Income Taxes

9 Months Ended

Jun. 30, 2023

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Income tax provisions for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual discrete items related specifically to interim periods. The following summarizes income tax expense and the effective tax rate in each interim period:

	Three months ended June 30						Nine months ended June 30
(In millions)	2023			2022			2023			2022
Income tax expense	$	22.9		$	13.2		$	14.2		$	32.6
Effective tax rate percentage	26.2		%	24.9		%	10.2		%	25.2		%

The increase in income tax expense for the three months ended June 30, 2023 was principally due to higher pre-tax earnings, while the increase in the effective tax rate for this period was primarily attributed to favorable discrete tax benefits that drove a lower prior year rate. The favorable income tax provision and effective tax rate in the nine months ended June 30, 2023 were primarily attributed to the release of valuation allowances due to the change in expectations regarding the utilization of certain legacy tax attributes as described further below.

Legacy tax attributes

In connection with amending the Tax Matters Agreement, management expects the Company is currently more likely than not to realize certain legacy tax attributes that were transferred from its former parent prior to Valvoline's initial public offering in late fiscal 2016. As a result, the Company recognized an income tax benefit of $26.5 million during the nine months ended June 30, 2023 in connection with releasing its valuation allowance. Additionally, Valvoline recognized $24.4 million of expense within Net legacy and separation-related expenses in the Condensed Consolidated Statement of Comprehensive Income during the nine months ended June 30, 2023 to reflect its increased estimated indemnity obligation due to its former parent company as a result of the terms of the amended Tax Matters Agreement.

Unrecognized tax benefits

In connection with the sale of Global Products, Valvoline established reserves of $24.4 million for gross unrecognized tax benefits during the nine months ended June 30, 2023. If realized, these unrecognized tax benefits would favorably impact the discontinued operations effective income tax rate.