Income Taxes

12 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Components of income tax expense

Income tax expense consisted of the following for the years ended September 30:

(In millions)	2022		2021		2020
Current
Federal	$	9.4	$	(0.9)	$	(14.4)
State	4.3		2.1		(2.6)
Non-U.S.	3.0		1.8		1.7
	16.7		3.0		(15.3)
Deferred
Federal	16.2		47.7		43.8
State	1.3		9.0		24.8
Non-U.S.	0.5		0.2		0.1
	18.0		56.9		68.7
Income tax expense	$	34.7	$	59.9	$	53.4

The following presents pre-tax income and the principal components of the reconciliation between the effective tax rate and the U.S. federal statutory income tax rate in effect for the years ended September 30:

(In millions)	2022			2021			2020
Income before income taxes
United States	$	119.1		$	250.8		$	115.6
Non-U.S.	25.0			9.2			7.4
Total income before income taxes	$	144.1		$	260.0		$	123.0
U.S. statutory tax rate	21		%	21		%	21		%
Income taxes computed at U.S. statutory tax rate	$	30.3		$	54.6		$	25.8
(Decrease) increase in amount computed resulting from:
Unrecognized tax benefits	0.1			0.8			0.6
State taxes, net of federal benefit	5.2			9.3			3.7
International rate differential	(0.4)			—			0.2
Permanent items	(1.0)			0.5			0.4
Remeasurement of net deferred taxes	(0.5)			0.1			1.0
Return-to-provision adjustments	(0.4)			0.6			(0.8)
Change in valuation allowances	1.8			—			28.7
Tax Matters Agreement activity	—			(5.6)			(6.4)
Other	(0.4)			(0.4)			0.2
Income tax expense	$	34.7		$	59.9		$	53.4
Effective tax rate	24.1		%	23.0		%	43.4		%

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

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

Deferred taxes

A summary of the deferred tax assets and liabilities included in the Consolidated Balance Sheets follows as of September 30:

(In millions)	2022		2021
Deferred tax assets
Non-U.S. net operating loss carryforwards (a)	$	0.7	$	0.6
State net operating loss carryforwards (b)	17.5		17.6
Employee benefit obligations	43.6		45.5
Compensation accruals	22.8		25.0
Credit carryforwards (c)	12.3		12.4
Operating lease liabilities	99.6		90.9
Outside basis difference (d)	99.1		—
Other	23.0		18.7
Valuation allowances (e)	(33.3)		(31.8)
Net deferred tax assets	285.3		178.9
Deferred tax liabilities
Goodwill and other intangibles	18.7		18.1
Property, plant and equipment	131.6		111.5
Operating lease assets	74.5		70.5
Total deferred tax liabilities	224.8		200.1
Total net deferred tax assets (liabilities) (f)	$	60.5	$	(21.2)

(a)Gross non-U.S. net operating loss carryforwards of $2.4 million expire in fiscal years 2039 to 2042.

(b)Apportioned gross state net operating loss carryforwards of $361.3 million expire in fiscal years 2023 through 2034.

(c)Credit carryforwards consist primarily of U.S. tax credits that generally expire in fiscal years 2025 through 2036.

(d)Outside tax over GAAP basis difference recorded through discontinued operations.

(e)Valuation allowances at September 30, 2022 primarily relate to state net operating loss carryforwards and certain other federal legacy tax attributes that are not expected to be realized or realizable.

(f)Balances are presented in the Consolidated Balance Sheets based on the net position of each tax jurisdiction.

Tax Matters Agreement

Background

Prior to its initial public offering (the "IPO") in September 2016, the Valvoline business operated as a wholly-owned subsidiary of Ashland Inc. (which together with its predecessors and consolidated subsidiaries is referred to herein as “Ashland”). In advance of the IPO, the Valvoline business and certain other legacy Ashland assets and liabilities were transferred from Ashland to Valvoline as a reorganization of entities under common Ashland control (the "Contribution"). In connection with the IPO, Ashland retained 83% of the total outstanding shares of Valvoline's common stock. On May 12, 2017, Ashland distributed its interest in Valvoline to Ashland stockholders through a pro rata dividend on shares of Ashland common stock outstanding (the "Distribution"), which marked the completion of Valvoline's separation from Ashland.

For the periods prior to the Distribution, Valvoline was included in Ashland’s consolidated U.S. and state income tax returns and in the income tax returns of certain Ashland international subsidiaries (collectively, the “Ashland Group Returns”). For the taxable periods that began on and after the Distribution, Valvoline files tax returns that include only Valvoline and its subsidiaries.

Key terms and conditions

An agreement (the "Tax Matters Agreement") was entered into in September 2016 between Valvoline and Ashland, that generally provides that Valvoline indemnify Ashland for the following items:

•The utilization of certain legacy tax attributes transferred from Ashland as the result of the Contribution;

•Taxes for the pre-IPO period that arise on audit or examination and are directly attributable to the Valvoline business;

•Certain U.S. federal, state or local taxes for the pre-IPO period of Ashland and/or its subsidiaries that arise on audit or examination and are not directly attributable to either the Valvoline business or the Ashland chemicals business;

•Taxes of Valvoline for the period between the IPO and Distribution that are not attributable to Ashland Group Returns (as defined above);

•Taxes of Valvoline for all taxable periods that begin on or after the day after the date of the Distribution; and

•Certain taxes and expenses resulting from the failure of the Contribution or Distribution to qualify for the intended tax-free treatment.

Summary of activity

Adjustments to the net obligations to Ashland under the Tax Matters Agreement are recorded within Net legacy and separation-related expenses (income), with any resulting impacts to Valvoline's stand-alone income tax provision recorded in Income tax expense within the Consolidated Statements of Comprehensive Income. Amounts recognized in the current period are not material.

During fiscal 2021, the Company reduced its indemnity obligations to Ashland by $33.0 million, principally due to settlement for fiscal 2014 to 2016 federal audit examinations. This reduction resulted in pre-tax income of $26.8 million and an income tax benefit of $5.8 million attributable to the Valvoline stand-alone business.

During fiscal 2020, the Company determined it did not expect to utilize certain tax attributes that were transferred from Ashland as a result of the Contribution. Accordingly, the Company recognized income tax expense of $28.5 million to establish a valuation allowance for these tax attributes with an offsetting reduction in its indemnity obligation, the combined effects of which had no impact on net income in the fiscal year ended September 30, 2020.

Total liabilities related to obligations owed to Ashland under the Tax Matters Agreement are primarily recorded in Other noncurrent liabilities in the Consolidated Balance Sheets and were $0.6 million and $1.3 million as of September 30, 2022 and 2021, respectively. Given the indemnification of Ashland for periods in which Valvoline was included in Ashland Group Returns, a portion of the Company's liability for unrecognized tax benefits is included in the Tax Matters Agreement obligation. The periods under indemnity that currently remain open to examination include certain U.S. state jurisdictions from fiscal 2011.

Unrecognized tax benefits

The aggregate changes in the balance of gross unrecognized tax benefits were as follows for the years ended September 30:

(In millions)	2022		2021		2020
Gross unrecognized tax benefits as of October 1	$	8.7	$	13.4	$	12.4
Increases related to tax positions from prior years	0.1		1.5		0.5
Decreases related to tax positions from prior years	(0.6)		(1.3)		—
Increases related to tax positions taken during the current year	0.8		0.7		0.9
Settlements with tax authorities	—		(4.2)		—
Lapses of statutes of limitation	(0.8)		(1.4)		(0.4)
Gross unrecognized tax benefits as of September 30 (a)	$	8.2	$	8.7	$	13.4

(a)These unrecognized tax benefits would favorably impact the continuing operations and discontinued operations effective income tax rates, if recognized. Accruals for interest and penalties were $1.2 million as of September 30, 2022 and $1.1 million as of September 30, 2021.

The Company's U.S. federal income tax returns and Canada remain open to examination from fiscal 2018 forward. Fiscal years including and after 2017 remain open to examination by certain U.S. state jurisdictions.

Because Valvoline is routinely under examination by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during fiscal 2023. Due to the complexity and number of open years, it is not practical to estimate the amount or range of such change at this time. Based on current information available, management does not expect a material change to the Company's gross unrecognized tax benefits within fiscal 2023.