XML 50 R18.htm IDEA: XBRL DOCUMENT v3.24.3
Income Taxes
 12 Months Ended
Sep. 30, 2024
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)202420232022
Current
Federal
$34.7 $8.0 $9.4 
State8.3 (5.5)4.3 
Non-U.S. 2.6 1.0 3.0 
45.6 3.5 16.7 
Deferred
Federal20.8 36.8 16.2 
State2.7 (3.2)1.3 
Non-U.S.— — 0.5 
23.5 33.6 18.0 
Income tax expense$69.1 $37.1 $34.7 

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)202420232022
Income before income taxes
United States$286.5 $242.7 $119.1 
Non-U.S.(2.9)(6.2)25.0 
Total income before income taxes$283.6 $236.5 $144.1 
U.S. statutory tax rate
21 %21 %21 %
Income taxes computed at U.S. statutory tax rate$59.6 $49.7 $30.3 
(Decrease) increase in amount computed resulting from:
Unrecognized tax benefits0.1 0.1 0.1 
State taxes, net of federal benefit9.2 11.2 5.2 
International rate differential(0.1)0.1 (0.4)
Permanent items1.7 0.1 (1.0)
Remeasurement of net deferred taxes
(0.1)(1.1)(0.5)
Return-to-provision adjustments(0.7)(0.9)(0.4)
Change in valuation allowances(1.7)(27.7)1.8 
Tax Matters Agreement activity— 5.4 — 
Other1.1 0.2 (0.4)
Income tax expense$69.1 $37.1 $34.7 
Effective tax rate24.4 %15.7 %24.1 %

The higher effective tax rate in fiscal 2024 is primarily due to more normalized activity compared to the prior year period, which included a $29.0 million income tax benefit. This benefit resulted from the release of a valuation allowance due to the change in expectations regarding the utilization of certain legacy tax attributes as a result of the terms of the amended tax matters agreement with Valvoline’s former parent company. Higher pre-tax income in fiscal 2023 compared to fiscal 2022 led to increased tax expense, which was more than offset by the benefit from the valuation allowance release, driving a lower effective tax rate in fiscal 2023.
Deferred taxes

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

(In millions)20242023
Deferred tax assets
Non-U.S. net operating loss carryforwards (a)
$2.9 $1.1 
State net operating loss carryforwards (b)
6.9 8.2 
Employee benefit obligations33.9 34.6 
Compensation accruals15.8 17.9 
Credit carryforwards (c)
0.3 0.3 
Operating lease liabilities107.9 95.2 
Other10.3 12.4 
Valuation allowances (d)
(1.0)(3.0)
Net deferred tax assets177.0 166.7 
Deferred tax liabilities
Goodwill and other intangibles 25.9 19.1 
Property, plant and equipment154.1 134.7 
Operating lease assets75.4 68.1 
Other
0.2 0.3 
Total deferred tax liabilities255.6 222.2 
Total net deferred tax liabilities (e)
$(78.6)$(55.5)
(a)Gross non-U.S. net operating loss carryforwards of $10.6 million expire in fiscal years 2039 to 2044.
(b)Apportioned gross state net operating loss carryforwards of $130.2 million expire in fiscal years 2029 through 2037.
(c)Credit carryforwards consist primarily of state tax credits that generally expire in fiscal years 2025 through 2032.
(d)Valuation allowances at September 30, 2024 primarily relate to nondeductible executive compensation and state net operating loss carryforwards that are not expected to be realized or realizable.
(e)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.

During fiscal 2023, Valvoline recognized an income tax benefit of $29.0 million in connection with releasing its valuation allowance. Additionally, Valvoline recognized $25.7 million of expense within Net legacy and separation-related expenses in the Consolidated Statement of Comprehensive Income during fiscal 2023 to reflect its increased estimated indemnity obligation to its former parent as a result of the terms of the amended Tax Matters Agreement.

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 $9.0 million and $10.8 million as of September 30, 2024 and 2023, 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 2018.

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)202420232022
Gross unrecognized tax benefits as of October 1$35.7 $8.2 $8.7 
Increases related to tax positions from prior years0.1 0.6 0.1 
Decreases related to tax positions from prior years(2.1)(0.6)(0.6)
Increases related to tax positions taken during the current year— 27.7 0.8 
Lapses of statutes of limitation(0.6)(0.2)(0.8)
Gross unrecognized tax benefits as of September 30 (a)
$33.1 $35.7 $8.2 
(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 $1.8 million as of September 30, 2024 and 2023, respectively.

In connection with the sale of Global Products, Valvoline established reserves of $27.1 million for gross unrecognized tax benefits as of September 30, 2024. If realized, these unrecognized tax benefits would favorably impact the discontinued operations effective income tax rate.
The Company's U.S. federal income tax returns remain open to examination from fiscal 2019 forward and Canada from fiscal 2020 and forward. Fiscal years including and after 2018 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 2025. 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 2025.