These services may not be sufficient to meet our needs, and after our agreements with Ashland expire (which will generally occur within 24 months following

 

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the closing of this offering), we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have with Ashland. We will need to create our own administrative and other support systems or contract with third parties to replace Ashland’s systems. In addition, we have received informal support from Ashland which may not be addressed in the agreements we have entered into with Ashland, and the level of this informal support may diminish as we become a more independent company. Any failure or significant downtime in our own administrative systems or in Ashland’s administrative systems during the transitional period could result in unexpected costs, impact our results and/or prevent us from paying our suppliers or employees and performing other administrative services on a timely basis.

After this offering, we will be a smaller company relative to Ashland, which could result in increased costs because of a decrease in our purchasing power. We may also experience decreased revenue due to difficulty maintaining existing customer relationships and obtaining new customers.

Prior to this offering, we were able to take advantage of Ashland’s size and purchasing power in procuring goods, technology and services, including insurance, employee benefit support and audit and other professional services. We are a smaller company than Ashland, and we cannot assure you that we will have access to financial and other resources comparable to those available to us prior to this offering. As a standalone company, we may be unable to obtain office space, goods, technology and services at prices or on terms as favorable as those available to us prior to this offering, which could increase our costs and reduce our profitability. Our future success depends on our ability to maintain our current relationships with existing customers, and we may have difficulty attracting new customers.

In order to preserve the ability for Ashland to distribute its shares of our common stock on a tax-free basis, we may be prevented from pursuing opportunities to raise capital, to effectuate acquisitions or to provide equity incentives to our employees, which could hurt our ability to grow.

Beneficial ownership by Ashland of at least 80% of the total voting power of our classes of voting stock and 80% of each class of our non-voting stock is required in order for Ashland to effect the spin-off of us or certain other tax-free transactions. We have agreed that, so long as the spin-off could, in the reasonable discretion of Ashland, be effectuated, we will not knowingly take or fail to take, or permit any of our affiliates to knowingly take or fail to take, any action that could reasonably be expected to preclude Ashland’s ability to effectuate the spin-off. As a result, we may be precluded from pursuing certain growth initiatives, including the creation of a class of non-voting stock, unless Ashland were to purchase at least 80% of such class of shares of any subsequent equity offering.

Ashland has agreed to indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Ashland’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation Agreement and certain other agreements with Ashland, Ashland has agreed to indemnify us for certain liabilities. However, third parties could also seek to hold us responsible for any of the liabilities that Ashland has agreed to retain, and there can be no assurance that the indemnity from Ashland will be sufficient to protect us against the full amount of such liabilities, or that Ashland will be able to fully satisfy its indemnification obligations in the future. Even if we ultimately succeed in recovering from Ashland any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could negatively affect our business, financial position, results of operations and cash flows.

 

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Some of our directors and executive officers own Ashland common stock, restricted shares of Ashland common stock or options to acquire Ashland common stock and hold positions with Ashland, which could cause conflicts of interest, or the appearance of conflicts of interest, that result in our not acting on opportunities we otherwise may have.

Some of our directors and executive officers own Ashland common stock, restricted shares of Ashland stock or options to purchase Ashland common stock. In addition, Mr. Wulfsohn will serve as the Non-Executive Chairman of our board of directors, while retaining his role as Chairman and Chief Executive Officer of Ashland.

Ownership of Ashland common stock, restricted shares of Ashland common stock and options to purchase Ashland common stock by our directors and executive officers after this offering and the presence of executive officers or directors of Ashland on our board of directors could create, or appear to create, conflicts of interest with respect to matters involving both us and Ashland that could have different implications for Ashland than they do for us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between Ashland and us regarding terms of the agreements governing the separation and the relationship between Ashland and us thereafter, including the Separation Agreement, the employee matters agreement, the Tax Matters Agreement, the transition services agreements or any other commercial agreements between Ashland and us. Potential conflicts of interest could also arise if we enter into commercial arrangements with Ashland in the future. As a result of these actual or apparent conflicts of interest, we may be precluded from pursuing certain growth initiatives.

Ashland’s ability to control our board of directors may make it difficult for us to recruit high-quality independent directors.

So long as Ashland beneficially owns shares of our common stock representing at least a majority of the votes entitled to be cast by the holders of our outstanding voting stock, Ashland can effectively control and direct our board of directors. Currently,              members of our board of directors are also members of the Ashland board of directors. Further, the interests of Ashland and our other shareholders may diverge. Under these circumstances, persons who might otherwise accept our invitation to join our board of directors may decline.

Our inability to resolve favorably any disputes that arise between us and Ashland with respect to our past and ongoing relationships may adversely affect our operating results.

Disputes may arise between Ashland and us in a number of areas relating to our ongoing relationships, including:

 

    labor, tax, employee benefit, indemnification and other matters arising from our separation from Ashland;

 

    employee retention and recruiting;

 

    business combinations involving us; and

 

    the nature, quality and pricing of services that we and Ashland have agreed to provide each other.

We may not be able to resolve potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.

The agreements we have entered into with Ashland may be amended upon agreement between the parties. While we are controlled by Ashland, we may not have the leverage to negotiate amendments to these agreements if required on terms as favorable to us as those we would negotiate with an unaffiliated third party.

 

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We will be a “controlled company” within the meaning of the NYSE rules and, as a result, we intend to rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

After the completion of this offering, Ashland will own more than 50% of the total voting power of our common stock and we will be a “controlled company” under the NYSE corporate governance standards. As a controlled company, certain exemptions under the NYSE corporate governance standards free us from the obligation to comply with certain of the NYSE corporate governance requirements, including the requirements:

 

    that a majority of our board of directors consists of independent directors;

 

    that we have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committees’ purpose and responsibilities;

 

    that we have a governance and nominating committee that is comprised entirely of independent directors with a written charter addressing the committees’ purpose and responsibilities; and

 

    the requirement for an annual performance evaluation of our nominating and governance and compensation committees.

Consistent with these exceptions, while Ashland continues to control a majority of our outstanding common stock, we intend to elect not to comply with the corporate governance standards requiring (i) a majority of independent directors on the board; (ii) a fully independent compensation committee; and (iii) a fully independent governance and nominating committee. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE. In the event that we cease to be a controlled company within the meaning of the NYSE rules, we will be required to comply with these requirements after specified transition periods.

Risks Related to This Offering and Ownership of Our Common Stock

No market currently exists for our common stock. We cannot assure you that an active trading market will develop for our common stock.

Prior to this offering, there has been no public market for shares of our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the NYSE or otherwise, or how liquid that market might become. If an active market does not develop, you may have difficulty selling any shares of our common stock that you purchase in this initial public offering. The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters, and may not be indicative of prices that will prevail in the open market following this offering.

If our stock price fluctuates after this offering, you could lose a significant part of your investment.

The market price of our common stock will be influenced by many factors, some of which are beyond our control, including those described above in “—Risks Related to Our Business” and the following:

 

    the failure of securities analysts to cover our common stock after this offering or changes in financial estimates by analysts;

 

    the inability to meet the financial estimates of analysts who follow our common stock;

 

    strategic actions by us or our competitors;

 

    announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

 

    variations in our quarterly operating results and those of our competitors;

 

    general economic and stock market conditions;

 

    risks related to our business and our industry, including those discussed above;

 

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    changes in conditions or trends in our industry, markets or customers;

 

    terrorist acts;

 

    future sales of our common stock or other securities;

 

    whether, when and in what manner Ashland completes the spin-off; and

 

    investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the initial offering price or may not be able to resell them at all. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.

We may change our dividend policy at any time.

Although following this offering we initially expect to pay quarterly cash dividends to holders of our common stock, we have no obligation to pay any dividend, and our dividend policy may change at any time without notice to our shareholders. The declaration and amount of any future dividends to holders of our common stock will be at the discretion of our board of directors in accordance with applicable law and after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, cash flows, impact on our effective tax rate, indebtedness, contractual obligations, legal requirements and other factors that our board of directors deems relevant. As a result, we cannot assure you that we will pay dividends at any rate or at all.

Future sales, or the perception of future sales, of our common stock may depress the price of our common stock.

The market price of our common stock could decline significantly as a result of sales or other distributions of a large number of shares of our common stock in the market after this offering, including shares which might be offered for sale or distributed by Ashland. The perception that these sales might occur could depress the market price of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering, we will have              shares of common stock (              shares if the underwriters exercise their overallotment option in full) outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), except for any shares of common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. We will grant registration rights to Ashland with respect to shares of our common stock. Any shares registered pursuant to the registration rights agreement described in “Certain Relationships and Related Party Transactions” will be freely tradable in the public market following a 180-day lock-up period as described below.

In connection with this offering, we, our directors and executive officers and Ashland have each agreed to enter into a lock-up agreement and thereby be subject to a lock-up period, meaning that they and their permitted transferees will not be permitted to sell any of the shares of our common stock for 180 days after the date of this prospectus, without the prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC on behalf of the underwriters. Although we have been advised that there is no present intention to do so, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC, on behalf of the underwriters may, in their sole discretion and without notice, release all or any portion of the shares of our common stock from the restrictions in any of the lock-up agreements described above. See “Underwriting.”

 

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Also, in the future, we may issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering, and you will suffer additional dilution if the underwriters exercise their overallotment option.

If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution, as the initial public offering price of our common stock will be substantially greater than the pro forma net tangible book value per share of our common stock. Based on the assumed initial offering price of $         per share, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $         per share. In connection with the separation, we will assume Ashland stock-based compensation awards of our employees, which may result in additional dilution to investors in this offering.

Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

We have historically operated our business as a division of a public company. As a standalone public company, we will have additional legal, accounting, insurance, compliance and other expenses that we have not incurred historically. After this offering, we will become obligated to file with the Securities Exchange Commission (“SEC”) annual and quarterly reports and other reports that are specified in Section 13 and other sections of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we will become subject to other reporting and corporate governance requirements, including certain requirements of the NYSE, and certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the regulations promulgated thereunder, which will impose significant compliance obligations upon us.

Sarbanes-Oxley, as well as rules subsequently implemented by the SEC and the NYSE, have imposed increased regulation and disclosure and required enhanced corporate governance practices of public companies. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased selling and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. These changes will require a significant commitment of additional resources. We may not be successful in implementing these requirements and implementing them could materially adversely affect our business, results of operations and financial condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE. Any such action could harm our reputation and the confidence of investors and customers in our company and could materially adversely affect our business and cause our share price to fall.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley could have a material adverse effect on our business and stock price.

As a public company, we will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of Sarbanes-Oxley, which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm that addresses the effectiveness of internal control over financial reporting. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet our deadline for compliance with Section 404. Testing and maintaining internal control can divert our management’s

 

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attention from other matters that are important to the operation of our business. We also expect the regulations under Sarbanes-Oxley to increase our legal and financial compliance costs, make it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations because there is presently no precedent available by which to measure compliance adequacy. If either we are unable to conclude that we have effective internal control over financial reporting or our independent auditors are unable to provide us with an unqualified report as required by Section 404, then investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock or if our operating results do not meet their expectations, our stock price could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our stock or if our operating results do not meet their expectations, our stock price could decline.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in the price of our common stock, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and results of operations and divert management’s attention and resources from our business.

Anti-takeover provisions in our charter documents and under Kentucky law could discourage, delay or prevent a change in control of our company and may result in an entrenchment of management and diminish the value of our common stock.

Several provisions of our amended and restated certificate of incorporation and amended and restated by-laws could make it difficult for our shareholders to change the composition of our board of directors, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that our shareholders may consider favorable.

These include:

 

    provisions in our amended and restated articles of incorporation and our amended and restated by-laws limiting the ability of our shareholders to remove directors without cause, change the authorized number of directors and fill director vacancies;

 

    provisions in our amended and restated articles of incorporation prohibiting cumulative voting in the election of directors;

 

    the availability under our amended and restated articles of incorporation of authorized but unissued shares of preferred stock for issuance by us from time to time at the discretion of our board of directors;

 

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    provisions in our amended and restated by-laws requiring that shareholders provide advance notice in order to raise business or make nominations at shareholders’ meetings, which could have the effect of delaying shareholder action until the next shareholders’ meeting that is favored by the holders of a majority of our outstanding voting securities or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of us;

 

    provisions in our amended and restated articles of incorporation limiting the ability of shareholders to adopt, amend or repeal our amended and restated by-laws and to amend or repeal certain provisions in our amended and restated articles of incorporation; and

 

    provisions in Section 271B.12 of the Kentucky Business Corporation Act and our amended and restated articles of incorporation preventing us from engaging in certain business combinations with an interested shareholder (generally defined as a beneficial owner of 10% or more of our outstanding voting power) for a period of five years after the date such shareholder became an interested shareholder, unless certain procedures are followed or certain conditions are satisfied.

These anti-takeover provisions could substantially impede the ability of our shareholders to benefit from a change in control and, as a result, could materially adversely affect the market price of our common stock and your ability to realize any potential change-in-control premium. You should carefully review our amended and restated articles of incorporation and our amended and restated by-laws, forms of which are filed as exhibits to the registration statement of which this prospectus is a part, which will govern your rights as a shareholder, as well as “Description of Capital Stock” and the provisions of applicable Kentucky law.

Our board of directors will have the ability to issue blank check preferred stock, which may discourage or impede acquisition attempts or other transactions.

Our board of directors will have the power, subject to applicable law, to issue series of preferred stock that could, depending on the terms of the series, impede the completion of a merger, tender offer or other takeover attempt. For instance, subject to applicable law, a series of preferred stock may impede a business combination by including class voting rights, which would enable the holder or holders of such series to block a proposed transaction. Our board of directors will make any determination to issue shares of preferred stock on its judgment as to our and our shareholders’ best interests. Our board of directors, in so acting, could issue preferred stock having terms which could discourage an acquisition attempt or other transaction that some, or a majority, of the shareholders may believe to be in their best interests or in which shareholders would have received a premium for their stock over the then prevailing market price of the stock.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements, other than statements of historical facts, contained in this prospectus, including statements regarding our industry, position, goals, strategy, future operations, future financial position, future revenues, estimated costs, prospects, margins, profitability, capital expenditures, liquidity, capital resources, plans, and objectives of management, including those made in the sections entitled “Prospectus Summary,” Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “likely,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “forecast,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” “might,” “objective,” “on-going,” “seek” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements are based on our current expectations and assumptions regarding, as of the date such statements are made, our future operating performance and financial condition, including our separation from Ashland, the expected timetable for the spin-off and our future financial and operating performance, strategic and competitive advantages, leadership and future opportunities, as well as the economy and other future events or circumstances. Our expectations and assumptions include, without limitation, internal forecasts and analyses of current and future market conditions and trends, management plans and strategies, operating efficiencies and economic conditions (such as prices, supply and demand, cost of raw materials, and the ability to recover raw-material cost increases through price increases), and risks and uncertainties associated with the following: demand for our products and services; sales growth in emerging markets; the prices and margins of our products and services; the strength of our reputation and brand; our ability to develop and successfully market new products and implement our digital platforms; our ability to retain our largest customers; potential product liability claims; achievement of the expected benefits of the separation; our substantial indebtedness (including the possibility that such indebtedness and related restrictive covenants may adversely affect our future cash flows, results of operations, financial condition and our ability to repay debt) and other liabilities; operating as a standalone public company; our ongoing relationship with Ashland; failure, caused by us, of Ashland’s spin-off of our common stock to its shareholders to qualify for tax-free treatment, which may result in significant tax liabilities to Ashland for which we may be required to indemnify Ashland; and the impact of acquisitions and/or divestitures we have made or may make (including the possibility that we may not realize the anticipated benefits from such transactions). These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

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

See “Risk Factors” for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this prospectus and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

 

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USE OF PROCEEDS

Based on our assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), we estimate that the proceeds we will receive from the sale of our common stock in this offering will be approximately $         million (or approximately $         million if the underwriters’ overallotment option is exercised in full), after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to repay $         million of indebtedness, with an interest rate of     %. As described in “Description of Indebtedness,” we may incur certain short-term indebtedness in the amount of $     million, with an interest rate of     %, immediately prior to the closing of this offering. If we incur this short-term indebtedness, we plan to repay such short-term indebtedness in full with the net proceeds of this offering. Any remaining proceeds will be used for general corporate purposes.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $         million, assuming the expected number of shares to be sold by us in this offering remains the same and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. If the underwriters exercise their overallotment option in full, we estimate our net proceeds will be approximately $         million. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us by approximately $         million, assuming that the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us.

 

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DIVIDEND POLICY

We intend to pay quarterly cash dividends to holders of our common stock. The declaration and payment of dividends to holders of our common stock will be at the discretion of our board of directors in accordance with applicable law after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, cash flows, impact on our effective tax rate, indebtedness, legal requirements and other factors that our board of directors deems relevant. In addition, the instruments governing our indebtedness may limit our ability to pay dividends. Therefore, no assurance is given that we will pay any dividends to our shareholders, or as to the amount of any such dividends if our board of directors determines to do so.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2016 on an actual basis and on a pro forma basis to reflect the transactions described in “Unaudited Pro Forma Condensed Combined Financial Statements.”

The information below is not necessarily indicative of what our cash and cash equivalents and capitalization would have been had the separation and contribution transactions been completed as of March 31, 2016. In addition, it is not indicative of our future cash and cash equivalents and capitalization. This table is derived from, and is qualified in its entirety by reference to, our historical and pro forma financial statements and the notes thereto included elsewhere in this prospectus, and should be read in conjunction with “Selected Combined Financial Data,” “Unaudited Pro Forma Condensed Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and notes thereto included elsewhere in this prospectus.

 

     As of
March 31, 2016
 
     Actual      Pro forma(1)  
     (Unaudited)  

(Dollars in millions, except per share data)

     

Cash and cash equivalents(2)

   $                    $                
  

 

 

    

 

 

 

Debt:

     

Long-term debt

     —         $     
  

 

 

    

 

 

 

Total debt

     —         $     
  

 

 

    

 

 

 

Equity:

     

Ashland’s net investment

   $           —     

Common stock, $0.01 par value (          shares authorized and          shares issued and outstanding on a pro forma basis)(3)

     —         $     

Accumulated other comprehensive income (loss)

     —        
  

 

 

    

 

 

 

Additional paid-in capital

   $         $     
  

 

 

    

 

 

 

Total equity

   $         $     
  

 

 

    

 

 

 

Total capitalization

   $         $     
  

 

 

    

 

 

 

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total stockholders’ equity by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) total stockholders’ equity by approximately $        , assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.
(2) Ashland uses a centralized approach to cash management. Accordingly, cash and cash equivalents are held by Ashland at the corporate level and were not attributed to Valvoline for the period presented. Transfers of cash, both to and from Ashland’s centralized cash management system, are reflected as a component of Ashland’s net investment in Valvoline on the Combined Balance Sheet and as a financing activity within the accompanying Combined Statement of Cash Flows.
(3) The number of shares of common stock issued and outstanding on a pro forma basis assumes the underwriters do not exercise their overallotment option.

 

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DILUTION

Investors purchasing our common stock in this offering will experience immediate and substantial dilution in the pro forma net tangible book value of their shares of common stock. Dilution in pro forma net tangible book value represents the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Pro forma net tangible book value represents our total tangible assets (total assets less intangible assets) less total liabilities, divided by the pro forma number of outstanding shares of common stock. As of March 31, 2016, our pro forma net tangible book value was $         million, or $         per share. After giving effect to the sale and issuance of              shares of our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2016 would have been approximately $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing shareholder, Ashland, and an immediate dilution of $         per share to new investors participating in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial price to public per share

      $                

Pro forma net tangible book value per share as of March 31, 2016(1)

   $                   

Increase per share attributable to new investors(2)

   $        
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering(3)

     
     

 

 

 

Dilution per share to new investors

      $     
     

 

 

 

 

(1) Determined by dividing the net tangible book value of the contributed tangible assets (total assets less intangible assets) less total liabilities by the total number of common shares (             common shares) to be issued to Ashland for its contribution of assets and liabilities to us in connection with the separation.
(2) Represents the difference between pro forma as adjusted net tangible book value per share after this offering and pro forma net tangible book value per share as of March 31, 2016.
(3) Determined by dividing (i) pro forma as adjusted net tangible book value, which is our pro forma net tangible book value plus the cash proceeds of this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us, by (ii) the total number of our common shares to be outstanding following this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by approximately $         million, or approximately $         per share, and increase (decrease) the dilution per share to investors participating in this offering by approximately $         per share, assuming that the number of shares offered by us remains the same and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 in the number of shares offered by us would increase our pro forma as adjusted net tangible book value by approximately $         million, or $         per share, and decrease the dilution per share to investors participating in this offering by $         per share, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. Similarly, a decrease of 1,000,000 shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $         million, or $         per share, and increase the dilution per share to investors participating in this offering by $         per share, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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If the underwriters exercise their overallotment option in full, the pro forma as adjusted net tangible book value per share after this offering would be $         per share, the incremental increase in the pro forma net tangible book value per share to our existing shareholder, Ashland, would be $         per share and the pro forma dilution to new investors participating in this offering would be $         per share.

The following table summarizes, on the pro forma as adjusted basis described above as of March 31, 2016, the differences between the number of shares of common stock purchased from us, the total consideration and the price per share paid by our existing shareholder, Ashland, and by investors participating in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discount and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration
(in thousands)
    Weighted-
Average
Price Per
Share
 
     Number     Percent     Amount     Percent    

Ashland

                  (1)             $              (2)                 $                

Investors participating in this offering

                            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

       100.0   $                                $     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents the total number of common shares (             common shares) to be issued to Ashland for its contribution of assets and liabilities to us.
(2) Represents the net tangible book value as of                     , 2016 of the tangible assets (total assets less intangible assets) less total liabilities contributed in connection with the separation.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) total consideration paid by new investors by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors by approximately $         million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discount and commissions and estimated offering expenses payable by us.

 

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SELECTED COMBINED FINANCIAL DATA

The following financial data should be read in conjunction with our audited and unaudited combined financial statements and the related notes, and our unaudited pro forma condensed combined financial statements and the related notes, included elsewhere in this prospectus.

The following table summarizes our historical combined financial data. The selected historical combined balance sheet data as of September 30, 2015 and 2014 and statement of operations data for the years ended September 30, 2015, 2014, and 2013 are derived from our audited combined financial statements included elsewhere in this prospectus. The selected historical combined financial data as of and for the six months ended March 31, 2016 and 2015 is derived from our unaudited interim combined financial statements included elsewhere in this prospectus. The historical combined balance sheet data as of September 30, 2013, 2012, and 2011 and statement of operations data for the years ended September 30, 2012 and 2011 are derived from our unaudited annual combined financial statements, which are not included in this prospectus. In the opinion of management, the unaudited combined financial statements include all normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and the operating results for these periods. The operating results for the six months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended September 30, 2016 or any other interim periods or any future year or period.

The selected historical combined financial data includes certain expenses of Ashland that were allocated to us for certain corporate functions including, treasury, legal, accounting, insurance, information technology, payroll administration, human resources, stock incentive plans and other services. Management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by us during the periods presented. However, these shared expenses may not represent the amounts that would have been incurred had we operated autonomously or independently from Ashland. Actual costs that would have been incurred if we had been a standalone company would depend on multiple factors, including organizational structure and strategic decisions in various areas, such as information technology and infrastructure. In addition, our historical combined financial data does not reflect changes that we expect to experience in the future as a result of our separation from Ashland, including changes in our cost structure, personnel needs, tax structure, capital structure, financing and business operations.

Our annual and interim combined financial statements also do not reflect the assignment of certain assets and liabilities between Ashland and us as reflected under “Unaudited Pro Forma Condensed Combined Financial Statements” included elsewhere in this prospectus. Consequently, the financial information included in this section may not necessarily reflect what our financial position, results of operations and cash flows would have been had we been a standalone company during the periods presented. Accordingly, these historical results should not be relied upon as an indicator of our future performance.

 

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The following selected historical combined financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Unaudited Pro Forma Condensed Combined Financial Statements” and accompanying notes and the interim and annual combined financial statements and accompanying notes included elsewhere in this prospectus.

 

(Dollars in millions)   Six months ended
March 31,
    Year ended
September 30,
 
  2016     2015     2015     2014     2013     2012     2011  
    (unaudited)     (unaudited)                       (unaudited)     (unaudited)  

Statement of Operations Data:

             

Sales

  $ 935.7      $ 973.4      $ 1,966.9      $ 2,041.3      $ 1,996.2      $ 2,034.0      $ 1,971.1   

Cost of sales

    567.9        634.9        1,281.8        1,408.9        1,338.3        1,502.1        1,447.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    367.8        338.5        685.1        632.4        657.9        531.9        523.2   

Selling, general and administrative

    137.4        128.4        290.8        302.8        213.4        302.3        298.8   

Corporate expense allocation

    41.1        39.2        79.5        95.0        88.2        80.6        81.7   

Equity and other income (loss)

    10.7        (2.0     8.3        30.1        24.3        22.5        19.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    200.0        168.9        323.1        264.7        380.6        171.5        162.3   

Net loss on acquisition and divestiture

    (0.5     (26.0     (26.3     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    199.5        142.9        296.8        264.7        380.6        171.5        162.3   

Income tax expense

    66.5        52.4        100.7        91.3        134.5        57.7        52.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 133.0      $ 90.5      $ 196.1      $ 173.4      $ 246.1      $ 113.8      $ 109.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    As of
March 31,
    As of
September 30,
 
    2016     2015     2015     2014     2013     2012     2011  
    (unaudited)     (unaudited)           (unaudited)     (unaudited)     (unaudited)  

Balance Sheet Data:

             

Current assets

  $ 514.4      $ 502.0      $ 477.3      $ 544.7      $ 519.1      $ 496.2      $     501.1   

Property, plant and equipment, net

    266.5        248.0        253.5        272.4        270.2        262.1        255.7   

Total assets

    1,117.4        999.3        977.9        1,082.5        1,062.0        1,023.9        993.1   

Current liabilities

    300.6        266.1        298.6        293.5        312.6        291.8        289.4   

Total liabilities

    377.8        327.3        360.8        357.7        378.3        354.0        337.0   

 

     Six months
ended

March 31,
     Year ended
September 30,
 
Unaudited    2016      2015      2015      2014      2013      2012      2011  

Other Financial Data:

                    

Free cash flow (1)

   $ 76.7       $ 142.9       $ 284.8       $ 133.4       $ 232.0       $ 98.1       $ 86.6   

EBITDA (2)

     218.5         161.7         334.8         301.8         416.3         207.2         199.9   

Adjusted EBITDA (2)

     223.2         204.4         421.8         369.2         342.3         275.0         251.6   

 

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(1) For a complete discussion of the method of calculating free cash flow and its usefulness, refer to “Prospectus Summary—Summary Historical and Pro Forma Combined Financial Data” included elsewhere in this prospectus.

 

     The following table reconciles free cash flow to cash flows provided by operating activities for the periods presented.

 

(Dollars in millions)    Six months
ended
March 31,
     Year ended
September 30,
 
     2016      2015      2015      2014      2013      2012      2011  

Cash flows provided by operating activities

   $ 91.1       $ 160.6       $ 329.8       $ 170.6       $ 272.9       $ 137.8       $ 122.7   

Less:

                    

Additions to property, plant and equipment

     (14.4)         (17.7)         (45.0)         (37.2)         (40.9)         (39.7)         (36.1)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

   $ 76.7       $ 142.9       $ 284.8       $ 133.4       $ 232.0       $ 98.1       $ 86.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) For a complete discussion of the method of calculating EBITDA and Adjusted EBITDA and their usefulness, refer to “Prospectus Summary—Summary Historical and Pro Forma Combined Financial Data” included elsewhere in this prospectus.

The following table reconciles EBITDA and Adjusted EBITDA to net income for the periods presented.

 

(Dollars in millions)    Six months
ended
March 31,
     Year ended
September 30,
 
     2016      2015      2015      2014      2013     2012      2011  

Net income

   $ 133.0       $ 90.5       $ 196.1       $ 173.4       $ 246.1      $ 113.8       $ 109.9   

Income tax expense

     66.5         52.4         100.7         91.3         134.5        57.7         52.4   

Depreciation and amortization

     19.0         18.8         38.0         37.1         35.7        35.7         37.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

EBITDA

     218.5         161.7         334.8         301.8         416.3        207.2         199.9   

Losses (gains) on pension and other postretirement plans remeasurement

     4.7         2.0         46.0         61.1         (74.0     67.8         51.7   

Net loss on divestiture

     —           26.0         26.3         —           —          —           —     

Impairment of equity investment

     —           14.3         14.3         —           —          —           —     

Restructuring

     —           0.4         0.4         6.3         —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 223.2       $ 204.4       $ 421.8       $ 369.2       $ 342.3      $ 275.0       $ 251.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial statements consist of the unaudited pro forma condensed combined statements of operations for the six months ended March 31, 2016 and for the year ended September 30, 2015, and the unaudited pro forma condensed combined balance sheet as of March 31, 2016. The unaudited pro forma condensed combined financial statements have been derived by application of pro forma adjustments to our historical combined financial statements included elsewhere in this prospectus.

The unaudited pro forma condensed combined balance sheet reflects the separation as if it occurred on March 31, 2016, while the unaudited pro forma condensed combined statements of operations give effect to the separation as if it occurred on October 1, 2014, the beginning of the earliest period presented. The pro forma adjustments, described in the related notes, are based on currently available information and certain assumptions that management believes are reasonable. Excluded from the pro forma adjustments are items that are non-recurring in nature or are not material.

The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have occurred had the separation from Ashland been completed on March 31, 2016 for the unaudited pro forma condensed combined balance sheet or on October 1, 2014 for the unaudited pro forma condensed combined statements of operations. The unaudited pro forma condensed combined financial statements should not be relied on as indicative of the historical operating results that we would have achieved or any future operating results or financial position that we will achieve after the completion of this offering.

In addition, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are preliminary and have been made solely for purposes of developing these unaudited pro forma condensed combined financial statements. Actual results could differ, perhaps materially, from these estimates and assumptions.

The unaudited pro forma condensed combined financial statements reflect the impact of certain transactions, which comprise the following:

 

    the recapitalization, the contribution and the separation;

 

    the receipt of approximately $         in net proceeds from the sale of shares of our common stock in this offering at an assumed initial offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and commissions and estimated offering expenses payable by us, and the use of approximately $         of these proceeds to repay indebtedness;

 

    the indebtedness to be incurred in the related financing transactions; and

 

    other adjustments described in the notes to the unaudited pro forma condensed combined financial statements.

We have operated as a business segment of Ashland since 1950. As a result, Ashland provides certain corporate services to us, and costs associated with these functions have been allocated to us. These allocations include costs related to corporate services, such as executive management, supply chain, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury, and other services, as well as stock-based compensation expense attributable to our employees and an allocation of stock-based compensation attributable to employees of Ashland. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of total sales, relative percentage of headcount, or specific identification. The total amount of these allocations from

 

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Ashland was approximately $41.1 million in the six months ended March 31, 2016 and approximately $79.5 million in the year ended September 30, 2015. These cost allocations are primarily reflected within corporate expense allocation in the combined statements of operations and comprehensive income. Management believes the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented. Following the completion of this offering, we expect Ashland to continue to provide some services related to these functions on a transitional basis for a fee. These services will be provided under the transitional services agreement described in “Certain Relationships and Related Party Transactions—Relationship with Ashland.” Upon completion of this offering, we will assume responsibility for all our standalone public company costs, including the costs of corporate services currently provided by Ashland.

The following unaudited pro forma condensed combined financial statements and the related notes should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the interim and annual combined financial statements and the related notes included elsewhere in this prospectus.

 

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Valvoline

Unaudited Pro Forma Condensed Combined Statement of Operations

Six Months Ended March 31, 2016

 

(In millions except per share data)

 

     Valvoline
Historical
    Adjustments     Valvoline
Pro Forma
 

Sales

   $ 935.7      $               $            

Cost of sales

     567.9                 (A)   
  

 

 

   

 

 

   

 

 

 

Gross profit

     367.8       

Selling, general and administrative expenses

     137.4                 (A)   
                (B)   
                (C)   

Corporate expense allocation

     41.1                 (A)   

Equity and other income

     10.7       
  

 

 

   

 

 

   

 

 

 

Operating income

     200.0       

Net interest and other financing expense

     —                   (D)   

Net loss on acquisition

     (0.5    
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     199.5       

Income tax expense

     66.5                 (E)   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 133.0      $               $     
  

 

 

   

 

 

   

 

 

 

Earnings per Share, Basic and Diluted

      

Basic

     N/A        $          (F) 

Diluted

     N/A        $          (F) 

Weighted Average Shares Outstanding

      

Basic

     N/A                   (F) 

Diluted

     N/A                   (F) 

See notes to unaudited pro forma condensed combined financial statements.

 

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Valvoline

Unaudited Pro Forma Condensed Combined Statement of Operations

Year Ended September 30, 2015

 

(In millions except per share data)

 

     Valvoline
Historical
    Adjustments     Valvoline
Pro Forma
 

Sales

   $ 1,966.9      $               $            

Cost of sales

     1,281.8                 (A)   
  

 

 

   

 

 

   

 

 

 

Gross profit

     685.1       

Selling, general and administrative expenses

     290.8                 (A)   
                (B)   
                (C)   

Corporate expense allocation

     79.5                 (A)   

Equity and other income

     8.3       
  

 

 

   

 

 

   

 

 

 

Operating income

     323.1       

Net interest and other financing expense

     —                   (D)   

Net loss on divestitures

     (26.3    
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     296.8       

Income tax expense

     100.7                 (E)   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 196.1      $        $     
  

 

 

   

 

 

   

 

 

 

Earnings per Share, Basic and Diluted

      

Basic

     N/A        $          (F) 

Diluted

     N/A        $          (F) 

Weighted Average Shares Outstanding

      

Basic

     N/A                   (F) 

Diluted

     N/A                   (F) 

See notes to unaudited pro forma condensed combined financial statements.

 

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Valvoline

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2016

 

(In millions)

 

     Valvoline
Historical
    Adjustments     Valvoline
Pro Forma
 

Assets

      

Current assets

      

Cash and cash equivalents

   $ —        $          (G)    $            

Accounts receivable

     350.4                 (I)   

Inventories

     142.8       

Other assets

     21.2       
  

 

 

   

 

 

   

 

 

 

Total current assets

     514.4       

Noncurrent assets

      

Property, plant and equipment, net

     266.5                 (I)   

Goodwill

     253.0       

Intangibles

     3.5       

Equity method investments

     28.2       

Other assets

     51.8                 (E)   
                (H)   
                (I)   
  

 

 

   

 

 

   

 

 

 

Total noncurrent assets

     603.0       
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,117.4      $        $     
  

 

 

   

 

 

   

 

 

 

Liabilities and stockholders’ equity

      

Current liabilities

      

Short-term debt

   $ —        $          (H)    $     

Current portion of long-term debt

     —                   (H)   

Trade and other payables

     168.0                 (I)   

Accrued expenses and other liabilities

     132.6                 (B)   
                (I)   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     300.6       

Noncurrent liabilities

      

Long-term debt (less current portion)

     —                   (H)   

Employee benefit obligations

     12.1                 (B)   

Deferred income taxes

     23.8                 (E)   

Other liabilities

     41.3                 (I)   
  

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

     77.2       

Stockholders’ equity:

      

Common stock

     —         

Additional paid-in capital

     —                   (J)   

Invested equity attributable to Ashland Inc.

     795.5                 (J)   

Accumulated other comprehensive income (loss)

     (55.9              (B)   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     739.6       
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,117.4      $        $     
  

 

 

   

 

 

   

 

 

 

See notes to unaudited pro forma condensed combined financial statements.

 

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Notes to Unaudited Pro Forma Condensed Combined Financial Statements

(A) Costs from allocated pension and other postretirement plans

Adjustment represents the elimination of expenses associated with allocated pension and other postretirement plans included within our historical figures. For the year ended September 30, 2015, the reduction in expense totaled $         million, comprised of $         million within cost of sales, $         million within selling, general and administrative expenses and $         million within corporate expense allocation. The adjustment for the six months ended March 31, 2016 represents a reduction in expense totaling $         million, comprised of $         million within cost of sales, $         million within selling, general and administrative expenses and $         million within corporate expense allocation. As explained in Note B below, certain pension and other postretirement plans will be transferred to us. The costs associated with these plans are included as an adjustment to the pro forma condensed combined financial statements through Note B.

(B) Pension and other postretirement plans transferred to Valvoline

Reflects the addition of net pension and other postretirement plan liabilities that will be transferred to us by Ashland as part of the separation. Plans transferred to us by Ashland include a substantial portion of Ashland’s largest U.S. qualified pension plan and non-qualified U.S. pension plans.

This adjustment includes a $         million adjustment to accrued expense and other liabilities, a $         million adjustment to employee benefit obligations, a $         million adjustment, net of tax of $         million, to accumulated other comprehensive income and $         million of related deferred tax assets as of March 31, 2016. These benefit plan obligations are excluded from our historical combined balance sheet, which has been presented using the multiemployer approach as further described in the Notes to Combined Financial Statements.

The expense adjustment related to these plans was $         million for the year ended September 30, 2015 and $         million for the six months ended March 31, 2016 and reflects interest cost, expected return on plan assets, amortization of prior service credit and remeasurement gains and losses, including actuarial gains and losses. Additionally, these costs have been reclassified solely into selling, general and administrative expenses as a result of the freezing or elimination of benefits for the majority of the U.S. pension plans and certain U.S. postretirement plans announced by Ashland during March 2016. These announced plan changes resulted in a curtailment gain of $         million included within the adjustment for the year ended September 30, 2015.

(C) Executive performance incentive and retention program

Certain executives were granted performance-based restricted shares of Ashland in October 2015 in order to provide an incentive to remain employed with us in the period after the separation. The expense associated with these awards is not recognized until the spin-off occurs and will be recognized ratably over the vesting period, which is generally three years. The unaudited pro forma condensed combined statement of operations reflects the assumption that the spin-off occurred on October 1, 2014 and that the median amount of potential shares to be awarded will be earned and expensed over the service period. Therefore our estimate of the fair value of the awards resulted in expense of $         million and $         million for the year ended September 30, 2015 and the six months ended March 31, 2016, respectively.

(D) Interest expense

The unaudited pro forma condensed combined statements of operations reflect an adjustment for the expected interest expense and the amortization of deferred financing costs on our new indebtedness described in Note H below. Pro forma interest expense (i) reflects an adjustment of $         million in annual interest expense based on an estimated weighted average annual interest rate of     % on indebtedness to be incurred in conjunction with the separation, and (ii) reflects annual amortization expense on the approximately $         million of deferred debt

 

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issuance costs associated with our new indebtedness, utilizing a weighted average maturity of          years. A     % increase or decrease in the weighted average annual interest rate would increase or decrease pro forma interest expense by $         million annually.

The following table reflects the adjustments in the unaudited pro forma condensed combined statements of operations to reflect the impact of the adjustments to interest expense.

 

     Year ended
September 30, 2015
     Six months ended
March 31, 2016
 

Interest expense

   $                    $                

Amortization of deferred debt issuance costs

     
  

 

 

    

 

 

 

Pro forma adjustment to interest expense

   $         $     
  

 

 

    

 

 

 

(E) Resulting tax effects

Reflects the tax effects of the pro forma adjustments at the applicable tax rates within the respective jurisdictions. The applicable tax rates could be different (either higher or lower) depending on activities subsequent to the separation.

(F) Pro forma earnings per share / weighted-average shares outstanding

The weighted-average number of shares used to compute pro forma basic earnings per share for the six months ended March 31, 2016 and the year ended September 30, 2015 is             , which represents the number of shares we expect to be outstanding after giving effect to this offering.

The weighted-average number of shares used to compute pro forma diluted earnings per share for the year ended September 30, 2015 and the six months ended March 31, 2016 is             , which represents the number of shares we expect to be outstanding after giving effect to this offering, adjusted for the dilutive impact of shares granted for the Executive Performance Incentive and Retention Program discussed in Note C and for estimated Ashland stock-based compensation awards that will be converted into Valvoline stock-based compensation awards in connection with the spin-off.

(G) Cash and cash equivalents

Represents $         million of cash that we will receive as a result of     . Historically, cash and cash equivalents were held at the Ashland level utilizing Ashland’s centralized approach to cash management.

(H) New debt financing

The unaudited pro forma condensed combined balance sheet reflects the incurrence of the following events as if they occurred on March 31, 2016:

 

    the incurrence of new senior term loans (which may be secured or unsecured), new senior unsecured notes or a combination thereof in an aggregate principal amount of approximately $             million (the proceeds of which will be transferred to Ashland through intercompany transfers); and

 

    the application of $         million of net proceeds of this offering to repay indebtedness incurred prior to the completion of this offering.

The adjustment to long-term debt also reflects the capitalization of approximately $             million of new deferred debt issuance costs that we will incur in connection with the related financing transactions. These costs will be deferred and recognized over the terms of the respective debt agreements. The figures reflected in these adjustments are estimates and subject to change as the agreements are executed.

 

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(I) Legacy assets and liabilities

Represents certain Ashland legacy assets and liabilities that are expected to be transferred to us as a result of the separation. This adjustment includes a $         million adjustment to current assets, a $             million adjustment to other noncurrent assets, a $             million adjustment to current liabilities, and a $         million adjustment to other noncurrent liabilities as of March 31, 2016. No adjustments were made to the statements of operations as the effect on the periods presented was immaterial.

(J) Offering adjustments

Represents the receipt of approximately $         million by us associated with the sale of          shares of common stock in this offering at the initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus). This represents the net proceeds of $         million, after deducting the underwriters’ discount and offering fees. In addition, it includes the reclassification of Ashland’s net investment in us, which was reclassified into additional paid-in capital and the required balancing entry to reflect the par value of our outstanding common stock. The issuance of common stock was at a par value of $0.01 per share.

The following reflects the adjustments in our unaudited pro forma condensed combined balance sheet to reflect the impact of the above transactions on cash and cash equivalents, Ashland’s net investment, common stock and additional paid-in capital:

 

          As of March 31, 2016  
    Proceeds
from
initial
public
offering/
Use of
proceeds
    Capital
contribution
    Conversion of
Ashland’s net
investment to
additional
paid-in
capital
    Total
use of
proceeds
 

Cash and cash equivalents

  $                   $                   $                   $                

Common stock

       

Additional paid-in capital

       

Invested equity attributable to Ashland Inc.

       

Accumulated other comprehensive income (loss)

       

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our audited and unaudited combined financial statements and the related notes, and our unaudited pro forma condensed combined financial statements and the related notes, included elsewhere in this prospectus.

This discussion and analysis contains forward-looking statements that are subject to risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks, and assumptions associated with those statements. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the section entitled “Risk Factors.”

Our fiscal year ends on September 30 of each year. We refer to the year ended September 30, 2016 as “fiscal 2016,” the year ended September 30, 2015 as “fiscal 2015,” the year ended September 30, 2014 as “fiscal 2014” and the year ended September 30, 2013 as “fiscal 2013.”

BUSINESS OVERVIEW

We are one of the most recognized and respected premium consumer brands in the global automotive lubricant industry, known for our high quality products and superior levels of service. Established in 1866, our heritage spans 150 years, during which we have developed powerful name recognition across multiple product and service channels. We have significant positions in the United States in all of the key lubricant sales channels, and also have a strong international presence with our products sold in approximately 140 countries.

In the United States and Canada, our products are sold to consumers through over 30,000 retail outlets, to installer customers with over 12,000 locations, and to approximately 1,050 Valvoline branded franchised and company-owned stores. We serve our customer base through an extensive sales force and technical support organization, allowing us to leverage our technology portfolio and customer relationships globally, while meeting customer demands locally. This combination of scale and strong local presence is critical to our success.

We have a history of leading innovation with revolutionary products such as All Climate, DuraBlend, and MaxLife. In addition to our iconic Valvoline-branded passenger car motor oils and other automotive lubricant products, we provide a wide array of lubricants used in heavy duty equipment, as well as automotive chemicals and fluids designed to improve engine performance and lifespan. Our premium branded product offerings enhance our high quality reputation and provide our customers with solutions that address a wide variety of needs.

Reportable Segments

Our reporting structure is principally composed of three reportable segments: Core North America, Quick Lubes and International. We also have an Unallocated and other segment.

Core North America

Our Core North America business segment sells Valvoline and other branded products in the United States and Canada to both consumers who perform their own automotive maintenance, referred to as “Do-It-Yourself” or “DIY” consumers, as well as to installer customers who use our products to service vehicles owned by “Do-It-For-Me” or “DIFM” consumers. We sell to DIY consumers through over 30,000 retail outlets, such as AutoZone, Advance Auto Parts and O’Reilly Auto Parts, as well as leading mass merchandisers and independent auto parts stores. We sell to DIFM consumers through installers who collectively operate over 12,000 locations in the United States and Canada. Installer customers include car dealers, general repair shops and third-party quick lube chains. We directly serve these customers with our own sales force and fulfillment capabilities, through retailers such as NAPA, and a network of approximately 140 distributors. Our key installer customers include large national accounts such as Goodyear, Monro, Express Oil Change, TBC Retail Group and Sears. Our installer channel team also sells branded products and solutions

 

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to heavy duty customers such as on-highway fleets and construction companies, and we have a strategic relationship with Cummins for co-branding products in the heavy duty business.

Quick Lubes

Our Quick Lubes business segment services the passenger car and light truck quick lube market through two platforms: our company-owned and franchised VIOC stores, which we believe comprise the industry’s best retail quick lube service chain; and Express Care, a quick lube customer platform developed for independent operators who purchase Valvoline motor oil and other products pursuant to contracts while displaying Valvoline branded signage. VIOC, which is the second-largest United States retail quick lube service chain by number of stores, provides fast, trusted service through approximately 720 franchised and 330 company-owned stores. Our VIOC stores provide a broad range of preventive maintenance services, including full-service oil changes, OEM mileage-based services (transmission, radiator and gear box fluid exchange services), tire rotations, fuel system services and seasonal air conditioning coolant replacement services. Our VIOC company-owned stores have had nine years of consecutive same-store sales growth,* and consistently outperformed our competitors, delivering on average over 36% more daily oil changes during 2015 than competing quick lube service centers. Our franchisees have also enjoyed strong results, performing on average 22% more daily oil changes in 2015 than competitors. We also sell our products and provide Valvoline branded signage to independent quick lube operators through our Express Care program. The Express Care platform has been designed to support smaller (typically single store) operators that do not fit our franchised model and typically offer other non-quick lube services such as auto repair and car washes. In 2015, we estimate that VIOC and Express Care stores performed approximately 13% of the total oil changes in the quick lube market.

International

Our International business segment sells Valvoline and our other branded products in approximately 140 countries. Our key international markets include China, India, Latin America, Australia Pacific and EMEA. We have significant overall market share in India and Australia and a growing presence in a number of markets, with primary growth targets being China, India and select countries within Latin America. Our International business segment sells products for both consumer and commercial vehicles and equipment, and is served by company-owned manufacturing facilities in the United States, Australia and the Netherlands, a joint venture-owned facility in India and third-party warehouses and toll manufacturers in other regions. Our heavy duty products are used in a wide variety of heavy duty equipment, including on-road trucks and buses, agricultural equipment, construction and mining equipment, and power generation equipment. We go to market in our International business in three ways: (1) through our own local sales, marketing and back office support teams, which we refer to as our “wholly owned affiliate markets”; (2) through joint ventures; and (3) through independent distributors. In our wholly owned affiliate markets, we have a direct presence and maintain the sales and marketing teams required to build effective channels. We have 50/50 joint ventures with Cummins in India and China. We also have smaller joint ventures in select countries in Latin America. In other countries, we go to market via independent distributors, which provide access to these geographies with limited capital investment.

Business Results

Sales by each reportable segment expressed as a percentage of total combined sales were as follows:

 

     For the six months
ended March 31,
    For the year ended September 30,  

Sales by Reportable Segment

   2016     2015     2015     2014     2013  

Core North America

     51     55     54     55     56

Quick Lubes

     24     20     20     18     17

International

     25     25     26     27     27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*  We have historically determined 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.

 

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Sales by geography expressed as a percentage of total combined sales were as follows:

 

     For the six months
ended March 31,
    For the year ended September 30,  

Sales by Geography

   2016     2015     2015     2014     2013  

North America (a)

     75     75     74     73     73

Europe

     7     7     8     8     9

Asia Pacific

     13     14     14     14     14

Latin America & other

     5     4     4     5     4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) We only include the United States and Canada in our North American designation.

Our Adjusted EBITDA increased 14% during 2015 compared to 2014 from $369.2 million to $421.8 million (see U.S. GAAP reconciliation under “—Combined Review—Operating Income—EBITDA and Adjusted EBITDA”). The increase in Adjusted EBITDA was primarily due to an increase in Adjusted EBITDA in our Core North America and Quick Lubes reportable segments, while the International reportable segment’s Adjusted EBITDA was consistent with the prior year primarily due to the negative impact of foreign currency exchange. Core North America’s Adjusted EBITDA increased $36.0 million, or 20%, compared to 2014, while Quick Lubes’ Adjusted EBITDA increased $16.0 million, or 17%, compared to 2014. These increases were primarily driven by increased volumes and lower raw material costs, specifically relating to the price of base oil, which increased gross profit.

Acquisitions and Divestitures

Oil Can Henry’s Acquisition

In February 2016, Ashland acquired OCH International, Inc. (“Oil Can Henry’s”), which was the 13th largest quick-lube network in the United States, servicing approximately 1 million vehicles annually with 89 quick lube stores, comprised of 47 company-owned stores and 42 franchise locations, in Oregon, Washington, California, Arizona, Idaho and Colorado.

The acquisition of Oil Can Henry’s within the Quick Lubes reportable segment was valued at $72.0 million, which included acquired indebtedness of $10.5 million, working capital payments of $0.6 million and cash received of $2.4 million, for a total all-cash purchase price of $63.3 million. The net cash outlay for this acquisition during the quarter ended March 31, 2016 was $60.4 million.

Car Care Products Divestiture

During 2015, Ashland entered into a definitive sale agreement to sell our car care products within the Core North America reportable segment for $24.0 million, which included Car Brite™ and Eagle One™ automotive appearance products. Prior to the sale, we recognized a loss of $26.3 million before tax in 2015 to recognize the assets at fair value less cost to sell. The loss is reported within the net loss on divestiture caption within the combined statements of operations and comprehensive income. The transaction closed on June 30, 2015 and we received net proceeds of $19.3 million after adjusting for certain customary closing costs and final working capital amounts.

Venezuela Equity Method Investment Divestiture

During 2015, we sold the equity method investment in Venezuela within the International reportable segment. Prior to the sale, we recognized a $14.3 million impairment in 2015, for which there was no tax effect, within the equity and other income caption of the combined statements of operations and comprehensive income.

 

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Our decision to sell the equity investment and the resulting impairment charge recorded during 2015 was a result of the continued devaluation of the Venezuelan currency (bolivar) based on changes to the Venezuelan currency exchange rate mechanisms during the fiscal year. In addition, the continued lack of exchangeability between the Venezuelan bolivar and U.S. dollar had restricted the equity method investee’s ability to pay dividends and obligations denominated in U.S. dollars. These exchange regulations and cash flow limitations, combined with other recent Venezuelan regulations and the impact of declining oil prices on the Venezuelan economy, had significantly restricted our ability to conduct normal business operations through the joint venture arrangement.

CERTAIN FACTORS AFFECTING OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Industry

The global finished lubricants market is a $60 billion market with demand for over 11.7 billion gallons of lubricants in 2015. For the same period, demand for passenger car motor oil and motorcycle oil accounted for slightly over 24% of global lubricant demand, while the remaining 76% of demand was for commercial and industrial products. The United States has historically accounted for the largest amount of lubricant demand, followed by China and India. The lubricants market is impacted by the following key drivers and trends:

 

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

 

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

 

    Between 2007 and 2012, the North American transport lubes market experienced average annual volume declines of 2.7% per annum, due in part to an increase in oil change intervals, which have resulted from changing OEM recommendations and advancements in engine technology. Over the past two years, market volume has increased, largely due to the 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. For example, the number of passenger cars on the road in China grew from 59 million in 2010 to 121 million in 2014, representing a compound annual growth rate of 21%.

Business and Growth Strategies

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

 

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

 

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

 

    leveraging innovation, both in terms of product development, packaging, marketing and the implementation of our new digital infrastructure, to strengthen our market share and profitability in Core North America.

 

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Raw Material Supply and Prices

The key raw materials used by our business are base oils, additives, packaging materials (high density polyethylene bottles and steel drums) and ethylene glycol. We continuously monitor global supply and cost trends of these key raw materials. We obtain these raw materials from a diversified network of large global suppliers and regional providers. Our 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. We leverage our worldwide spend to obtain favorable contract terms from the global suppliers and use the regional providers to ensure market competitiveness and reliability in our supply chain. For materials that must be customized for us, we work with market leaders with global footprints and well developed business continuity plans. We also utilize our research and development resources to develop alternative product formulations, which provide flexibility in the event of supply interruptions. We closely monitor our supply chain and conduct annual supply risk assessments of our critical suppliers to reduce risk.

The prices of many of our products fluctuate based on the price of base oil. Historically, base oil prices have been volatile, causing sharp cost increases during periods of short supply, which was the case in 2011. Since that time, base oil supply has increased dramatically, causing base oil prices to fall and we have reduced our selling prices for many of our products. We have negotiated base oil supply contracts with terms that have reduced the impact of changes in the base oil market on our financial results. Additionally, we have revised our contracts with many of our customers to shorten the timing of adjustments to our selling prices in response to changes in raw material prices.

Our Relationship with Ashland

We are currently a business unit of Ashland and our combined financial statements have been derived from the consolidated financial statements and accounting records of Ashland. Our historical expenses are not necessarily indicative of the expenses we may incur in the future as a standalone public company. Although we intend to enter into certain agreements with Ashland in connection with this offering and the separation, the amount and composition of our expenses may vary from historical levels since the fees charged for the services under the agreements may be higher or lower than the costs reflected in the historical allocations. In addition, we intend to replace these services over time with ones supplied either internally by our employees or by third parties, the cost of which may be higher or lower than the historical allocations. We are currently investing in expanding our own administrative functions, including finance, legal and compliance and human resources, as well as our information technology infrastructure, to replace services currently provided by Ashland. See “Certain Relationships and Related Party Transactions—Relationship with Ashland” and “Unaudited Pro Forma Condensed Combined Financial Statements.”

Ashland provides certain corporate services to us, and costs associated with these functions have been allocated to us. These allocations include costs related to corporate services, such as executive management, supply chain, information technology, legal, finance and accounting, investor relations, human resources, risk management, tax, treasury, and other services, as well as stock-based compensation expense attributable to our employees and an allocation of stock-based compensation attributable to employees of Ashland. The costs of such services have been allocated to us based on the most relevant allocation method to the service provided, primarily based on relative percentage of total sales, relative percentage of headcount or specific identification. The total amount of these allocations from Ashland was approximately $41.1 million in the six months ended March 31, 2016 and approximately $79.5 million in the year ended September 30, 2015. These cost allocations are primarily reflected within corporate expense allocation in the combined statements of operations and comprehensive income. Management believes the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by us during the periods presented. Following the completion of this offering, we expect Ashland to continue to provide some services related to these functions on a transitional basis for a fee. These services will be provided under the transitional services agreement described in “Certain Relationships and Related Party Transactions—Relationship with Ashland.” Upon completion of this offering, we will assume responsibility for all our standalone public company costs, including the costs of corporate services currently provided by Ashland.

 

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Compensation

We expect to institute competitive compensation policies and programs as a standalone public company, the expense for which may differ from the compensation expense allocated by Ashland in our combined financial statements.

Pension and Other Post Retirement Plan Liabilities

We expect that approximately $         million in net unfunded pension and other postretirement plan liabilities will be transferred to us by Ashland as part of the separation. As announced by Ashland in March 2016, these plans are frozen to new participants and, effective September 2016, the accrual of pension benefits for participants will be frozen. Certain postretirement benefits were also eliminated or curtailed. Plans transferred to us by Ashland will include a substantial portion of the largest U.S. qualified pension plan and non-qualified U.S. pension plans.

Similar to our current standalone defined benefit pension plans, we will recognize the change in the fair value of plan assets and net actuarial gains and losses for the pension and other postretirement plan liabilities transferred to us by Ashland annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement within the combined statement of operations and comprehensive income. The remaining components of pension and other postretirement benefits expense will be recorded ratably on a quarterly basis. Our policy to recognize these changes annually through mark to market accounting could result in volatility in our results of operations, which could be material.

Public Company Expenses

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act and Sarbanes-Oxley. We will have to establish additional procedures and practices as a standalone public company. As a result, we will incur additional costs as a standalone public company, including internal audit, investor relations, director and officer insurance, stock administration and regulatory compliance costs.

Seasonality

Overall, there is little seasonality in our business. Our Quick Lubes business and, to a lesser extent, our 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. Our International business experiences almost no seasonality due to its geographic diversity and the high percentage of its business in the commercial and industrial lubricants market, which is less influenced by weather.

RESULTS OF OPERATIONS – COMBINED REVIEW

Non-GAAP Performance Metrics

In addition to our net income determined in accordance with U.S. GAAP, we evaluate operating performance using certain non-GAAP measures including EBITDA, which we define as our net income, plus income tax expense (benefit), net interest and other financing expenses, and depreciation and amortization, Adjusted EBITDA, which we define as EBITDA adjusted for losses (gains) on pension and other postretirement plans remeasurement, net gain (loss) on acquisitions and divestitures, impairment of equity investment, restructuring, other income and (expense) and other items, which may include pro forma impact of significant acquisitions or divestitures and restructuring costs, as applicable, and Adjusted EBITDA margin, which we define as Adjusted EBITDA as a percentage of sales. These measures are not prepared in accordance with U.S. GAAP and as related to pro forma adjustments, contain our best estimates of cost allocations and shared resource

 

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costs. Management believes the use of non-GAAP measures on a combined and reportable segment basis assists investors in understanding the ongoing operating performance of our business by presenting comparable financial results between periods. The non-GAAP information provided is used by our 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 our operating performance on a combined and reportable segment basis. Adjusted EBITDA generally includes adjustments for unusual, non-operational or restructuring-related activities.

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

We use free cash flow as an additional non-GAAP metric of cash flow generation. By deducting capital expenditures and certain other adjustments as applicable from operating cash flows, we are 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. Free cash flow does not reflect adjustments for certain non-discretionary cash flows. Our results of operations are presented based on our management structure and internal accounting practices. The structure and practices are specific to us; therefore, our financial results are not necessarily comparable with similar information for other comparable companies.

EBITDA, Adjusted EBITDA and free cash flow each have limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, or more meaningful than, net income and cash flows provided from operating activities as determined in accordance with U.S. GAAP. Because of these limitations, you should rely primarily on net income and cash flows provided from operating activities as determined in accordance with U.S. GAAP and use EBITDA, Adjusted EBITDA and free cash flow only as supplements. In evaluating EBITDA, Adjusted EBITDA and free cash flow, you should be aware that in the future we may incur expenses similar to those for which adjustments are made in calculating EBITDA, Adjusted EBITDA and free cash flow. Our presentation of EBITDA, Adjusted EBITDA and free cash flow should not be construed as a basis to infer that our future results will be unaffected by unusual or non-recurring items.

Combined Review

Net income

Our net income is primarily affected by results within operating income, income taxes and other significant events or transactions that are unusual or nonrecurring. Operating income includes our adjustment for the immediate recognition of the change in the fair value of the plan assets and net actuarial gains and losses for defined benefit pension plans and other postretirement benefit plans each fiscal year.

 

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Six months ended March 31, 2016 compared to six months ended March 31, 2015

Key financial results during the six months ended March 31, 2016 and 2015 included the following:

 

    our net income amounted to $133.0 million and $90.5 million during the six months ended March 31, 2016 and 2015, respectively;

 

    the effective income tax rates of 33% and 37% for the six months ended March 31, 2016 and 2015, respectively, are generally in line with the U.S. statutory rate; and

 

    operating income was $200.0 million and $168.9 million during the six months ended March 31, 2016 and 2015, respectively.

Fiscal years ended September 30, 2015, 2014 and 2013

Key financial results for 2015, 2014 and 2013 included the following:

 

    our net income amounted to $196.1 million in 2015, $173.4 million in 2014 and $246.1 million in 2013;

 

    the effective income tax rate of 34% for each of 2015 and 2014 and 35% for 2013 are generally in line with the U.S. statutory rate; and

 

    operating income was $323.1 million, $264.7 million and $380.6 million during 2015, 2014 and 2013, respectively.

For further information on the items reported above, see the discussion in the comparative “Combined Statements of Operations and Comprehensive Income – Caption Review.”

Operating income

Six months ended March 31, 2016 compared to six months ended March 31, 2015

Operating income was $200.0 million and $168.9 million during the six months ended March 31, 2016 and 2015, respectively. The current and prior periods’ operating income include certain key items that are excluded to arrive at Adjusted EBITDA. These key items are summarized as follows:

 

    expense of $4.7 million and $2.0 million during the six months ended March 31, 2016 and 2015, respectively, from the allocated pension and other postretirement plans remeasurement adjustments; and

 

    restructuring costs include allocated expense of $0.4 million during the six months ended March 31, 2015.

Operating income during the six months ended March 31, 2016 and 2015 included depreciation and amortization of $19.0 million and $18.8 million, respectively. EBITDA totaled $218.5 million and $161.7 million, respectively, during each period.

Fiscal years ended September 30, 2015, 2014 and 2013

Operating income amounted to $323.1 million, $264.7 million and $380.6 million in 2015, 2014 and 2013, respectively. The current and prior years’ operating income include certain key items that are excluded to arrive at Adjusted EBITDA. These key items are summarized as follows:

 

    expense of $46.0 million and $61.1 million in 2015 and 2014, respectively, and income of $74.0 million in 2013 from the allocated pension and other postretirement plans remeasurement adjustments;

 

    restructuring costs include allocated expense of $0.4 million in 2015 and $6.3 million in 2014; and

 

    $14.3 million impairment related to the joint venture equity investment within Venezuela during 2015.

 

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Operating income for 2015, 2014 and 2013 included depreciation and amortization of $38.0 million, $37.1 million and $35.7 million, respectively. EBITDA totaled $334.8 million, $301.8 million and $416.3 million for 2015, 2014 and 2013, respectively.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA results in the following table have been prepared to illustrate the ongoing effects of our operations, which exclude certain key items since management believes the use of such non-GAAP measures on a combined and reportable segment basis assists investors in understanding the ongoing operating performance by presenting the financial results between periods on a more comparable basis.

 

     For the six
months ended
March 31,
     For the year ended
September 30,
 

(In millions)

   2016      2015      2015      2014      2013  

Net income

   $ 133.0       $ 90.5       $ 196.1       $ 173.4       $ 246.1   

Income tax expense

     66.5         52.4         100.7         91.3         134.5   

Depreciation and amortization

     19.0         18.8         38.0         37.1         35.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     218.5         161.7         334.8         301.8         416.3   

Losses (gains) on pension and other postretirement plans remeasurement

     4.7         2.0         46.0         61.1         (74.0

Net loss on divestiture

     —           26.0         26.3         —           —     

Impairment of equity investment

     —           14.3         14.3         —           —     

Restructuring

     —           0.4         0.4         6.3         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 223.2       $ 204.4       $ 421.8       $ 369.2       $ 342.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME – CAPTION REVIEW

Six months ended March 31, 2016 compared to six months ended March 31, 2015

A comparative analysis of our combined statements of operations and comprehensive income by caption is provided as follows for the six months ended March 31, 2016 and 2015.

 

     Six months ended March 31  

(In millions)

   2016      2015      Change  

Sales

   $ 935.7       $ 973.4       $ (37.7

The following table provides a reconciliation of the change in sales between the six months ended March 31, 2016 and 2015.

 

(In millions)

   Six months ended
March 31, 2016
 

Pricing

   $ (53.2

Volume

     45.8   

Product mix

     17.0   

Currency exchange

     (26.3

Divestiture and acquisition

     (21.0
  

 

 

 

Change in sales

   $ (37.7
  

 

 

 

Sales decreased $37.7 million, or 4%, to $935.7 million during the current period. Lower product pricing and unfavorable foreign currency exchange decreased sales by $53.2 million, or 5%, and $26.3 million, or 3%,

 

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respectively. Unfavorable foreign currency exchange was due to the U.S. dollar strengthening compared to various foreign currencies, primarily the Euro and Australian dollar. Higher volume levels and changes in product mix increased sales by $45.8 million, or 5%, and $17.0 million, or 2%, respectively. During the current period, lubricant gallons sold increased 6% to 84.2 million. The divestiture of car care products within the Core North America reportable segment, during fiscal 2015, decreased sales by $28.5 million, while the acquisition of Oil Can Henry’s within the Quick Lubes reportable segment, during fiscal 2016, increased sales by $7.5 million compared to the prior year period.

 

     Six months ended March 31  

(In millions)

   2016     2015     Change  

Cost of sales

   $ 567.9      $ 634.9      $ (67.0

Gross profit as a percent of sales

     39.3     34.8  

The following table provides a reconciliation of the changes in cost of sales between the six months ended March 31, 2016 and 2015.

 

(In millions)

   Six months ended
March 31, 2016
 

Product cost

   $ (65.9

Volume and product mix

     37.2   

Currency exchange

     (19.5

Divestiture and acquisition

     (18.6

Pension and other postretirement benefit plans expense (income) (including remeasurements)

     (0.2
  

 

 

 

Change in cost of sales

   $ (67.0
  

 

 

 

Cost of sales decreased $67.0 million during the current period. Lower raw material costs decreased cost of sales by $65.9 million. Increases in volumes and changes in product mix combined to increase cost of sales by $37.2 million while favorable foreign currency exchange decreased cost of sales by $19.5 million. The divestiture of car care products, during fiscal 2015, decreased cost of sales by $24.6 million, while the acquisition of Oil Can Henry’s, during fiscal 2016, increased cost of sales by $6.0 million. Pension and other postretirement benefit plans income of $0.2 million includes remeasurement losses of $1.9 million and $1.2 million in the current and prior year period, respectively. This increase of $0.7 million in the remeasurement losses was more than offset by the increase in recurring pension and other postretirement income compared to the prior year period.

 

     Six months ended March 31  

(In millions)

   2016     2015     Change  

Selling, general and administrative expense

   $ 137.4      $ 128.4      $ 9.0   

As a percent of sales

     14.7     13.2  

Selling, general and administrative expense increased $9.0 million, or 7%, during the current period as compared to the prior year period. Key drivers of this increase were:

 

    increased advertising and promotional costs of $4.7 million during the current period;

 

    increased consulting and legal costs of $1.5 million during the current period, primarily related to digital infrastructure upgrades;

 

    employee cost increase of $1.7 million during the current period;

 

    increased bad debt expense of $1.0 million during the current period; and

 

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    decreased pension and other postretirement plan income of $0.8 million compared to the prior year period, with $2.0 million of the decrease attributable to the increased remeasurement losses allocated to us during the current period of $2.8 million compared to $0.8 million in the prior year period. The remaining decrease is due to recurring pension and other postretirement income as the portion allocated to cost of sales increased during the current period compared to the prior year period.

 

     Six months ended
March 31
 

(In millions)

   2016      2015      Change  

Corporate expense allocation

   $ 41.1       $ 39.2       $ 1.9   

Corporate expense allocations remained relatively consistent with the prior year period.

 

     Six months ended
March 31
 

(In millions)

   2016      2015      Change  

Equity and other income (loss)

        

Equity income (loss)

   $ 6.9       $ (7.8    $ 14.7   

Other income

     3.8         5.8         (2.0
  

 

 

    

 

 

    

 

 

 
   $ 10.7       $ (2.0    $ 12.7   
  

 

 

    

 

 

    

 

 

 

Equity and other income (loss) increased $12.7 million during the current period primarily as a result of the $14.3 million impairment of the Venezuelan equity method investment in the prior year period.

 

     Six months ended
March 31
 

(In millions)

   2016      2015      Change  

Net loss on acquisition and divestiture

        

Valvoline car care products

   $ —         $ (26.0    $ 26.0   

Oil Can Henry’s

     (0.5      —           (0.5
  

 

 

    

 

 

    

 

 

 
   $ (0.5    $ (26.0    $ 25.5   
  

 

 

    

 

 

    

 

 

 

Net loss on acquisition and divestiture during the current period includes transaction costs related to the acquisition of Oil Can Henry’s while the prior year period included the impairment of car care products.

 

     Six months ended March 31  

(In millions)

   2016     2015     Change  

Income tax expense

   $ 66.5      $ 52.4      $ 14.1   

Effective tax rate

     33     37  

The overall effective tax rate was 33% for the six months ended March 31, 2016 and was impacted by net favorable discrete items primarily related to the tax law change from the reinstatement of research and development credit. The overall effective tax rate of 37% for the six months ended March 31, 2015 was unfavorably impacted by the loss on the disposition of car care products and the impairment of the Venezuelan equity method investment for which no tax benefit was realized.

 

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Fiscal years ended September 30, 2015, 2014 and 2013

A comparative analysis of the Combined Statements of Operations and Comprehensive Income by caption is provided as follows for the years ended September 30, 2015, 2014 and 2013.

 

(In millions)

   2015      2014      2013      2015
Change
    2014
Change
 

Sales

   $ 1,966.9       $ 2,041.3       $ 1,996.2       $ (74.4   $ 45.1   

The following table provides a reconciliation of the change in sales between fiscal years 2015 and 2014 and between fiscal years 2014 and 2013.

 

(In millions)

   2015
Change
     2014
Change
 

Pricing

   $ (52.7    $ 4.3   

Volume

     51.5         35.8   

Product mix

     11.2         15.6   

Currency exchange

     (70.4      (10.6

Divestiture

     (14.0      —     
  

 

 

    

 

 

 

Change in sales

   $ (74.4    $ 45.1   
  

 

 

    

 

 

 

2015 compared to 2014

Sales decreased $74.4 million, or 4%, to $1,966.9 million in 2015. Unfavorable foreign currency exchange and lower product pricing decreased sales by $70.4 million, or 3%, and $52.7 million, or 3%, respectively. Unfavorable foreign currency exchange was due to the U.S. dollar strengthening compared to various foreign currencies, primarily the Euro and Australian dollar. Higher volume levels and changes in product mix increased sales by $51.5 million, or 3%, and $11.2 million, respectively. During 2015, lubricant gallons sold increased 3% to 167.4 million. The divestiture of car care products within the Core North America reportable segment during fiscal 2015 decreased sales by $14.0 million compared to the prior year.

2014 compared to 2013

Sales increased $45.1 million, or 2%, to $2,041.3 million in 2014. Volume increased sales by $35.8 million, or 2%, as lubricant gallons sold increased 3% to 162.6 million gallons during 2014. Changes in product mix and improved pricing increased sales by $15.6 million and $4.3 million, respectively. Unfavorable foreign currency exchange decreased sales by $10.6 million.

 

(In millions)

   2015     2014     2013     2015
Change
    2014
Change
 

Cost of sales

   $ 1,281.8      $ 1,408.9      $ 1,338.3      $ (127.1   $ 70.6   

Gross profit as a percent of sales

     34.8     31.0     33.0    

Fluctuations in cost of sales are driven primarily by raw material prices, volume and changes in product mix, currency exchange, losses or gains on pension and other postretirement benefit plan remeasurements, and other certain charges incurred as a result of changes or events within the businesses or restructuring activities.

 

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The following table provides a reconciliation of the changes in cost of sales between fiscal years 2015 and 2014 and between fiscal years 2014 and 2013.

 

(In millions)

   2015
Change
     2014
Change
 

Product cost

   $ (105.7    $ —     

Currency exchange

     (52.0      (7.3

Volume and product mix

     43.3         35.6   

Divestiture

     (11.4      —     

Pension and other postretirement benefit plans expense (income) (including remeasurements)

     (1.3      42.3   
  

 

 

    

 

 

 

Change in cost of sales

   $ (127.1    $ 70.6   
  

 

 

    

 

 

 

2015 compared to 2014

Cost of sales decreased $127.1 million during 2015 compared to 2014. Lower raw material costs decreased cost of sales by $105.7 million primarily due to declining base oil prices in 2015. Favorable foreign currency exchange decreased cost of sales by $52.0 million, while changes in volume and product mix combined to increase cost of sales by $43.3 million. The divestiture of car care products during fiscal 2015 also decreased cost of sales by $11.4 million.

2014 compared to 2013

Cost of sales increased $70.6 million during 2014 compared to 2013. Changes in volume and product mix combined to increase cost of sales by $35.6 million, while favorable foreign currency exchange decreased cost of sales by $7.3 million. Pension and other postretirement plan expense increased $42.3 million compared to 2013 primarily due to the recognition of a remeasurement loss of $18.6 million in 2014 compared to a gain of $23.1 million in 2013 with the remainder due to the change in recurring pension and other postretirement income.

 

(In millions)

   2015     2014     2013     2015
change
    2014
change
 

Selling, general and administrative expense

   $ 290.8      $ 302.8      $ 213.4      $ (12.0   $ 89.4   

As a percent of sales

     14.8     14.8     10.7    

2015 compared to 2014

Selling, general and administrative expense decreased $12.0 million, or 4%, during 2015 as compared to 2014. Key drivers of this decrease were:

 

    a decrease of $14.3 million related to the pension and other postretirement costs. Specifically, a loss of $27.8 million on the pension and other postretirement plans remeasurement was recognized during 2015 compared to a loss of $42.5 million in 2014. The loss recognized, inclusive of both Valvoline specific plans and shared plans accounted for under the multi-employer approach, decreased primarily due to changes in the discount rate. See Note B in the Notes to Combined Financial Statements for further discussion on this accounting policy;

 

    approximately $18.5 million of cost savings related to restructuring programs;

 

    favorable foreign currency exchange of $9.3 million;

 

    increase of $9.3 million due to costs associated with supply chain operations that, as described below, were included within the corporate expense allocations prior to 2015;

 

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    increased advertising expense of $4.8 million;

 

    increased legal, consultant and technology cost of $4.7 million; and

 

    increased incentive compensation expense of $3.6 million.

2014 compared to 2013

Selling, general and administrative expense increased $89.4 million, or 42%, during 2014 as compared to 2013. Key drivers of this increase were:

 

    an increase of $94.8 million related to pension and other postretirement costs attributable to Valvoline. Specifically, a loss of $42.5 million on the pension and other postretirement plans remeasurement was recognized during 2014 compared to a gain of $50.9 million in 2013, primarily impacted by a decrease in discount rates, the change in mortality assumptions, and the return on plan assets. The remaining increase was due to the change in recurring pension and other postretirement income;

 

    severance costs associated with restructuring programs of $6.3 million; and

 

    a decrease of $12.7 million in advertising and promotional expenses.

 

(In millions)

   2015      2014      2013      2015
change
    2014
change
 

Corporate expense allocation

   $ 79.5       $ 95.0       $ 88.2       $ (15.5   $ 6.8   

2015 compared to 2014

Corporate expense allocations decreased $15.5 million in 2015 compared to 2014 primarily due to a $9.3 million decrease from a change in reporting of supply chain operations. Prior to 2015, supply chain operations were previously included within corporate allocation; however, in 2015 the reporting of these costs attributable to our operations were realigned in order to be directly reported by us within selling, general and administrative expense. Additional decreases were the result of cost savings as a result of restructuring programs.

2014 compared to 2013

Corporate expense allocations increased $6.8 million in 2014 compared to 2013 primarily due to increased incentive compensation expense.

 

(In millions)

   2015     2014      2013      2015
change
    2014
change
 

Equity and other income

            

Equity income (loss)

   $ (2.2   $ 10.2       $ 12.8       $ (12.4   $ (2.6

Other income

     10.5        19.9         11.5         (9.4     8.4   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 8.3      $ 30.1       $ 24.3       $ (21.8   $ 5.8   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

2015 compared to 2014

Equity income (loss) decreased by $12.4 million during 2015 compared to 2014, primarily due to the $14.3 million impairment of a joint venture equity investment within Venezuela in 2015. For additional information see Note C in the Notes to Combined Financial Statements. Other income decreased by $9.4 million primarily due to a favorable arbitration ruling on a commercial contract in 2014. For additional information see Note L in the Notes to Combined Financial Statements.

 

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2014 compared to 2013

Equity income decreased by $2.6 million during 2014 compared to 2013 primarily due to decreased equity income within India and Venezuela joint ventures. Other income increased by $8.4 million primarily due to the favorable arbitration ruling on a commercial contract in 2014.

 

(In millions)

   2015     2014      2013      2015
change
    2014
change
 

Net loss on divestiture

            

Valvoline car care products

   $ (26.3   $ —         $ —         $ (26.3   $ —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ (26.3   $ —         $ —         $ (26.3   $ —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The loss on divestiture in 2015 represents the loss on the disposition of car care products. This loss was a result of the book value exceeding the sales price of the assets sold.

 

(In millions)

   2015     2014     2013     2015
change
     2014
change
 

Income tax expense

   $ 100.7      $ 91.3      $ 134.5      $ 9.4       $ (43.2

Effective tax rate

     34     34     35     

The effective tax rates are generally in line with the U.S. statutory rate. For fiscal years 2015 through 2013, the effective tax rate was impacted favorably by the lower tax rate on foreign earnings and net favorable permanent items. These favorable items are offset by the unfavorable impact of state taxes. These adjustments net to an immaterial overall impact to the effective tax rate for each year.

RESULTS OF OPERATIONS – REPORTABLE SEGMENT REVIEW

Results of our reportable segments are presented based on our management structure and internal accounting practices. The structure and practices are specific to us; therefore, the financial results of our reportable segments are not necessarily comparable with similar information for other comparable companies. We allocate all costs to our reportable segments except for certain significant company-wide restructuring activities, such as certain restructuring plans described in Note D in the Notes to Combined Financial Statements for three years ended September 30, and other costs or adjustments that relate to former businesses that we no longer operate. The service cost component of pension and other postretirement benefits costs is allocated to each reportable segment on a ratable basis; while the remaining components of pension and other postretirement benefits costs are recorded to Unallocated and other. We refine our expense allocation methodologies to the reportable segments from time to time as internal accounting practices are improved, more refined information becomes available and the industry or market changes. Revisions to our methodologies that are deemed insignificant are applied on a prospective basis.

We provide EBITDA and Adjusted EBITDA for each of our reportable segments as a means to enhance the understanding of financial measurements that we have internally determined to be relevant measures of comparison for each reportable segment. Each of these non-GAAP measures is defined as follows: EBITDA (operating income plus depreciation and amortization), Adjusted EBITDA (EBITDA adjusted for key items, which may include pro forma effects for significant acquisitions or divestitures, as applicable), and Adjusted EBITDA margin (Adjusted EBITDA as a percentage of sales). We do not allocate items to each reportable segment below operating income, such as income taxes. As a result, reportable segment EBITDA and Adjusted EBITDA are reconciled directly to operating income since it is the most directly comparable Combined Statements of Operations and Comprehensive Income caption.

 

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The following table shows sales, operating income and statistical operating information by reportable segment for the six months ended March 31, 2016 and 2015 and each of the last three years ended September 30.

 

     For the six
months ended
March 31,
    For the year ended
September 30,
 

(In millions)

   2016     2015     2015     2014     2013  

Sales

          

Core North America

   $ 478.5      $ 534.1      $ 1,060.7      $ 1,114.0      $ 1,107.5   

Quick Lubes

     223.0        191.7        394.4        369.9        343.7   

International

     234.2        247.6        511.8        557.4        545.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 935.7      $ 973.4      $ 1,966.9      $ 2,041.3      $ 1,996.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

          

Core North America

   $ 110.6      $ 101.7      $ 200.5      $ 165.0      $ 157.7   

Quick Lubes

     54.3        44.1        94.8        79.7        70.1   

International

     32.8        20.6        64.7        78.4        67.8   

Unallocated and other

     2.3        2.5        (36.9     (58.4     85.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 200.0      $ 168.9      $ 323.1      $ 264.7      $ 380.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

          

Core North America

   $ 8.3      $ 8.3      $ 16.6      $ 16.1      $ 15.3   

Quick Lubes

     8.1        7.7        16.2        15.3        15.1   

International

     2.6        2.8        5.2        5.7        5.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 19.0      $ 18.8      $ 38.0      $ 37.1      $ 35.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating information

          

Core North America

          

Lubricant sales gallons

     49.4        47.7        99.9        99.0        98.8   

Premium lubricants (percent of U.S. branded volumes)

     40.6     36.0     36.6     33.7     30.0

Gross profit as a percent of sales (a)

     42.7     35.6     36.6     31.6     31.0

Quick Lubes

          

Lubricant sales gallons

     9.4        8.4        17.4        15.9        15.5   

Premium lubricants (percent of U.S. branded volumes)

     56.2     54.0     54.5     52.2     49.5

Gross profit as a percent of sales (a)

     41.1     39.7     39.8     38.4     38.9

International

          

Lubricant sales gallons

     25.4        23.4        50.1        47.7        44.1   

Premium lubricants (percent of lubricant volumes)

     29.5     30.6     30.9     30.1     29.2

Gross profit as a percent of sales (a)

     30.2     28.9     30.2     27.7     28.3

 

(a) Gross profit is defined as sales, less cost of sales.

Core North America

Six months ended March 31, 2016 compared to six months ended March 31, 2015

Core North America sales decreased $55.6 million, or 10%, to $478.5 million during the current period. Lower product pricing and the disposition of car care products decreased sales by $42.8 million, or 8%, and $28.5 million, or 5%, respectively. Changes in product mix and higher volume levels increased sales by $15.4 million, or 3%, and $2.9 million, respectively. Unfavorable foreign currency exchange decreased sales by $2.6 million primarily due to the U.S. dollar strengthening compared to the Canadian dollar.

Gross profit increased $14.2 million during the current period compared to the prior year period. Increases in volumes and changes in product mix combined to increase gross profit by $11.6 million, while lower product

 

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costs, partially offset by lower product pricing, increased gross profit by $7.2 million. The divestiture of car care products and unfavorable foreign currency exchange decreased gross profit by $3.9 million and $0.7 million, respectively. Gross profit as a percent of sales (or gross profit margin) during the current period increased 7.1 percentage points to 42.7%.

Selling, general and administrative expense (which, for reportable segment purposes, includes corporate expense allocation costs) increased $5.6 million during the current period, primarily as a result of $4.2 million of increased advertising costs, $2.6 million of increased consulting and legal costs, $1.8 million of increased bad debt expense, and $1.1 million of increased incentive compensation costs. These increases were partially offset by cost savings from the divestiture of car care products of $4.3 million. Equity and other income increased $0.3 million compared to the prior year primarily as a result of higher other income.

Operating income totaled $110.6 million in the current period as compared to $101.7 million in the prior year period. EBITDA increased $8.9 million to $118.9 million in the current period. EBITDA margin increased 4.2 percentage points to 24.8% in the current period.

2015 compared to 2014

Core North America sales decreased $53.3 million, or 5%, to $1,060.7 million in 2015. Lower product pricing and the disposition of car care products decreased sales by $51.4 million, or 5%, and $14.0 million, or 1%, respectively. Higher volume levels and changes in product mix increased sales by $9.2 million and $8.3 million, respectively. Unfavorable foreign currency exchange decreased sales by $5.4 million due to the U.S. dollar strengthening compared to the Canadian dollar.

Gross profit increased $36.2 million during 2015 compared to 2014. Lower product costs, partially offset by lower product pricing, increased gross profit by $33.8 million. Increases in volumes and changes in product mix combined to increase gross profit by $6.5 million, while unfavorable foreign currency exchange decreased gross profit by $1.5 million. The divestiture of car care products also decreased gross profit by $2.6 million. Gross profit margin during 2015 increased 5.0 percentage points to 36.6%.

Selling, general and administrative expense increased $0.3 million during 2015 as compared to 2014, primarily as a result of $5.2 million of increased advertising costs, $1.5 million of increased Ashland allocated resource costs, a $1.4 million increase in salaries and benefits, and $1.0 million of increased incentive compensation costs. These increases were partially offset by restructuring savings related to salaries and advertising of $4.4 million and $3.5 million, respectively, and cost savings from the divestiture of car care products of $1.5 million. Equity and other income decreased $0.4 million compared to the prior year primarily as a result of lower other income.

Operating income totaled $200.5 million in 2015 as compared to $165.0 million in 2014. EBITDA increased $36.0 million to $217.1 million in 2015. EBITDA margin increased 4.2 percentage points to 20.5% in 2015.

2014 compared to 2013

Core North America sales increased $6.5 million to $1,114.0 million during 2014. Changes in product mix and higher volumes increased sales by $12.8 million and $5.7 million, respectively. These increases were nearly offset by lower pricing and unfavorable foreign currency exchange, which decreased sales by $9.1 million and $2.9 million, respectively.

Gross profit increased $8.1 million during 2014 compared to 2013. Lower product costs, partially offset by lower product pricing, increased gross profit by $8.1 million while increases in volume and changes in product mix combined to increase gross profit by $0.8 million. Unfavorable foreign currency exchange reduced gross profit by $0.8 million. Gross profit margin during 2014 increased 0.6 percentage points to 31.6%.

 

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Selling, general and administrative expense increased $1.4 million during 2014 as compared to 2013, primarily as a result of increased Ashland allocated resource costs of $4.1 million and increased salaries and benefits costs of $2.2 million. These increases were partially offset by decreased advertising and promotional expenses of $4.4 million and $0.5 million of favorable foreign currency exchange. Equity and other income increased by $0.6 million during 2014 compared to 2013, primarily due to an increase in equity income from a domestic joint venture.

Operating income totaled $165.0 million in 2014 as compared to $157.7 million in 2013. EBITDA increased $8.1 million to $181.1 million in 2014. EBITDA margin increased 0.7 percentage points to 16.3% in 2014.

EBITDA and Adjusted EBITDA reconciliation

The following EBITDA presentation is provided as a means to enhance the understanding of financial measurements that we have internally determined to be relevant measures of comparison for the results of Core North America. There were no unusual or key items that affected comparability for Adjusted EBITDA during the six months ended March 31, 2016 and 2015 and fiscal years 2015, 2014 and 2013.

 

     For the six
months ended
March 31,
     For the year ended September 30,  

(In millions)

   2016      2015          2015              2014              2013      

Operating income

   $ 110.6       $ 101.7       $ 200.5       $ 165.0       $ 157.7   

Depreciation and amortization

     8.3         8.3         16.6         16.1         15.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 118.9       $ 110.0       $ 217.1       $ 181.1       $ 173.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Quick Lubes

Six months ended March 31, 2016 compared to six months ended March 31, 2015

Quick Lubes sales increased $31.3 million, or 16%, to $223.0 million during the current period. Volume increased sales by $25.0 million as lubricant sales gallons increased to 9.4 million during the current period. The acquisition of Oil Can Henry’s and changes in product mix increased sales $7.5 million and $0.8 million, respectively. Unfavorable product pricing decreased sales by $2.0 million.

Gross profit increased $15.6 million during the current period compared to the prior year period. Increases in volumes and changes in product mix combined to increase gross profit by $8.7 million. Lower raw material costs, partially offset by unfavorable product pricing, increased gross profit by $5.4 million, while the acquisition of Oil Can Henry’s increased gross profit by $1.5 million. Gross profit margin during the current period increased 1.4 percentage points to 41.1%.

Selling, general and administrative expense increased $5.5 million during the current period. The increase was primarily a result of $2.5 million of cost savings from allocated resource costs, a $1.0 million increase in operating costs as a result of the acquisition of Oil Can Henry’s, a $0.9 million increase in advertising and sales promotion costs and a $0.7 million increase in salaries and incentive compensation costs. Equity and other income increased $0.1 million compared to the prior year period due to a gain on the disposition of certain assets.

Operating income totaled $54.3 million in the current period as compared to $44.1 million in the prior year period. EBITDA increased $10.6 million to $62.4 million in the current period. EBITDA margin increased 1.0 percentage points to 28.0% in the current period.

 

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2015 compared to 2014

Quick Lubes sales increased $24.5 million, or 7%, to $394.4 million during 2015. Volume increased sales by $18.2 million as lubricant sales gallons increased to 17.4 million during 2015. Favorable pricing and changes in product mix increased sales by $4.6 million and $1.7 million, respectively.

Gross profit increased $14.8 million during 2015 compared to 2014. Lower raw material costs and favorable product pricing increased gross profit by $8.2 million. Increases in volumes and changes in product mix combined to increase gross profit by $6.6 million. Gross profit margin during 2015 increased 1.4 percentage points to 39.8%.

Selling, general and administrative expense decreased $0.2 million during 2015 as compared to 2014. The decrease was primarily a result of $4.7 million of cost savings from Ashland allocated resource costs. These costs were partially offset by a $1.5 million increase in salary and benefit costs and a $1.2 million increase in legal and consulting costs, as well as increased advertising costs and bad debt expense of $0.6 million and $0.4 million, respectively. Equity and other income increased $0.1 million compared to the prior year due to a gain on the disposition of certain assets.

Operating income totaled $94.8 million in 2015 as compared to $79.7 million in 2014. EBITDA increased $16.0 million to $111.0 million in 2015. EBITDA margin increased 2.4 percentage points to 28.1% in 2015.

2014 compared to 2013

Quick Lubes sales increased $26.2 million, or 8%, to $369.9 million during 2014 with higher pricing increasing sales by $14.7 million, or 4%. Changes in volume and product mix increased sales by $9.6 million, or 3%, and $1.9 million, respectively.

Gross profit increased $8.4 million during 2014 compared to 2013. Increases in volumes and changes in product mix combined to increase gross profit by $6.4 million, while price improvements, partially offset by higher raw materials costs, increased gross profit by $2.0 million. Gross profit margin during 2014 decreased 0.5 percentage points to 38.4%.

Selling, general and administrative expense decreased $1.1 million during 2014 as compared to 2013, primarily as a result of decreased advertising and promotional expenses of $1.5 million and insurance expense of $0.6 million, partially offset by increased Ashland allocated resource costs of $1.8 million. Equity and other income increased by $0.1 million during 2014 compared to 2013, primarily due to a gain on the disposition of certain assets.

Operating income totaled $79.7 million in 2014 as compared to $70.1 million in 2013. EBITDA increased $9.8 million to $95.0 million in 2014. EBITDA margin increased 0.9 percentage points to 25.7% in 2014.

 

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EBITDA and Adjusted EBITDA reconciliation

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

 

     For the six months
ended March 31,
     For the year ended September 30,  

(In millions)

       2016              2015              2015              2014              2013      

Operating income

   $ 54.3       $ 44.1       $ 94.8       $ 79.7       $ 70.1   

Depreciation and amortization

     8.1         7.7         16.2         15.3         15.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 62.4       $ 51.8       $ 111.0       $ 95.0       $ 85.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

International

Summarized below are the sales by geographic region for the International reportable segment for the six months ended March 31, 2016 and 2015 and the last three fiscal years ended September 30.

 

International

 
     For the six months
ended March 31,
    For the year ended September 30,  

Sales by Geography

     2016         2015       2015     2014     2013  

Europe, Middle East and Africa

     29     29     29     31     32

Australia

     27     28     27     29     32

Asia Pacific excluding Australia

     26     25     26     23     22

Latin America

     18     18     18     17     14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended March 31, 2016 compared to six months ended March 31, 2015

International sales decreased $13.4 million, or 5%, to $234.2 million during the current period. Unfavorable foreign currency exchange, primarily with the Euro and Australian dollar, decreased sales by $23.7 million, or 10%. Higher volume levels and changes in product mix increased sales by $17.9 million, or 7%, and $0.8 million, respectively. Lower product pricing decreased sales by $8.4 million, or 3%.

Gross profit decreased $0.8 million during the current period compared to the prior year period. Unfavorable foreign currency exchange decreased gross profit by $6.1 million, while increases in volumes and changes in product mix combined to increase gross profit by $5.2 million. Lower product costs were essentially offset by lower product pricing increasing gross profit by $0.1 million. Gross profit margin during the current period increased 1.3 percentage points to 30.2%.

Selling, general and administrative expense decreased $0.8 million during the current period, primarily as a result of $0.7 million of bad debt expense. Equity and other income (loss) increased $12.2 million compared to the prior year period primarily as a result of the $14.3 million impairment of the Venezuelan equity method investment in the prior year period. For additional information see Note C in the Notes to Condensed Combined Financial Statements for the period ended March 31, 2016.

Operating income totaled $32.8 million in the current period as compared to $20.6 million in the prior year period. EBITDA increased $12.0 million in the current period to $35.4 million. Adjusted EBITDA decreased $2.3 million to $35.4 million and Adjusted EBITDA margin decreased 0.1 percentage points to 15.1% in the current period.

 

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2015 compared to 2014

International sales decreased $45.6 million, or 8%, to $511.8 million during 2015. Unfavorable currency exchange decreased sales by $65.0 million as a result of the U.S. dollar strengthening as compared to various foreign currencies, primarily the Euro and the Australian dollar. Volume increased sales $24.1 million, as lubricant gallons sold increased to 50.1 million during 2015, and changes in product mix increased sales by $1.2 million. Unfavorable product pricing decreased sales by $5.9 million.

Gross profit increased $0.4 million during 2015 compared to 2014. Unfavorable foreign currency exchange decreased gross profit by $16.9 million while lower raw material costs, partially offset by lower product pricing, increased gross profit by $11.1 million. Increases in volumes and changes in product mix combined to increase gross profit by $6.2 million. Gross profit margin during 2015 increased 2.5 percentage points to 30.2%.

Selling, general and administrative expense decreased $7.3 million, or 7%, during 2015 as compared to 2014, primarily as a result of declines from favorable foreign currency exchange of $8.5 million, which was partially offset by increased sales promotion costs of $1.1 million.

Equity and other income decreased by $21.4 million during 2015 compared to 2014, primarily due to the $14.3 million impairment of an equity method investment in Venezuela during 2015 and $7.7 million from a favorable arbitration ruling on a commercial contract during 2014. For additional information see Notes C and L in the Notes to Combined Financial Statements.

Operating income totaled $64.7 million in 2015 as compared to $78.4 million in 2014. EBITDA decreased $14.2 million to $69.9 million in 2015. Adjusted EBITDA increased $0.1 million to $84.2 million in 2015. Adjusted EBITDA margin increased 1.4 percentage points to 16.5% in 2015.

2014 compared to 2013

International sales increased $12.4 million, or 2%, to $557.4 million during 2014. Volume increased sales by $20.4 million, or 4%, as lubricant gallons sold increased to 47.7 million gallons during 2014. Changes in product mix also increased sales by $1.0 million. Unfavorable foreign currency exchange and lower pricing decreased sales by $7.7 million and $1.3 million, respectively.

Gross profit increased $0.3 million during 2014 compared to 2013. Increases in volumes and changes in product mix combined to increase gross profit by $8.4 million, while lower pricing and higher production costs combined to decrease gross profit by $5.6 million. Unfavorable foreign currency exchange reduced gross profit by $2.5 million. Gross profit margin during 2014 decreased 0.6 percentage points to 27.7%.

Selling, general and administrative expense decreased $5.1 million during 2014 as compared to 2013, primarily as a result of decreased advertising and promotional expenses of $6.6 million and favorable foreign currency exchange of $1.8 million. These decreases were partially offset by increased salaries and benefits costs of $2.9 million.

Equity and other income increased by $5.2 million during 2014 compared to 2013, as a result of an increase of $8.4 million in other income due to a favorable arbitration ruling on a commercial contract during 2014. This increase was partially offset by a decrease of $3.2 million in equity income primarily related to unfavorable performance in our India and Venezuela joint ventures.

Operating income totaled $78.4 million in 2014 as compared to $67.8 million in 2013. EBITDA increased $11.0 million to $84.1 million in 2014. EBITDA margin increased 1.7 percentage points to 15.1% in 2014. There were no unusual or key items that affected comparability for EBITDA during 2014 and 2013.

 

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EBITDA and Adjusted EBITDA reconciliation

The following EBITDA and Adjusted EBITDA presentation is provided as a means to enhance the understanding of financial measurements that we have internally determined to be relevant measures of comparison for the results of International. Adjusted EBITDA results have been prepared to illustrate the ongoing effects of our operations, which exclude certain key items. The $14.3 million adjustment in March 2015 is related to the impairment of an equity method investment within Venezuela.

 

     For the six months
ended March 31,
     For the year ended September 30,  

(In millions)

       2016              2015              2015              2014              2013      

Operating income

   $ 32.8       $ 20.6       $ 64.7       $ 78.4       $ 67.8   

Depreciation and amortization

     2.6         2.8         5.2         5.7         5.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     35.4         23.4         69.9         84.1         73.1   

Impairment of equity investment

     —           14.3         14.3         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 35.4       $ 37.7       $ 84.2       $ 84.1       $ 73.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unallocated and Other

Unallocated and other generally includes items such as components of pension and other postretirement benefit plan expenses (excluding service costs, which are allocated to the reportable segments), certain significant company-wide restructuring activities and legacy costs.

The following table summarizes the key components of the Unallocated and other segment’s operating income (expense) for the six months ended March 31, 2016 and 2015 and each of the last three years ended September 30.

 

     For the six months
ended March 31,
    For the year ended September 30,  

(In millions)

       2016             2015             2015             2014             2013      

Gain (losses) on pension and other postretirement plan remeasurement

   $ (4.7   $ (2.0   $ (46.0   $ (61.1   $ 74.0   

Pension and other postretirement net periodic income (a)

     7.0        4.9        9.5        9.0        11.0   

Restructuring activities

     —          (0.4     (0.4     (6.3     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income (expense)

   $ 2.3      $ 2.5      $ (36.9   $ (58.4   $ 85.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Amounts exclude service costs of $4.3 million and $4.5 million for the six months ended March 31, 2016 and 2015, respectively, $8.8 million during 2015, $9.6 million during 2014 and $10.5 million during 2013, which are allocated to our reportable segments.

Six months ended March 31, 2016 compared to six months ended March 31, 2015

Unallocated and other recorded income was $2.3 million and $2.5 million during the six months ended March 31, 2016 and 2015, respectively. Unallocated and other includes pension and other postretirement net periodic costs and income within operations that have not been allocated to reportable segments. These costs and income are reflective of standalone Valvoline pension plans as well as the shared pension and other postretirement plans accounted for under a multi-employer approach. These costs include interest cost, expected return on assets and amortization of prior service credit, which resulted in income of $7.0 million and $4.9 million during the current and prior year period, respectively. Unallocated and other also includes gains and losses on pension and other postretirement plan remeasurements, which resulted in a loss of $4.7 million and $2.0 million during the current and prior year period, respectively. Fluctuations in these amounts from year to

 

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year result primarily from changes in the discount rate but are also partially affected by differences between the expected and actual return on plan assets during each year as well as other changes in other actuarial assumptions such as changes in demographic data or mortality assumptions. The current period remeasurement losses include the allocation of the curtailment gains and actuarial losses resulting from the March 2016 announced plan amendments of certain shared pension and other postretirement plans. These plan amendments will freeze the pension benefits for the majority of Ashland’s U.S. pension plans as of September 30, 2016 and reduce the retiree life and medical benefits effective October 1, 2016 and January 1, 2017, respectively.

Fiscal years ended September 30, 2015, 2014 and 2013

Unallocated and other recorded expense was $36.9 million for 2015 and $58.4 million for 2014, and income of $85.0 million for 2013. Unallocated and other includes pension and other postretirement net periodic costs and income within operations that have not been allocated to reportable segments. These costs and income are reflective of standalone Valvoline pension plans as well as the shared pension and other postretirement plans accounted for under a multi-employer approach. These costs include interest cost, expected return on assets and amortization of prior service credit, which resulted in income of $9.5 million during 2015, $9.0 million during 2014, and $11.0 million during 2013. Unallocated and other also includes gains and losses on pension and other postretirement plan remeasurements, which resulted in a loss of $46.0 million in 2015, a loss of $61.1 million in 2014 and a gain of $74.0 million in 2013. Fluctuations in these amounts from year to year result primarily from changes in the discount rate but are also partially affected by differences between the expected and actual return on plan assets during each year as well as other changes in other actuarial assumptions such as changes in demographic data or mortality assumptions.

Unallocated and other also includes severance expense of $0.4 million and $6.3 million during 2015 and 2014, respectively, related to restructuring programs.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Overview

Historically, the primary source of liquidity for our business was the cash flow provided by our operations, which was transferred to Ashland to support its overall cash management strategy. Transfers of cash to and from Ashland’s cash management system have been reflected in Ashland’s net investment in the historical combined balance sheets, statements of cash flows and statements of changes in invested equity. We have not reported cash or cash equivalents for the periods presented in the combined balance sheets.

Upon the completion of this offering, we will maintain separate cash management and financing functions for operations. Additionally, our capital structure, long-term commitments and sources of liquidity will change significantly from our historical capital structure, long-term commitments and sources of liquidity. The cash balance on the date of the completion of this offering is expected to be approximately $         million. However, that amount could fluctuate based on the outcome of several of our current assumptions.

Prior to the closing of this offering, we expect to incur new senior term loans (which may be secured or unsecured), new senior unsecured notes or a combination thereof in an aggregate principal amount of approximately $             million. We expect to transfer the proceeds of this indebtedness to Ashland through intercompany transfers. Upon closing this offering, we expect to apply $             million of net proceeds from this offering to repay this indebtedness. After giving effect to these transactions, following the closing of this offering, we expect to have new senior term loans (which may be secured or unsecured), new senior unsecured notes or a combination thereof in an aggregate principal amount of approximately $             million. We also plan to obtain an accounts receivable securitization facility with up to $             million of available funding from qualified receivables.

In addition to the senior term indebtedness described above, in the event that the net proceeds of this offering are expected to exceed $             million, we may incur certain short-term indebtedness immediately prior to the closing of this offering and transfer the net proceeds thereof to a subsidiary of Ashland Global. We plan to repay such short-term indebtedness in full from the net proceeds of this offering.

 

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Further, we expect that approximately $         million in net unfunded pension and other postretirement plan liabilities will be transferred to us by Ashland as part of the separation. As announced by Ashland in March 2016, these plans are frozen to new participants and, effective September 2016, the accrual of pension benefits for participants will be frozen. Certain postretirement benefits were also eliminated or curtailed. Plans transferred to us by Ashland will include a substantial portion of the largest U.S. qualified pension plan and non-qualified U.S. pension plans.

No U.S. qualified pension plan contributions are required in 2016 and approximately $15.0 million will be contributed to the U.S. non-qualified pension plans in 2016. During 2017, no contributions are expected to be required to be made to the U.S. qualified pension plans, while approximately $15.0 million of contributions are expected to be required to be made to the U.S. non-qualified pension plans. We expect to fund the costs of the non-qualified plans as the benefits are paid.

We believe that our available cash and cash flows expected to be generated from operations will be adequate to satisfy our current and planned operations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of sales growth, the expansion of our sales and marketing activities, our expansion into other markets and our results of operations. To the extent that existing cash, cash from operations and credit facilities are insufficient to fund our future activities, we may need to raise additional funds through public equity or debt financing.

Operating activities

The cash generated during each period is primarily driven by net income results, adjusted for certain non-cash items such as depreciation and amortization and remeasurement adjustments to the pension plans, as well as changes in working capital, which are fluctuations within accounts receivable, inventory, trade and other payables, and accrued expenses and other liabilities. We continue to emphasize working capital management as a high priority and focus.

The following table sets forth the cash flows associated with our operating activities for the six months ended March 31, 2016 and 2015 and the fiscal years 2015, 2014 and 2013.

 

     For the six
months ended
March 31,
    For the year ended
September 30,
 

(In millions)

   2016     2015     2015     2014     2013  

Cash flows provided (used) by operating activities:

          

Net Income

   $ 133.0      $ 90.5      $ 196.1      $ 173.4      $ 246.1   

Adjustments to reconcile income to cash flows from operating activities

          

Depreciation and amortization

     19.0        18.8        38.0        37.1        35.7   

Deferred income taxes

     —          —          (9.1     (16.0     37.7   

Equity income from affiliates

     (6.8     (6.5     (12.1     (10.2     (12.8

Distributions from equity affiliates

     8.1        8.1        17.9        7.5        7.7   

Net loss on acquisition and divestiture

     0.5        26.0        26.3        —          —     

Impairment of equity method investment

     —          14.3        14.3        —          —     

Loss (gain) on pension and postretirement plan remeasurement

     —          —          2.0        1.0        (2.5

Change in operating assets and liabilities (a)

     (62.7     9.4        56.4        (22.2     (39.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flows provided by operating activities

   $ 91.1      $ 160.6      $ 329.8      $ 170.6      $ 272.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Excludes changes resulting from operations acquired or sold.

 

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The following table details certain changes in key operating assets and liabilities for the six months ended March 31, 2016 and 2015 and for the years ended September 30, 2015, 2014 and 2013.

 

     For the six
months ended
March 31,
    For the year ended September 30,  

(In millions)

   2016     2015         2015             2014             2013      

Changes in assets and liabilities (a)

          

Accounts receivable

   $ (15.4   $ 32.4      $ 53.4      $ (31.3   $ (1.3

Inventories

     (17.2     7.4        (6.4     8.2        (18.9

Trade and other payables

     (5.3     (20.1     (7.3     (7.8     12.0   

Accrued expenses and other liabilities

     (4.5     (7.3     9.3        (11.3     8.8   

Other assets and liabilities

     (20.3     (3.0     7.4        20.0        (39.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in operating assets and liabilities

   $ (62.7   $ 9.4      $ 56.4      $ (22.2   $ (39.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Excludes changes resulting from operations acquired or sold.

Six months ended March 31, 2016 compared to six months ended March 31, 2015

Changes in net working capital (accounts receivable, inventory, trade and other payables and accrued expense and other liabilities) accounted for an outflow of $42.4 million and an inflow of $12.4 million during the six months ended March 31, 2016 and 2015, respectively, and were driven by the following:

 

    Accounts receivable – The cash outflow during the six months ended March 31, 2016 of $15.4 million is a result of higher sales during February and March 2016 compared to August and September 2015 as well as changes in the balances of customer accounts receivable sold to a financial institution. The cash inflow of $32.4 million during the six months ended March 31, 2015 related to the inception of the program of selling certain customer accounts receivables to a financial institution at the beginning of fiscal 2015. See Note B in the Notes to Condensed Combined Financial Statements for further information on this program.

 

    Inventory – Changes in inventory from year to year are primarily a result of sales activity and inventory management strategies, specifically the movement in lubricant gallons.

 

    Trade and other payables and accrued expenses and other liabilities – Changes in trade and other payables and accrued expenses and other liabilities combined were cash outflows of $9.8 million and $27.4 million during the six months ended March 31, 2016 and 2015, respectively. Fluctuations within trade and other payables is primarily a result of timing of payments, inventory balances and currency movements.

The remaining cash outflows for operating assets and liabilities during the six months ended March 31, 2016 and 2015 of $20.3 million and $3.0 million, respectively, were primarily due to adjustments to other long term assets and liabilities.

Operating cash flows for the six months ended March 31, 2016 included net income of $133.0 million and noncash adjustments of $19.0 million for depreciation and amortization.

Operating cash flows for the six months ended March 31, 2015 included net income of $90.5 million and noncash adjustments of $18.8 million for depreciation and amortization, the loss on the disposition of car care products of $26.0 million, and $14.3 million related to the impairment of the Venezuelan equity method investment.

 

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Fiscal years ended September 30, 2015, 2014 and 2013

Changes in net working capital (accounts receivable, inventory, trade and other payables and accrued expense and other liabilities) accounted for inflows of $49.0 million and $0.6 million in 2015 and 2013, respectively, and an outflow of $42.2 million in 2014, and were driven by the following:

 

    Accounts receivable – The cash inflow related to accounts receivable during 2015 compared to 2014 was primarily due to the sale of certain customer accounts receivable to a financial institution of $41.4 million as of September 30, 2015. See Note B in the Notes to Combined Financial Statements for further information on this activity. The cash outflow related to accounts receivable during 2014 compared to 2013 was due to increased sales compared to 2013 and also slower paced collections.

 

    Inventory – Changes in inventory from year to year are primarily a result of sales activity and inventory management strategies. The cash outflows during 2015 and 2013 were primarily the result of increased lubricant gallon volumes compared to the preceding years’, while the cash inflow during 2014 was the result of a decrease in lubricant gallon volumes compared to 2013.

 

    Trade and other payables and accrued expenses and other liabilities – Changes in trade and other payables and accrued expenses and other liabilities combined were cash inflows of $2.0 million in 2015, cash outflows of $19.1 million in 2014 and cash inflows of $20.8 million in 2013. Fluctuations within trade and other payables is primarily a result of timing of payments and inventory balances. The change during 2014 within accrued expenses and other liabilities was primarily due to the completion of certain costs associated with the construction of a manufacturing facility. The changes in 2015 and 2013 within accrued expenses and other liabilities were primarily due to increased incentive compensation accruals.

The remaining cash inflows for operating assets and liabilities during 2015 and 2014 of $7.4 million and $20.0 million, respectively, and an outflow of $39.6 million during 2013 were primarily due to adjustments to other long term assets and liabilities.

Operating cash flows for 2015 included net income of $196.1 million, $2.0 million of losses on pension plan remeasurements for standalone Valvoline plans and noncash adjustments of $38.0 million for depreciation and amortization, the loss on the disposition of car care products of $26.3 million, and $14.3 million related to the impairment of the Venezuelan joint venture equity investment.

Operating cash flows for 2014 included net income of $173.4 million, $1.0 million of losses on pension plan remeasurements for standalone Valvoline plans and a noncash adjustment of $37.1 million for depreciation and amortization.

Operating cash flows for 2013 included net income of $246.1 million, a $2.5 million gain on pension plan remeasurement for standalone Valvoline plans and a noncash adjustment of $35.7 million for depreciation and amortization.

 

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Investing activities

The following table sets forth the cash flows associated with our investing activities for the six months ended March 31, 2016 and 2015 and the fiscal years 2015, 2014 and 2013.

 

     For the six
months ended
March 31,
    For the year ended September 30,  

(In millions)

   2016     2015         2015             2014             2013      

Cash flows provided (used) by investing activities

          

Additions to property, plant and equipment

   $ (14.4   $ (17.7   $ (45.0   $ (37.2   $ (40.9

Proceeds from disposal of property, plant and equipment

     0.2        0.4        0.9        0.8        0.5   

Purchase of operations - net of cash acquired

     (66.4     —          (4.7     (1.9     (0.2

Proceeds from sale of operations

     —          —          22.8        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flows used by investing activities

   $ (80.6   $ (17.3   $ (26.0   $ (38.3   $ (40.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended March 31, 2016 compared to six months ended March 31, 2015

Cash used by investing activities was $80.6 million and $17.3 million during the six months ended March 31, 2016 and 2015, respectively. The purchase of operations of $66.4 million during the current period relates primarily to the acquisition of Oil Can Henry’s as well as other nominal Quick Lubes locations. Both periods include cash outflows for capital expenditures of $14.4 million and $17.7 million, respectively.

Fiscal years ended September 30, 2015, 2014 and 2013

Cash used by investing activities was $26.0 million in 2015 compared to $38.3 million and $40.6 million for 2014 and 2013, respectively. Fiscal 2015 included cash outflows of $45.0 million for capital expenditures and $4.7 million for a Quick Lube acquisition, as well as cash inflows of $22.8 million from the disposition of car care products and the Venezuelan equity method investment.

The significant cash investing activities for 2014 and 2013 included cash outflows for capital expenditures of $37.2 million and $40.9 million, respectively.

Financing activities

The following table sets forth the cash flows associated with our financing activities for the six months ended March 31, 2016 and 2015 and fiscal years 2015, 2014 and 2013.

 

     For the six
months ended
March 31,
    For the year
ended September 30,
 

(In millions)

   2016     2015     2015     2014     2013  

Cash flows provided (used) by financing activities

          

Net transfers to Ashland

   $ (10.5   $ (143.3   $ (303.8   $ (132.3   $ (232.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flows used by financing activities

   $ (10.5   $ (143.3   $ (303.8   $ (132.3   $ (232.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As Ashland managed our cash and financing arrangements, all excess cash generated through earnings were deemed remitted to Ashland and all sources of cash were deemed funded by Ashland. See Note B in the Notes to Combined Financial Statements for additional information.

 

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Six months ended March 31, 2016 compared to six months ended March 31, 2015

Cash used by financing activities was $10.5 million and $143.3 million for the six months ended March 31, 2016 and 2015, respectively. The current period net transfers to Ashland amount was driven by the acquisition of Oil Can Henry’s and changes in working capital.

Fiscal years ended September 30, 2015, 2014 and 2013

Cash used by financing activities was $303.8 million for 2015, $132.3 million for 2014, and $232.3 million for 2013. Cash provided by operations, which increased for the reasons discussed previously, and proceeds from the disposition of car care products drove the $171.5 million increase in cash transferred from us to Ashland during 2015 compared to 2014. The 2013 net transfers to Ashland were driven by earnings results.

Free cash flow and other liquidity information

The following table sets forth free cash flow for the disclosed periods and reconciles free cash flow to cash flows provided by operating activities. Free cash flow does not reflect adjustments for certain non-discretionary cash flows. See “Results of Operations—Combined Review—Non-GAAP Performance Metrics” for additional information.

 

     For the six
months ended
March 31,
    For the year ended September 30,  

(In millions)

   2016     2015         2015             2014             2013      

Cash flows provided by operating activities

   $ 91.1      $ 160.6      $ 329.8      $ 170.6      $ 272.9   

Less:

          

Additions to property, plant and equipment

     (14.4     (17.7     (45.0     (37.2     (40.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flows

   $ 76.7      $ 142.9      $ 284.8      $ 133.4      $ 232.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At March 31, 2016, working capital (current assets minus current liabilities) amounted to $213.8 million, compared to $178.7 million at the end of 2015. Working capital is affected by our use of the last-in, first-out (“LIFO”) method of inventory valuation that valued inventories below their replacement costs by $25.9 million at March 31, 2016 and $31.2 million at September 30, 2015. Accounts receivable amounted to 117% of current liabilities at March 31, 2016 and 112% at September 30, 2015.

Debt

Historically, the primary source of liquidity for our business was the cash flow provided by our operations, which was transferred to Ashland to support its overall cash management strategy. Transfers of cash to and from Ashland’s cash management system have been reflected in Ashland’s net investment in the historical combined balance sheets, statements of cash flows and statements of changes in invested equity. We have not reported cash or cash equivalents or debt for the periods presented in the combined balance sheets.

Prior to the closing of this offering, we expect to incur new senior term loans (which may be secured or unsecured), new senior unsecured notes or a combination thereof in an aggregate principal amount of approximately $         million. We expect to transfer the proceeds of this indebtedness to Ashland through intercompany transfers. Upon closing this offering, we expect to apply $         million of net proceeds from this offering to repay this indebtedness. After giving effect to these transactions, following the closing of this offering, we expect to have new senior term loans (which may be secured or unsecured), new senior unsecured notes or a combination thereof in an aggregate principal amount of approximately $         million. We also plan to obtain an accounts receivable securitization facility with up to $         million of available funding from qualified receivables.

 

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Capital expenditures

Capital expenditures were $14.4 million for the six months ended March 31, 2016 and $45.0 million for 2015. The annual average capital expenditure during the last three years was $41.0 million. Capital expenditures by reportable segment for the last three fiscal years are set forth in the table below.

 

(in millions)

   2015      2014      2013  

Core North America

   $ 20.2       $ 15.2       $ 14.9   

Quick Lubes

     19.2         16.4         19.5   

International

     5.6         5.6         6.5   
  

 

 

    

 

 

    

 

 

 
   $ 45.0       $ 37.2       $ 40.9   
  

 

 

    

 

 

    

 

 

 

Contractual obligations and other commitments

The following table sets forth our obligations and commitments to make future payments under existing contracts at September 30, 2015. Excluded from the table are contractual obligations for which the ultimate settlement of quantities or prices are not fixed and determinable or capital lease obligations.

 

(In millions)

   Total      Less than
1 Year
     1-3
years
     3-5
years
     More than
5 years
 

Contractual obligations

              

Operating lease obligations (a)

   $ 62.7       $ 12.6       $ 19.6       $ 11.8       $ 18.7   

Employee benefit obligations (b)

     5.0         3.2         0.3         0.3         1.2   

Unrecognized tax benefits (c)

     4.7         —           —           —           4.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 72.4       $ 15.8       $ 19.9       $ 12.1       $ 24.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) As a result of the acquisition of Oil Can Henry’s during the period ended March 31, 2016, future minimum operating lease obligations increased approximately $50.0 million over the term of the existing lease agreements. This increase is excluded from the figures reflected in the table above.
(b) Includes estimated funding of Valvoline specific pension plans for 2016, as well as projected benefit payments through 2025 under our unfunded pension plans. Excludes the benefit payments from the pension plan trust funds. See Note K in the Notes to Combined Financial Statements.
(c) Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, we are unable to determine the timing of payments related to noncurrent unrecognized tax benefits, including interest and penalties. Therefore, these amounts were included in the “More than 5 years” column.

The foregoing table does not give effect to indebtedness, unfunded pension liabilities and certain other liabilities that we expect to incur or assume in connection with the separation transactions and the completion of this offering.

OFF-BALANCE SHEET ARRANGEMENTS

As part of our normal course of business, we are a party to various financial guarantees and other commitments. These arrangements involve elements of performance and credit risk that are not included in the combined balance sheets. The possibility that we would have to make actual cash expenditures in connection with these obligations is largely dependent on the performance of the party whose obligations we guarantee, or the occurrence of future events that we are unable to predict. We have reserved the approximate fair value of these guarantees in accordance with U.S. GAAP.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion and analysis of recently issued accounting pronouncements and its impact on us, see Note B in the Notes to Combined Financial Statements

 

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CRITICAL ACCOUNTING POLICIES

The preparation of our combined financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses, and the disclosures of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include, but are not limited to, long-lived assets (including goodwill), sales deductions and income taxes. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

Long-lived Assets

Tangible assets

The cost of property, plant and equipment is depreciated by the straight-line method over the estimated useful lives of the assets. Buildings are depreciated principally over 5 to 35 years and machinery and equipment principally over 5 to 15 years. We review property, plant and equipment asset groups for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We monitor these changes and events on at least a quarterly basis. Examples of events or changes in circumstances could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow losses combined with a history of losses or a forecast of continuing losses associated with the use of an asset group, or a current expectation that an asset group will be sold or disposed of before the end of its previously estimated useful life. Recoverability is based upon projections of anticipated future undiscounted cash flows associated with the use and eventual disposal of the property, plant and equipment asset groups, as well as specific appraisals in certain instances. Reviews occur at the lowest level for which identifiable cash flows are largely independent of cash flows associated with other property, plant and equipment asset groups. If the future undiscounted cash flows result in a value that is less than the carrying value, then the long-lived asset is considered impaired and a loss is recognized based on the amount by which the carrying amount exceeds the estimated fair value. Various factors that we use in determining the impact of these assessments include the expected useful lives of long-lived assets and the ability to realize any undiscounted cash flows in excess of the carrying amounts of such asset groups, and are affected primarily by changes in the expected use of the assets, changes in technology or development of alternative assets, changes in economic conditions, changes in operating performance and changes in expected future cash flows. Because judgment is involved in determining the fair value of property, plant and equipment asset groups, there is risk that the carrying value of these assets may require adjustment in future periods.

Goodwill

We review goodwill for impairment annually or when events and circumstances indicate an impairment may have occurred. This annual assessment is performed as of July 1 and consists of us determining each reporting unit’s current fair value compared to its current carrying value. Our reporting units for the allocation of goodwill, and the associated goodwill balances, include the Core North America ($89.1 million as of September 30, 2015), Quick Lubes ($40.7 million as of September 30, 2015), and International ($39.6 million as of September 30, 2015) reportable segments.

In reviewing goodwill for impairment, we have the option to first perform a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we are not required to perform any additional tests in assessing goodwill for impairment. However, if we conclude otherwise or elect not to perform the qualitative assessment, then we are required to perform the first step of a two-step impairment review process.

 

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We performed the quantative assessment for each reporting unit during the applicable fiscal year periods within this standalone report and upon completion of this assessment noted no impairment for any fiscal year periods within the financial statements. During the fiscal 2015 annual impairment analysis, all of our reporting units’ fair value exceeded the book value by greater than 300%.

Our assessment of an impairment charge on goodwill could change in future periods if any or all of the following events were to occur with respect to a particular reporting unit: a significant change in projected business results, a divestiture decision, significant changes to certain discounted cash flow assumptions, economic deterioration that is more severe or of a longer duration than anticipated, or other significant economic events.

Sales Deductions

We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, when persuasive evidence of an arrangement exists, products are received or services are provided to customers, the sales price is fixed or determinable and collectability is reasonably assured. Provisions are made at the time of revenue recognition for sales rebates and discounts consisting primarily of promotion rebates and customer pricing discounts. These provisions are recorded as a reduction of revenue based on contract terms and our historical experience with similar programs and require management’s judgment with respect to estimating customer participation and performance levels. Differences between estimated expense and actual incentive costs are normally insignificant and are recognized in earnings in the period such differences are determined. The cost of these programs is recognized as incurred and recorded as a reduction of sales and totaled $344.8 million, $321.7 million and $300.4 million in the Combined Statements of Operations and Comprehensive Income for September 30, 2015, 2014 and 2013, respectively.

Income Taxes

The provision for income taxes includes current income taxes as well as deferred income taxes. Under U.S. GAAP, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. The effect of changes in tax rates on deferred taxes is recognized in the period in which the enactment date changes. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized.

Our income taxes as presented are calculated on a separate return basis, although our operations have historically been included in Ashland’s U.S. federal and state tax returns or non-U.S. jurisdictions tax returns. As our operations in many jurisdictions are unincorporated commercial units of Ashland and its subsidiaries, standalone tax returns have not been filed for the operations in these jurisdictions. Accordingly, our tax results as presented are not necessarily reflective of the results that we would have generated on a standalone basis.

Our combined balance sheet reflects assumptions regarding the expected manner of separation of the Company that would result in Ashland retaining certain tax items in a number of jurisdictions. As a result, the tax items that Ashland would retain in these jurisdictions have been eliminated from our combined balance sheet. The income tax expense of these items has been reflected in the combined statements of operations and comprehensive income, with a corresponding offset to total invested equity.

 

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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Exchange Risk

We are exposed primarily to market risks associated with foreign currency exchange rates. Our foreign currency risk is primarily limited to the Euro, Australian Dollar, Canadian Dollar and Chinese Yuan. We participate in Ashland’s centralized foreign currency derivatives program which mitigates risk associated with the foreign currency exposures. We believe our foreign currency risk is limited as 72% of our revenue during the year ended September 30, 2015 and 71% of our revenue in each of the years ended September 30, 2014 and 2013 was based in U.S. dollars, and 80% and 78% of our net assets was based in U.S. dollars. We do not have material exposures to market risk with respect to investments.

Inflation and Changing Prices

Our financial statements are prepared on the historical cost method of accounting in accordance with U.S. GAAP and, as a result, do not reflect changes in the purchasing power of the U.S. dollar. Monetary assets (such as cash, cash equivalents and accounts receivable) lose purchasing power as a result of inflation, while monetary liabilities (such as accounts payable and indebtedness) result in a gain, because they can be settled with dollars of diminished purchasing power. As of September 30, 2015, our monetary assets exceed our monetary liabilities, leaving us currently more exposed to the effects of future inflation. However, given the recent consistent stability of inflation in the United States in the past several years as well as forward economic outlooks, current inflationary pressures seem moderate.

Certain of the industries in which we operate are capital-intensive, and replacement costs for our plant and equipment generally would substantially exceed their historical costs. Accordingly, depreciation and amortization expense would be greater if it were based on current replacement costs. However, because replacement facilities would reflect technological improvements and changes in business strategies, such facilities would be expected to be more productive than existing facilities, mitigating at least part of the increased expense.

We use the LIFO method to value a portion of our inventories to provide a better matching of revenues with current costs. However, LIFO values such inventories below their replacement costs during inflationary periods.

 

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BUSINESS

 

 

LOGO

OUR COMPANY

We are one of the most recognized and respected premium consumer brands in the global automotive lubricant industry, known for our high quality products and superior levels of service. Established in 1866, our heritage spans 150 years, during which we have developed powerful name recognition across multiple product and service channels. We have significant positions in the United States in all of the key lubricant sales channels, and also have a strong international presence with our products sold in approximately 140 countries.

In the United States and Canada, our products are sold to consumers through over 30,000 retail outlets, to installer customers with over 12,000 locations, and to approximately 1,050 Valvoline branded franchised and company-owned stores. We serve our customer base through an extensive sales force and technical support organization, allowing us to leverage our technology portfolio and customer relationships globally, while meeting customer demands locally. This combination of scale and strong local presence is critical to our success.

We have a history of leading innovation with revolutionary products such as All Climate™, DuraBlend™, and MaxLife™. In addition to our iconic Valvoline-branded passenger car motor oils and other automotive lubricant products, we provide a wide array of lubricants used in heavy duty equipment, as well as automotive chemicals and fluids designed to improve engine performance and lifespan. Our premium branded product offerings enhance our high quality reputation and provide our customers with solutions that address a wide variety of needs.

We deliver products and services to our customers across three business segments:

 

    Core North America: We sell to consumers in the United States and Canada who perform their own automotive maintenance, referred to as “Do-It-Yourself” or “DIY” consumers, through retail outlets, including AutoZone, O’Reilly Auto Parts and Advance Auto Parts. We also sell to installer customers such as car dealers, general repair shops and third-party quick lube locations, including Goodyear, Monro, Express Oil Change, TBC Retail G