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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and the accompanying Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

BUSINESS OVERVIEW AND PURPOSE

Valvoline Inc. is a global vehicle and engine care company that continuously powers the future of mobility through innovative services and products for electric, hybrid, and internal combustion powertrains. Valvoline has consistently led the way innovating and reinventing its services and products for changing technologies and customer needs throughout its 155-year history. Valvoline operates a fast-growing, best-in-class network of service center stores, which are well positioned to serve evolving vehicle maintenance needs with Valvoline's iconic products. In addition to its quick, easy, and trusted quick lube oil change services and the legendary Valvoline-branded passenger car motor oils, Valvoline provides a wide array of lubricants, chemicals, fluids, and other complementary products and services, including leading the world's supply of battery fluids to electric vehicle manufacturers, with each solution tailored to help extend vehicle and engine range and efficiency.

Valvoline provides vehicle and engine care solutions to a range of customers, including end consumers, original equipment manufacturers (“OEM”), mass market and automotive parts retailers, small to large installers, vehicle fleets, and distributors, among others. Valvoline operates and franchises approximately 1,600 service center locations and is the second and third largest chain in the United States (“U.S.”) and Canada, respectively, by number of stores. With sales in more than 140 countries and territories, Valvoline’s solutions are available for every engine and powertrain, including high-mileage and heavy-duty applications, and are offered at more than 80,000 locations worldwide.

Valvoline's fiscal year ends on September 30 of each year and Valvoline has two reportable segments: Retail Services and Global Products with certain corporate and non-operational items included in Corporate to reconcile to consolidated results. Refer to Item 1 included in Part I of this Annual Report on Form 10-K for a description of Valvoline's reportable segments.

RECENT DEVELOPMENTS

On October 12, 2021, Valvoline announced that it is accelerating its continued transformation by pursuing a separation of its two reportable segments, Retail Services and Global Products. Valvoline is evaluating the alternatives to accomplish the separation, and no timetable has currently been established for its completion. The separation is expected to provide both businesses with the opportunity to pursue their respective strategic priorities, allocate capital to drive success, and create significant and sustainable value for the Company's shareholders.

FISCAL 2021 OVERVIEW

Fiscal 2021 was a remarkable year for growth and transformation at Valvoline. The strategy to shift to a more services-driven business was strengthened as Retail Services increased its contribution to total profitability. Key operating highlights are presented below, each of which is discussed more fully in this Annual Report on Form 10-K:

27%Growth in sales 32%Increase in net income 36%Growth in diluted EPS

In addition to these results in fiscal 2021, the following key events occurred during the year:

•Completed the issuance of the 3.625% senior unsecured notes due 2031 (the "2031 Notes") with an aggregate principal amount of $535 million and used the net proceeds, together with $312 million in cash and cash equivalents on hand, to redeem its 4.375% senior unsecured notes due 2025 (the "2025 Notes") with an aggregate principal amount of $800 million and pay related expenses and fees.

•Realigned the Company's global operations into two reportable segments, accelerating the strategic shift to a services-driven business.

•Began production at the blending and packaging plant in China, which is currently producing most of the Company's lubricant volume for the China market.

Summarized below are Valvoline's trends in consolidated sales and net income over the last two fiscal years:

Retail Services

Retail Services marked its 15th consecutive year for system-wide same-store-sales ("SSS") growth and added 132 net new stores to the system. The table below highlights the exceptional growth in Retail Services over the last two years:

(In millions, except store count) Fiscal Year 2021 Growth vs. Growth vs.

System-wide store sales $ 1,970 30 % 39 %

System-wide store count 1,594 9 % 15 %

Years ended September 30

System-wide SSS growth 21.2 % 2.3 % 10.1 %

Global Products

Global Products continued to gain share in key international markets and expanded distribution in North America, leveraging the strength of Valvoline's brand and technology. Global Products has exhibited steady growth as shown in below:

(In millions) Fiscal Year 2021 Growth vs. Growth vs.

Operating income $ 298 5 % 11 %

Lubricant sales (gallons) 160.9 16 % 7 %

COVID-19 UPDATE

Valvoline has been able to substantially maintain its operations, demonstrating growth and strong results while managing through the effects of the COVID-19 global pandemic. Management is unable to reasonably quantify the

impact of COVID-19 on its current year results due to their breadth and variability given the current stage and duration of the pandemic. During fiscal 2021, demand has been strong amid uneven global recoveries as miles driven and volumes have improved from the depths of the pandemic restrictions in fiscal 2020. Volumes across the business are ahead of pre-COVID trends and though certain of the cost benefits experienced in the prior year that were in part believed to have been prolonged due to or as a result of the pandemic, have inverted with supply chain challenges and overwhelming demand, in addition to a tightening labor market, in fiscal 2021, Valvoline has and continues to focus on these challenges in order to minimize impacts on the business and its results. In the face of these pressures, Valvoline delivered exceptional results in fiscal 2021 and will continue to focus on passing through price increases and managing supply chain bottlenecks during the first half of fiscal 2022.

Valvoline’s wholly-owned lubricant blending and packaging plants and retail service center stores have remained operational during fiscal 2021, while managing through the lingering effects of the pandemic. The Company's priority remains the safe operation of its facilities to protect its employees, customers and business partners. The drive-through, stay-in-your-car service experience and masking requirements continue to minimize contact between store teams and customers. Procedures in Valvoline's global plants and offices also continue to promote social distancing and masking requirements. Valvoline has established a return-to-office protocol for its corporate headquarters in Lexington, Kentucky, allowing employees that have been vaccinated to voluntarily return-to-office beginning in July 2021, with global offices following similar protocols. Management is continually monitoring the circumstances surrounding the pandemic and following government guidelines supported by COVID-19 trend data to make decisions regarding the safe operation of its offices and facilities.

The COVID-19 pandemic has continued to evolve and its future impact on Valvoline will depend on a number of factors, including and among others, the ultimate duration and severity of the pandemic and the success of vaccinations, boosters, and restrictive measures on containing the spread and resurgences of the virus. While the Company cannot predict the duration or the scale of the COVID-19 pandemic, or the effect it may continue to have on Valvoline's business, results of operations, or liquidity, management continuously monitors the situation, the sufficiency of its responses, and makes adjustments as needed.

Results for Fiscal 2020 compared to Fiscal 2019

For comparisons of Valvoline's consolidated results of operations and cash flows for the fiscal years ended September 30, 2020 to September 30, 2019, refer Item 7 of Part II of the Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on November 24, 2020.

Use of Non-GAAP Measures

To aid in the understanding of Valvoline’s ongoing business performance, certain items within this document are presented on an adjusted, non-GAAP basis. These non-GAAP measures, presented both on a consolidated and reportable segment basis, have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, or more meaningful than, the financial statements presented in accordance with U.S. GAAP. The financial results presented in accordance with U.S. GAAP and reconciliations of non-GAAP measures included within this Annual Report on Form 10-K should be carefully evaluated.

The following are the non-GAAP measures management has included and how management defines them:

•EBITDA - defined as net income/loss, plus income tax expense/benefit, net interest and other financing expenses, and depreciation and amortization;

•Adjusted EBITDA - defined as EBITDA adjusted for certain unusual, infrequent or non-operational activity not directly attributable to the underlying business, which management believes impacts the comparability of operational results between periods ("key items," as further described below);

•Segment adjusted EBITDA - defined as segment operating income adjusted for depreciation and amortization, in addition to key items impacting comparability;

•Free cash flow - defined as cash flows from operating activities less capital expenditures and certain other adjustments as applicable; and

•Discretionary free cash flow - defined as cash flows from operating activities less maintenance capital expenditures and certain other adjustments as applicable.

These measures are not prepared in accordance with U.S. GAAP and management believes the use of non-GAAP measures on a consolidated and reportable segment basis provides a useful supplemental presentation of Valvoline's operating performance, enables comparison of financial trends and results between periods where certain items may vary independent of business performance, and allows for transparency with respect to key metrics used by management in operating the business and measuring performance. The non-GAAP information used by management may not be comparable to similar measures disclosed by other companies, because of differing methods used in calculating such measures. For a reconciliation of the most comparable U.S. GAAP measures to the non-GAAP measures, refer to the “Results of Operations” and “Financial Position, Liquidity and Capital Resources” sections below.

Management believes EBITDA measures provide a meaningful supplemental presentation of Valvoline’s operating performance due to the depreciable assets associated with the nature of the Company’s operations and income tax and interest costs related to Valvoline’s tax and capital structures, respectively. Adjusted EBITDA measures exclude the impact of key items, which consist of income or expenses associated with certain unusual, infrequent or non-operational activity not directly attributable to the underlying business that management believes impacts the comparability of operational results between periods. Adjusted EBITDA measures enable comparison of financial trends and results between periods where key items may vary independent of business performance. Key items are often related to legacy matters or market-driven events considered by management to be outside the comparable operational performance of the business.

Key items may consist of adjustments related to: legacy businesses, including the separation from Valvoline's former parent company and associated impacts of related indemnities; significant acquisitions or divestitures; restructuring-related matters; and other matters that are non-operational or unusual in nature. Key items also include the following:

•Net pension and other postretirement plan expense/income - includes several elements impacted by changes in plan assets and obligations that are primarily driven by changes in the debt and equity markets, as well as those that are predominantly legacy in nature and related to prior service to the Company from employees (e.g., retirees, former employees, and current employees with frozen benefits). These elements include (i) interest cost, (ii) expected return on plan assets, (iii) actuarial gains/losses, and (iv) amortization of prior service cost/credit. Significant factors that can contribute to changes in these elements include changes in discount rates used to remeasure pension and other postretirement obligations on an annual basis or upon a qualifying remeasurement, differences between actual and expected returns on plan assets, and other changes in actuarial assumptions, such as the life expectancy of plan participants. Accordingly, management considers that these elements are more reflective of changes in current conditions in global markets (in particular, interest rates), outside the operational performance of the business, and are also primarily legacy amounts that are not directly related to the underlying business and do not have an immediate, corresponding impact on the compensation and benefits provided to eligible employees for current service. Adjusted EBITDA includes the costs of benefits provided to employees for current service, including pension and other postretirement service costs.

•Changes in the last-in, first out ("LIFO") inventory reserve - charges or credits recognized in Cost of sales to value certain lubricant inventories at the lower of cost or market using the LIFO method. During inflationary or deflationary pricing environments, the application of LIFO can result in variability of the cost of sales recognized each period as the most recent costs are matched against current sales, while preceding costs are retained in inventories. LIFO adjustments are determined based on published prices, which are difficult to predict and largely dependent on future events. The application of LIFO can impact comparability and enhance the lag period effects between changes in inventory costs and relating pricing adjustments.

Details with respect to the composition of key items recognized during the respective periods presented herein are set forth below in the “EBITDA and Adjusted EBITDA” section of “Results of Operations” that follows.

Management uses free cash flow and discretionary free cash flow as additional non-GAAP metrics of cash flow generation. By including capital expenditures and certain other adjustments, as applicable, management is able to provide an 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 includes the impact of capital expenditures, providing a supplemental view of cash generation. Discretionary free cash flow includes the impact of maintenance capital expenditures, which are routine uses of cash that are necessary to maintain the Company's operations and provides a supplemental view of cash flow generation to maintain operations before discretionary investments in growth. Free cash flow and discretionary free cash flow have certain limitations, including that they do not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments.

Key Business Measures

Valvoline tracks its operating performance and manages its business using certain key measures, including system-wide, company-operated and franchised store counts and same-store sales ("SSS"); system-wide store sales; and lubricant volumes sold. Management believes these measures are useful to evaluating and understanding Valvoline’s operating performance and should be considered as supplements to, not substitutes for, Valvoline's sales and operating income, as determined in accordance with U.S. GAAP.

Sales in the Retail Services reportable segment are influenced by the number of service center stores and the business performance of those stores. Stores are considered open upon acquisition or opening for business. Temporary store closings remain in the respective store counts with only permanent store closures reflected in the activity and end of period store counts. SSS is defined as sales by U.S. Retail Services service center stores (company-operated, franchised and the combination of these for system-wide SSS), with new stores including franchised conversions, excluded from the metric until the completion of their first full fiscal year in operation as this period is generally required for new store sales levels to begin to normalize. Differences in SSS are calculated to determine the percentage change between comparative periods.

Retail Services sales are limited to sales at company-operated stores, sales of lubricants and other products to independent franchisees and Express Care operators, and royalties and other fees from franchised stores. Although Valvoline does not recognize store-level sales from franchised stores as sales in its Consolidated Statements of Comprehensive Income, management believes system-wide and franchised SSS comparisons, store counts, and total system-wide store sales are useful to assess market position relative to competitors and overall store and segment operating performance.

Management believes lubricant volumes sold in gallons by its consolidated subsidiaries is a useful measure in evaluating and understanding the operating performance of the Global Products segment. Volumes sold in other units of measure, including liters, are converted to gallons utilizing standard conversions.

RESULTS OF OPERATIONS

Consolidated review

The following summarizes the results of the Company’s operations for the years ended September 30:

(In millions) Amount % of Sales Amount % of Sales Amount % Change

Sales

The following reconciles the year-over-year changes in sales:

(In millions) 2021 Change

Volume and mix $ 330

Currency exchange 39

Acquisitions 72

Change in sales $ 628

Total sales increased from both segments delivering balanced contributions led by the substantial volume growth compared to the prior year COVID-19 lows, in addition to delivering robust expansion from the pre-pandemic period due to strong ongoing demand across the business whereby sales in each region improved over this period. Strong SSS, unit growth, and benefits from acquisitions completed during the past year drove increased sales from Retail Services. In addition, the pass through of raw material cost increases from across the business, currency exchange, and favorable mix from the shift to synthetics and branded products contributed further to the growth in sales during the year.

Gross profit

The following reconciles the year-over-year changes in gross profit:

(In millions) 2021 Change

Volume and mix $ 170

Change in LIFO reserve (55)

Price and cost (29)

Currency exchange 12

Acquisitions 19

Change in gross profit $ 117

Gross profit improved driven by higher volumes in both reportable segments from the prior year unfavorable impacts of the COVID-19 pandemic, in addition to growth from the pre-pandemic period in fiscal 2019. These volume benefits combined with favorable mix due to the ongoing shift to synthetics and branded product sales, growth from acquisitions in Retail Services, and favorable currency exchange were partially offset by rising raw material costs that led to the negative impact of LIFO adjustments and lagged the pass through in pricing.

The decline in gross profit margin compared to the prior year was primarily the result of significant raw material cost increases that began earlier in the year and drove significant price-cost lag and unfavorable LIFO adjustments, in addition to labor investments made in Retail Services, which more than offset mix benefits. The lingering effects of price-cost lag and supply-chain bottlenecks are expected to continue to adversely impact margins in the first half of the next fiscal year as the Company executes incremental pricing actions to drive cost recovery during fiscal 2022.

Net operating expenses

Details of the components of net operating expenses are summarized below for the years ended September 30:

(In millions) Amount % of Sales Amount % of Sales Amount % Change

Net legacy and separation-related income (24) (0.8) % (30) (1.3) % 6 (20.0) %

Equity and other income, net (44) (1.5) % (34) (1.4) % (10) 29.4 %

The increase in selling, general and administrative expenses was primarily due to higher advertising expenses that were restricted in the prior year due to the severity of the COVID-19 pandemic, increased variable compensation driven by the Company’s strong performance, in addition to investments made to support future growth, including acquisitions of service center stores in Retail Services and investments in information technology and sales, and to a lesser extent unfavorable currency exchange. These increases were partially offset by a decline in travel expenses that reflected a full year with significant restrictions in place during the COVID-19 pandemic.

Net legacy and separation-related income was lower primarily as the current year adjustments of tax-related indemnity obligations related to the settlement of tax examinations resulted in lower reductions than the prior year adjustments for the change in utilization expectations of certain legacy tax attributes.

The increase in equity and other income, net was primarily driven by increased equity and royalty income attributable to the improved performance of the Company's unconsolidated joint ventures, in addition to recoveries related to the settlement of a Retail Services legal matter, and an increase in international subsidies realized during the year.

Net pension and other postretirement plan income

Net pension and other postretirement plan income increased $67 million from the prior year primarily due to the gain on pension and other postretirement plan remeasurement of $72 million compared to a gain of $22 million in fiscal 2020. This increased gain was primarily attributed to higher interest rates in the current year remeasurement. In addition, lower interest cost recognized throughout the year drove higher recurring non-service income.

Net interest and other financing expenses

Net interest and other financing expense increased $18 million during fiscal 2021 compared to the prior year. The increase was driven by higher debt extinguishment costs of $17 million as the expenses associated with the current year redemption of the 2025 Notes exceeded those incurred in connection with the extinguishment of the 5.500% senior unsecured notes due 2024 with an aggregate principal amount of $375 million (the “2024 Notes") in the prior year.

Income tax expense

The following summarizes income tax expense and the effective tax rate during the years ended September 30:

Effective tax rate percentage 22.7 % 29.7 %

Lower income tax expense from the prior year was principally driven by benefits associated with resolving tax examinations in the current year through settlement and statute lapses. This decrease in expense coupled with prior year income tax expense recognized to establish a $30 million valuation allowance on certain legacy tax attributes led to a lower effective tax rate in fiscal 2021.

EBITDA and Adjusted EBITDA

The following reconciles net income to EBITDA and Adjusted EBITDA for the years ended September 30:

Net interest and other financing expenses 111 93

Depreciation and amortization 92 66

Net pension and other postretirement plan income (126) (59)

Net legacy and separation-related income (24) (30)

LIFO charge (credit) 41 (15)

Business interruption recovery (3) (2)

Compensated absences benefits change — (11)

Acquisition and divestiture-related costs — 2

Adjusted EBITDA (a) $ 634 $ 495

(a)Net pension and other postretirement plan income (expenses) includes remeasurement gains and losses and recurring non-service pension and other postretirement net periodic income, which consists of interest cost, expected return on plan assets and amortization of prior service credit. Refer to Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for further details.

Adjusted EBITDA increased$139 million, or 28%, compared to the prior year. Retail Services provided exceptional SSS growth due to increased transactions and improved average ticket, in addition to benefits from recent acquisitions. Global Products had strong volume growth and product demand across all regions, in addition to increased contributions from its unconsolidated joint ventures and favorable currency exchange. These benefits were partially offset by increased operating expenses principally to support growth, and to a lesser extent, unfavorable margin impacts primarily attributed to price-cost lag as raw material costs were declining in the prior year and rose significantly during the current year.

Reportable Segment Review

During the third quarter of fiscal 2021, the Company realigned its global operations to manage its business through the following two reportable segments:

•Retail Services - services the passenger car and light truck quick lube market in the United States and Canada with a broad array of preventive maintenance services and capabilities performed through Valvoline’s retail network of Company-operated, independent franchise, and Express Care stores that service vehicles with Valvoline products.

•Global Products - sells engine and automotive products in more than 140 countries and territories to mass market and automotive parts retailers, installers, and commercial customers, including original equipment manufacturers, to service light- and heavy-duty vehicles and equipment.

The Company's realignment supports its strategic initiatives to transition to a services-driven business and enhances the ability to leverage Valvoline's brand equity and product platforms across geographies. Valvoline's segments represent components of the Company for which separate financial information is available that is utilized on a regular basis by the chief operating decision maker in allocating resources and evaluating performance of the business. Adjusted EBITDA is the primary measure used in making these operating decisions, which Valvoline defines as segment operating income adjusted for depreciation and amortization and certain key items impacting comparability.

In connection with the realignment, the Company changed its allocation of certain indirect expenses for such costs to be recognized in each segment based on the estimated utilization of indirect resources. Costs to support

corporate functions and certain non-operational and corporate activity that is not directly attributable to a particular segment are not included in the segment operating results regularly utilized by the chief operating decision maker. This activity is separately delineated within Corporate to reconcile to consolidated results.

Results of Valvoline’s reportable segments are presented based on how operations are managed internally, including how the results are reviewed by the chief operating decision maker. The structure and practices are specific to Valvoline; therefore, the financial results of its reportable segments are not necessarily comparable with similar information for other comparable companies.

Prior period segment financial information presented herein has been recast on a basis that is consistent with the realignment of Valvoline’s global operations. Refer to the disclosures below for comparisons of Valvoline's reportable segment results for fiscal years 2021 to 2020 and 2020 to 2019 under the current basis of reporting.

Retail Services

Management believes the number of company-operated and franchised service center stores as provided in the following tables is useful to assess the operating performance of the Retail Services reporting segment.

System-wide stores (a)

For the years ended September 30

Closed (6) (7)

Number of stores at end of period

For the years ended September 30

The Retail Services system unit growth over the prior year was the result of 63 net openings and 69 acquired stores, which along with the conversion of 50 net stores within the system from franchised to company-operated, combined to add132 net new company-operated and franchised stores in fiscal 2021. Organic growth was driven by 30 new company-operated service center store openings, with 39 new store openings from franchisee expansion in key markets.

The following summarizes the results of the Retail Services reportable segment for the years ended September 30:

Favorable (Unfavorable)

Financial information

Key items — — —

Same-store sales growth

Company-operated (d) 19.6 % 2.6 % 9.6 %

(a)Measure includes Valvoline franchisees, which are independent legal entities and Valvoline does not consolidate the results of operations of its franchisees.

(b)Valvoline does not generally allocate activity below operating income to its operating segments; therefore, the table above reconciles operating income to adjusted EBITDA.

(c)Operating margin is calculated as operating income divided by sales, and adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales.

(d)Beginning in fiscal 2021, Valvoline determines SSS growth as sales by U.S. Retail Services service center stores, with new stores, including franchise conversions, excluded from the metric until the completion of their first full fiscal year in operation. Previously, SSS growth was determined as sales by U.S. Retail Services service center stores, with stores new to the U.S. Retail Services system excluded from the metric until completion of their first full fiscal year in operation. Prior period measures have been revised to conform to the current basis of presentation.

2021 compared to 2020

Retail Services sales increased 38% during fiscal 2021 and nearly 50% from pre-pandemic 2019 driven by SSS performance and unit additions. System-wide SSS grew 21.2% compared to the prior year driven by increased transactions and high single-digit growth in average ticket. Transactions benefited from customer base expansion in addition to recovery from the most significant restrictions and limited travel during the onset of the pandemic in the prior year. Average ticket increases were driven by pricing and mix improvements, including the shift to synthetics and higher non-oil change services. Year-over-year system-wide unit growth of 9% also contributed to volumes and sales through the addition of 132 net new stores.

Operating income and adjusted EBITDA growth were primarily due to strong SSS performance, from an increase in transactions and higher average ticket from the ongoing shift to synthetics, in addition to unit growth primarily driven by acquisitions made during the year. This growth was partially offset by reinstated advertising spending that was restricted by the pandemic in the prior year, as well as incremental labor investments made during the year.

2020 compared to 2019

Fiscal 2020 sales increased over 2019 due to growth in system-wide SSS and average ticket, as well as 6% unit growth. These benefits were partially offset by the adverse effects on sales and volumes from limited travel in

response to the COVID-19 pandemic. Fiscal 2020 operating income and adjusted EBITDA increased over 2019 due to benefits of mix improvements and lower expenses due to controlled spending, partially offset by deleverage in labor costs earlier in the fiscal year as a result of the COVID-19 slow-down in volumes.

GlobalProducts

The following tables summarizes the results of the Global Products reportable segment for the years ended September 30:

Favorable (Unfavorable)

Financial information

Sales by geographic region

Key items:

Acquisition-related gain — — (4)

Business interruption expenses — — 6

Depreciation and amortization 29 25 25 16% —%

Volume information

(a)Valvoline includes the United States and Canada in its North America region. Mexico is included within the Latin America region.

(b)Valvoline does not generally allocate activity below operating income to its operating segments; therefore, the table above reconciles operating income to adjusted EBITDA.

(c)Operating margin is calculated as operating income divided by sales, and adjusted EBITDA margin is calculated as adjusted EBITDA divided by sales.

2021 compared to 2020

Global Products sales increased in fiscal 2021 related to higher volumes across all regions, as the Company continued to gain share in key international markets through the enhancement of its supply chain capabilities and investments in brand marketing, as well as expanded distribution in North America. Sales growth exceeded volume growth, demonstrating pass-through pricing progress, which contributed to the increase in sales during the year in addition to favorable currency exchange benefits.

Operating income and adjusted EBITDA increased in fiscal 2021 due to sales growth driven by higher volumes across all regions, product mix benefits, improved equity and royalty income, as well as currency exchange. These benefits were partially offset by price-cost lag in the second half of fiscal 2021 due to significant raw material cost increases and higher operating expenses to support market share growth. Valvoline is currently executing incremental pricing actions to drive cost recovery during fiscal 2022.

2020 compared to 2019

Global Products sales decreased during fiscal 2020 primarily related to reduced volume due to the COVID-19 pandemic across all regions as well as unfavorable currency exchange that more than offset the benefits from the Eastern European acquisition completed in late fiscal 2019. Operating income and Adjusted EBITDA increased in fiscal 2020 driven by improved margins combined with expense reductions that offset the impact of lower volumes. These improvements were largely the result of favorable product and channel mix in addition to lower raw material costs and benefits from the operating expense reduction program.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Overview

The Company closely manages its liquidity and capital resources. Valvoline’s liquidity requirements depend on key variables, including the level of investment needed to support business strategies, the performance of the business, capital expenditures, borrowing arrangements, and working capital management. Capital expenditures, acquisitions, share repurchases, and dividend payments are components of the Company’s cash flow and capital management strategy, which to a large extent, can be adjusted in response to economic and other changes in the business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities that support Valvoline’s business and growth strategies and returning capital to shareholders, while funding ongoing operations.

Cash flows

Valvoline’s cash flows as reflected in the Consolidated Statements of Cash Flows are summarized as follows for the years ended September 30:

Cash, cash equivalents, and restricted cash - beginning of period $ 761 $ 159

Cash provided by (used in):

Investing activities (400) (222)

(Decrease) increase in cash, cash equivalents, and restricted cash (530) 602

Cash, cash equivalents, and restricted cash - end of period $ 231 $ 761

Operating activities

The increase in cash flows provided by operating activities during fiscal 2021 compared to 2020 was primarily driven by higher cash earnings, partially offset by higher income tax payments of $28 million and unfavorable changes in working capital, which included the effects of factoring $15 million of receivables in the current year compared to $59 million of receivables in the prior year.

Investing activities

The increase in cash flows used in investing activities for fiscal 2021 compared to 2020 was primarily due to increased investments in Retail Services growth through the expansion of its store network via acquisitions of service center stores. Valvoline invested approximately $365 million in Retail Services through the acquisition and opening of 120 and 30 company-operated service center stores, respectively, which compared to 35 and 36, respectively, in the prior year. These increased investments are expected to continue driving growth and

transforming the business model and were partially offset by franchisee repayments of COVID-19 relief loans extended in the prior year, in addition to proceeds from the sale of service center stores to franchisees.

Valvoline is currently forecasting approximately $180 million to $200 million of capital expenditures for full year fiscal 2022, funded primarily from operating cash flows.

Financing activities

The increase in cash flows used in financing activities for fiscal 2021 compared to 2020 was primarily due to:

•Returning $74 million more in cash to shareholders through increased share repurchases and dividends in the current year. These increases were due to share repurchase activity being resumed following the suspension in the prior year at the onset of the COVID-19 pandemic to preserve liquidity along with the 11% increase in the dividend rate in the current year.

•Increasing net repayments on borrowings in the current year where the net proceeds from the $535 million 2031 Notes and cash and cash equivalents were used to redeem the $800 million 2025 Notes, and the prior year net proceeds primarily related to the issuance of the 4.250% senior unsecured notes due 2030 with an aggregate principal amount of $600 million (the "2030 Notes").

Free cash flow

The following table sets forth free cash flow and discretionary cash flow and reconciles cash flows from operating activities to both measures. As previously noted, free cash flow has certain limitations, including that it does not reflect adjustments for certain non-discretionary cash flows, such as mandatory debt repayments. Refer to “Use of Non-GAAP Measures” within this Item 7 for additional information regarding this non-GAAP measure.

For the years ended September 30

Cash flows provided by operating activities $ 404 $ 372

Less: Maintenance capital expenditures (36) (30)

Discretionary free cash flow 368 342

Less: Growth capital expenditures (108) (121)

The increase in free cash flow over the prior year was driven by higher cash flows provided by operating activities, in addition to modestly lower growth capital expenditures due in part to supply-chain driven delays in new company store openings. These increases were partially offset by higher maintenance capital expenditure requirements during the year.

Valvoline is currently forecasting $260 million to $300 million of free cash flow for full year fiscal 2022 primarily due to the Company's overall growth opportunities, partially offset by an increase in expected capital expenditures driven by new company store construction due to the supply chain challenges during fiscal 2021.

Debt

The following table summarizes Valvoline’s debt as of September 30:

Trade Receivables Facility (b) 59 88

China Construction Facility 39 18

Debt issuance costs and discounts (14) (19)

Current portion of long-term debt 17 —

(a)Issued 3.625% senior notes in January 2021 with the net proceeds of $528 million, together with cash and cash equivalents on hand, used to fully redeem the 2025 Notes, with a total aggregate redemption price of $840 million. The combination of these transactions reduced Valvoline's gross leverage and cost of capital and lowers ongoing interest expense.

(b)Amendment in fiscal 2021 to extend maturity to April 2024 and modify the eligibility requirements for certain receivables, which increased the remaining borrowing capacity. The amendment also reduced the minimum required borrowing to the lesser of (i) 33% of the total facility limit or (ii) the borrowing base from the availability of eligible receivables, in addition to permitting up to a 30 consecutive day annual exemption from this requirement. Other relevant terms and conditions of the Trade Receivables Facility were substantially unchanged under this amendment.

Inclusive of the interest rate swap agreements, approximately 87% of Valvoline's outstanding borrowings as of September 30, 2021 had fixed rates, with the remainder bearing variable interest rates. As of September 30, 2021, Valvoline was in compliance with all covenants of its debt obligations and had a combined total of $586 million of remaining borrowing capacity under its Revolver and Trade Receivables Facility. Credit facilities in place in China had approximately $24 million of combined borrowing capacity remaining, $23 million under the China Working Capital Facility and $1 million under the China Construction Facility. Refer to Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional details regarding the Company’s debt instruments.

Material cash requirements

The Company's material cash requirements include the following contractual obligations and commitments as of September 30, 2021:

(In millions) Total Less than 1 year 1-3 years 3-5 years 5 years and more

(a)Includes interest expense on both variable and fixed rate debt assuming no prepayments. Variable interest rates have been assumed to remain constant through the end of the term at the rates that existed as of September 30, 2021.

(b)Includes estimated funding of pension plans for fiscal 2022, as well as projected benefit payments through fiscal 2031 for Valvoline’s unfunded pension plans. Excludes benefit payments from pension plan trust funds.

Pension and other postretirement plan obligations

During fiscal 2021, the Company made cash and non-cash contributions of approximately $14 million to its U.S. non-qualified and non-U.S. pension plans. Refer to Note 10 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for additional information relating to the Company's pension and other postretirement plans.

Dividend payments and share repurchases

During the year ended September 30, 2021, the Company paid $91 million of cash dividends for $0.500 per common share and repurchased approximately 5 million shares of its common stock for $127 million. Approximately 4 million shares were repurchased for $100 million to complete the November 12, 2020 Board authorization with the remainder of share repurchases made pursuant to the May 17, 2021 Board to repurchase up to $300 million of common stock through September 30, 2024 (the "2021 Share Repurchase Authorization").

On November 11, 2021, the Board approved a quarterly cash dividend of $0.125 per share of common stock. The dividend is payable December 15, 2021 to shareholders of record on November 29, 2021. Additionally, the Company repurchased approximately 0.5 million shares for an aggregate amount of $16 million from October 1, 2021 through November 15, 2021 pursuant to the 2021 Share Repurchase Authorization. The Company has $257 million in aggregate share repurchase authority remaining under the 2021 Share Repurchase Authorization as of November 15, 2021.

The dividend and share repurchase authorization is part of a broader capital allocation framework to deliver value to shareholders by first driving growth in the business, organically and through acquisitions, and then returning excess cash to shareholders through dividends and share repurchases. Future declarations of quarterly dividends are subject to approval by the Board and may be adjusted as business needs or market conditions change. The timing and amount of any share repurchases will be based on the level of Valvoline's liquidity, general business and market conditions and other factors, including alternative investment opportunities.

Summary

As of September 30, 2021, cash and cash equivalents totaled $230 million, total debt was $1.7 billion, and total remaining borrowing capacity was $586 million. Valvoline’s ability to generate positive cash flows from operations is dependent on general economic conditions, the competitive environment in the industry, and is subject to the business and other risk factors described in Item 1A of Part I of this Annual Report on Form 10-K. If the Company is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of its credit facilities, Valvoline may be required to seek additional financing alternatives.

Management believes that the Company has sufficient liquidity based on its current cash and cash equivalents position, cash generated from business operations, and existing financing in place, to meet its required pension and other postretirement plan contributions, debt servicing obligations, tax-related and other material cash and operating requirements for the next twelve months.

NEW ACCOUNTING PRONOUNCEMENTS

For a discussion and analysis of recently issued and adopted accounting pronouncements and the impact on Valvoline, refer to Note 2 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

The preparation of Valvoline’s consolidated 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 matters. Significant items that are subject to such estimates and assumptions include, but are not limited to, employee benefit obligations, business combinations, income taxes, and customer incentives.

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. Valvoline’s significant accounting policies are discussed in Note 2 of the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. The Company believes the accounting estimates listed below are the most critical to aid in fully understanding and evaluating the reported financial results, and require the most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain.

Employee benefit obligations

Actuarial assumptions

Significant assumptions the Company must review and set annually and at each measurement date related to its pension and other postretirement benefit obligations are:

•Expected long-term return on plan assets — The expected long-term return on plan assets assumption reflects the long-term average rate of return plan assets are expected to earn. This assumption is determined considering each plan's asset allocation targets and overall expected performance, including evaluation of the most recent long-term historical returns, as applicable. The weighted-average long-term expected rate of return on assets assumption was 4.34% for fiscal 2021. In fiscal 2021, the global pension plan assets generated an actual weighted-average return of 6.39%, primarily driven by the market performance of the plan assets of the U.S. qualified pension plans based on the Company’s investment strategy to hedge the movement in liabilities related to changes in discount rates with investments of a matched duration that provide offsetting returns aligned with changes in interest rates. The expected return on plan assets is designed to be a long-term assumption, and therefore, actual returns will be subject to year-to-year variances. The U.S. qualified pension plans comprise the most significant portion of plan assets, and for fiscal 2022, the expected rate of return on assets assumption for the U.S. qualified pension plans will be 4.10%. The expected long-term return on plan assets assumption has no impact on the reported net liability or net actuarial gains or losses upon remeasurement, but does impact the recurring non-service net periodic income recognized ratably throughout the year.

Valvoline’s pension plans hold a variety of investments designed to diversify risk. Plan assets are invested in equity securities, government and agency securities, corporate debt, and other non-traditional assets such as hedge funds. The investment goal of the pension plans is to achieve an adequate net investment return to provide for future benefit payments to its participants. Target asset allocation percentages as of September 30, 2021 for the U.S. qualified pension plans were 83% fixed income and 17% equity investments. The U.S. qualified pension plans are managed by professional investment managers that operate under investment management contracts that include specific investment guidelines, requiring among other actions, adequate diversification and prudent use of risk management practices such as portfolio constraints relating to established benchmarks. Valvoline’s investment strategy and management practices relative to plan assets of non-U.S. plans generally are consistent except in those countries where investment of plan assets is dictated by applicable regulations. Holding all other assumptions constant, a hypothetical 1.00% change in the expected long-term return on plan assets assumption for the U.S. qualified pension plans would impact fiscal 2021 recurring non-service pension income by $19 million.

•Discount rate — Reflects the rates at which benefits could effectively be settled and is based on current investment yields of high-quality corporate bonds. Consistent with historical practice, the Company uses an actuarially-developed full yield curve approach, the above mean yield curve, to match the timing of cash flows of expected future benefit payments from the plans by applying specific spot rates along the yield curve to determine the assumed discount rate. Valvoline’s fiscal 2021 expense, excluding actuarial gains and losses, for both U.S. and non-U.S. pension plans was determined using the spot discount rate as of the beginning of the fiscal year. The service cost and interest cost discount rates for fiscal 2021 pension expense were 1.55% and 1.91%, respectively, and 3.03% and 1.83%, respectively, for other postretirement expense. The weighted-average discount rate at the end of fiscal 2021 was 2.70% for the pension plans and 2.67% for the postretirement health and life plans.

The following table illustrates the estimated impact on hypothetical pension and other postretirement expense that would have resulted from a one percentage point change in discount rates in isolation of impacts on other significant assumptions in the years ended September 30:

Pension benefits

Increase in benefit obligation $ 247 $ 263

Increased return on plan assets (a) (211) $ (218)

Estimated hypothetical increase in expense 36 45

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Valvoline is exposed to market risks arising from adverse changes in:

•Currency exchange rates;

•Inflation and changing prices;

•Interest rates; and

•Credit risk.

These market risks are described further below. In addition, refer to Item 1A of Part I in this Annual Report on Form 10-K for additional discussion of these and other risks, including the potential risks associated with the COVID-19 pandemic.

Currency exchange risk

A significant portion of Valvoline’s operations and sales occur outside the U.S. and are denominated in currencies other than the U.S. Dollar. The Company’s results can be significantly impacted by changes in currency exchange rates. Valvoline’s currency risk is primarily related to the Euro, Australian Dollar, Canadian Dollar and Chinese Yuan with respect to sales, profits, and assets and liabilities denominated in currencies other than the U.S. Dollar. Valvoline believes its currency risk is modest as its sales are primarily derived from the United States with 74% during fiscal 2021, 75% during fiscal 2020, and 74% during fiscal 2019.

To manage exposures and mitigate the impact of currency fluctuations on the Company's operations, Valvoline uses derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge non-functional currency denominated balance sheet exposures. These contracts are recorded within the Consolidated Balance Sheets as assets or liabilities at fair market value based upon market price quotations. Changes in the fair value of these derivatives are recognized in income to offset the gain or loss on the hedged item. The Company utilizes derivative instruments that are purchased exclusively from highly-rated financial institutions.

For purposes of analyzing potential risk, sensitivity analysis is used to quantify hypothetical changes in fair value of the Company's derivative portfolio and does not reflect the related gain or loss on the underlying exposure. A 10% appreciation or depreciation in the value of the U.S. Dollar against non-U.S. currencies from the prevailing market rates would have resulted in a corresponding increase or decrease of $14 million as of September 30, 2021 in the

fair value of open derivative contracts. The Company expects that any increase or decrease in the fair value of the portfolio would be substantially offset by increases or decreases in the underlying exposures.

The U.S. Dollar was weaker in fiscal 2021 compared to the prior year based on changes in currency exchange rates. This resulted in a favorable year-over-year impact of 2% on sales as non-U.S. currencies translated into more U.S. Dollars. The net effects of currency fluctuations on the Company's consolidated financial statements has generally not been material.

Inflation and changing prices

Increases in raw material prices, including those from inflationary pressures or from supply chain constraints such as those experienced in fiscal 2021 for base oils and additives, have in the past and may continue in the future to adversely impact Valvoline’s costs, results of operations and the valuation of its inventory. In fiscal 2021, results were impacted by unprecedented rising raw material costs, a significant portion of which were passed through to customers through a series of price increases. Pricing actions generally lag material cost increases as many customer contracts are negotiated, with a smaller but meaningful portion indexed to accommodate changes in base oil prices. Valvoline may not always be able to raise prices in response to increased costs of raw materials or may experience a lag in passing through such cost increases, as the ability to pass on the costs of such price increases is largely dependent upon market conditions. Likewise, reductions in the valuation of Valvoline’s inventory due to market volatility may not be recovered and could result in losses.

Interest rate risk

The Company is subject to modest interest rate risk in relation to its variable-rate debt. Inclusive of the Company's interest rate swap agreements, outstanding borrowings with fixed rates are 87% as of September 30, 2021. The increase in interest expense for the year ended September 30, 2021 from a hypothetical 100 basis point increase in variable interest rates would be approximately $2 million.

In addition, the Company is exposed to market risk relative to the impact of changes in interest rates and investment returns on its pension and other postretirement plans. Declines in the discount rates used in measuring the Company's pension and other postretirement plan obligations result in a higher obligation and decrease the funded status. The pension plans hold a variety of investments designed to diversify risk, protect against declines in interest rates, and achieve an adequate net investment return to provide for future benefit payments to its participants. These investments are subject to variability that can be caused by fluctuations in general economic conditions. Decreases in the fair value of plan assets and discount rates increase net pension and other postretirement plan expense and can also result in requirements to make contributions to the plans. Pension and other postretirement plans were underfunded by $197 million at September 30, 2021 as the projected benefit obligation exceeded the fair value of plan assets.

Concentrations of credit risk

The Company is potentially subject to concentrations of credit risk on accounts receivable and financial instruments, such as derivative instruments and cash and cash equivalents. Credit risk includes the risk of nonperformance by counterparties, and the maximum potential loss may exceed the amount recognized within the Consolidated Balance Sheets. Exposure to credit risk is managed through credit approvals, credit limits, selecting highly-rated financial institutions as counterparties to transactions and monitoring procedures.

Valvoline’s business often involves large transactions with customers for which the Company does not require collateral. If one or more of those customers were to default on its obligations under applicable contractual arrangements, the Company could be exposed to potentially significant losses. Moreover, a prolonged downturn in the global economy could have an adverse impact on the ability of customers to pay their obligations on a timely basis. The Company believes that the reserves for potential losses are adequate. As of September 30, 2021, there was not a significant concentration of credit risk related to financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Supplementary Data Page

Report of Independent Registered Public Accounting Firm 55

Consolidated Statements of Comprehensive Income 57

Consolidated Balance Sheets 58

Consolidated Statements of Stockholders’ Equity (Deficit) 59

Consolidated Statements of Cash Flows 60

Notes to Consolidated Financial Statements 61

Note 1 - Description of Business and Basis of Presentation 61

Note 2 - Significant Accounting Policies 61

Note 3 - Fair Value Measurements 72

Note 4 - Acquisitions and Divestitures 74

Note 5 - Leasing 76

Note 6 - Equity Method Investments 77

Note 7 - Intangible Assets 79

Note 8 - Debt 80

Note 9 - Income Taxes 83

Note 10 - Employee Benefit Plans 87

Note 11 - Litigation, Claims and Contingencies 93

Note 12 - Stock-Based Compensation Plans 94

Note 13 - Earnings Per Share 96

Note 14 - Accumulated Other Comprehensive Income 96

Note 15 - Reportable Segment Information 97

Note 16 - Supplemental Balance Sheet Information 101

Note 17 - Subsequent Events 102

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

Valvoline Inc. and Consolidated Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Valvoline Inc. and Consolidated Subsidiaries (the Company) as of September 30, 2021 and 2020, the related consolidated statements of comprehensive income, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended September 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 19, 2021, expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for leases in 2020.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Valuation of Employee Benefit Obligations

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2016.

Cincinnati, Ohio

November 19, 2021

Valvoline Inc. and Consolidated Subsidiaries

Consolidated Statements of Comprehensive Income

Years ended September 30

Selling, general and administrative expenses 520 442 449

Net legacy and separation-related (income) expenses (24) (30) 3

Equity and other income, net (44) (34) (40)

Net pension and other postretirement plan (income) expenses (126) (59) 60

Net interest and other financing expenses 111 93 73

NET EARNINGS PER SHARE

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

COMPREHENSIVE INCOME

Other comprehensive income (loss), net of tax

Currency translation adjustments 7 7 (12)

Unrealized gain (loss) on cash flow hedges 2 (1) —

Other comprehensive loss — (3) (21)

See Notes to Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Consolidated Balance Sheets

As of September 30

(In millions, except per share amounts) 2021 2020

Assets

Current assets

Cash and cash equivalents $ 230 $ 760

Prepaid expenses and other current assets 53 46

Noncurrent assets

Property, plant and equipment, net 817 613

Goodwill and intangibles, net 775 529

Equity method investments 47 44

Deferred income taxes 14 34

Other noncurrent assets 194 132

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities

Current portion of long-term debt $ 17 $ —

Trade and other payables 246 189

Accrued expenses and other liabilities 306 255

Total current liabilities 569 444

Noncurrent liabilities

Employee benefit obligations 258 317

Deferred income taxes 26 1

Operating lease liabilities 274 231

Other noncurrent liabilities 252 172

Commitments and contingencies

Stockholders’ equity (deficit)

Paid-in capital 35 24

Retained earnings (deficit) 90 (110)

Accumulated other comprehensive income 8 8

Total stockholders’ equity (deficit) 135 (76)

Total liabilities and stockholders’ equity (deficit) $ 3,191 $ 3,051

See Notes to Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)

Common stock

(In millions, except per share amounts) Shares Amount

Dividends paid, $0.424 per common share — — — (80) — (80)

Stock-based compensation, net of issuances — — 6 — — 6

Other comprehensive loss, net of tax — — — — (21) (21)

Dividends paid, $0.452 per common share — — — (84) — (84)

Stock-based compensation, net of issuances — — 11 — — 11

Repurchase of common stock (3) — — (60) — (60)

Cumulative effect of adoption of new leasing standard, net of tax — — — 1 — 1

Other comprehensive loss, net of tax — — — — (3) (3)

Dividends paid, $0.500 per common share — — 1 (91) — (90)

Stock-based compensation, net of issuances — — 10 — — 10

Repurchase of common stock (5) — — (127) — (127)

See Notes to Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Consolidated Statements of Cash Flows

Years ended September 30

Cash flows from operating activities

Adjustments to reconcile to cash flows from operations

Loss on extinguishment of debt 36 19 —

Depreciation and amortization 92 66 61

Pension contributions (5) (11) (10)

(Gain) loss on pension and other postretirement plan remeasurements (72) (22) 69

Stock-based compensation expense 14 12 9

Other, net 4 (5) (5)

Change in assets and liabilities

Payables and accrued liabilities 95 (3) 37

Other assets and liabilities (110) (81) (27)

Total cash provided by operating activities 404 372 325

Cash flows from investing activities

Additions to property, plant and equipment (144) (151) (108)

Notes receivable, net of repayments of $3 million in 2020 17 (31) (2)

Acquisitions of businesses, net of cash acquired (282) (40) (78)

Other investing activities, net 9 — —

Total cash used in investing activities (400) (222) (188)

Cash flows from financing activities

Payments of debt issuance costs and discounts (7) (16) (2)

Premium paid to extinguish debt (26) (15) —

Repurchases of common stock (127) (60) —

Cash dividends paid (91) (84) (80)

Other financing activities (11) (4) (7)

Total cash (used in) provided by financing activities (536) 450 (71)

(Decrease) increase in cash, cash equivalents and restricted cash (530) 602 63

Cash, cash equivalents and restricted cash - beginning of year 761 159 96

Cash, cash equivalents and restricted cash - end of year $ 231 $ 761 $ 159

Supplemental disclosures

Income taxes paid $ 72 $ 44 $ 25

See Notes to Consolidated Financial Statements.

Valvoline Inc. and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of business

Valvoline Inc. (“Valvoline” or the “Company”) is a global vehicle and engine care company that powers the future of mobility through innovative services and products for electric, hybrid, and internal combustion powertrains. Established in 1866, Valvoline’s heritage spans 155 years, during which it has developed recognition across multiple service and product channels. Valvoline's services performed at its retail stores, Valvoline-branded passenger car motor oils, and complementary products are designed to serve evolving maintenance needs and improve vehicle and engine performance and lifespan.

Valvoline operates and franchises approximately 1,600 service center locations and is the second and third largest chain in the United States (“U.S.”) and Canada, respectively, by number of stores. With sales in more than 140 countries and territories, Valvoline’s solutions are available for every engine and powertrain, including high-mileage and heavy-duty applications, and are offered at more than 80,000 locations worldwide.

Basis of presentation and consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Securities and Exchange Commission (“SEC”) regulations. The financial statements are presented on a consolidated basis for all periods presented and include the operations of the Company and its majority-owned and controlled subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Certain prior period amounts have been reclassified in the accompanying consolidated financial statements and notes thereto to conform to the current period presentation.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Valvoline’s significant accounting policies, which conform to U.S. GAAP and are applied on a consistent basis in all periods presented, except when otherwise disclosed, are described below.

Use of estimates, risks and uncertainties

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent matters. 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.

Valvoline has substantially maintained its operations throughout the novel coronavirus ("COVID-19") pandemic to-date and has continued precautionary measures to protect the Company's employees and customers and manage through the currently known impacts on its business. Given the unprecedented nature of the pandemic, the extent of future impacts cannot be reasonably estimated at this time due to numerous uncertainties, including the ultimate duration and severity of the pandemic.

Cash and cash equivalents

All short-term, highly liquid investments having original maturities of three months or less are considered to be cash equivalents.

Receivables and allowance for credit losses

Valvoline invoices customers and recognizes a receivable within its Consolidated Balance Sheets once the Company performs a service or transfers control of a product, at which point its right to consideration becomes unconditional and only the passage of time is required before payment of that consideration is due. As the majority of the Company’s performance obligations are satisfied at a point in time and customers typically do not make material payments in advance, nor does Valvoline have a right to consideration in advance of control transfer, the Company has no contract assets or contract liabilities.

Valvoline adopted guidance in fiscal 2021 that changes the recognition of credit losses from an incurred or probable loss methodology to a current expected credit loss model, which results in the immediate recognition of losses that are expected to occur over the life of the financial instruments, principally trade and other receivables. Allowances are maintained to estimate expected lifetime credit losses that are based on a broad range of reasonable and supportable information and factors, including the length of time receivables are past due, the financial health of its customers, macroeconomic conditions, and historical collection experience. If the financial condition of its customers deteriorates or other circumstances occur that result in an impairment of customers’ ability to make payments, the Company records additional allowances as needed. The Company writes off uncollectible receivables against the allowance when collection efforts have been exhausted and/or any legal action taken by the Company has concluded.

Inventories

Inventories are primarily carried at the lower of cost or net realizable value using the weighted average cost method. In addition, certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method to provide matching of revenues with current costs. Inventory costs include materials, labor and manufacturing overhead related to the purchase and production of inventories. The Company regularly reviews inventory quantities on hand and the estimated utilization of inventory. Excess and obsolete reserves are established when inventory is estimated to not be usable based on forecasts, product demand, life cycle, or utility.

Property, plant and equipment

Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over the estimated useful lives of the assets. Buildings generally have useful lives of ten to twenty-five years and machinery and equipment typically have two to thirty year useful lives, dependent on the nature and utility of the assets. Building and leasehold improvements are depreciated over the shorter of their estimated useful lives or the period from which the date the assets are placed in service to the end of the lease term, as appropriate. Depreciation expense is recognized in Cost of sales or Selling, general and administrative expenses within the Consolidated Statements of Comprehensive Income based on the function the underlying asset supports. Property, plant and equipment is relieved of the cost and related accumulated depreciation when assets are disposed of or otherwise retired. Gains or losses on the dispositions of property, plant and equipment are included in the Consolidated Statements of Comprehensive Income and generally reported in Equity and other income, net.

Property, plant and equipment carrying values are evaluated for recoverability at the lowest level of identifiable cash flows when impairment indicators are present. Such indicators could include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence. Recorded values of asset groups of long-lived assets that are not expected to be recovered through undiscounted future net cash flows are written down to fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).

Leases

Certain of the properties Valvoline utilizes, including its retail service center stores, offices, blending and warehouse facilities, in addition to certain equipment, are leased, with a small portion subleased primarily to Valvoline's franchisees. In fiscal 2020, Valvoline adopted new guidance related to leases using the optional transition approach, with prospective application from adoption on October 1, 2019 and the financial statements prior to

adoption reported in accordance with the previous guidance. Valvoline's policies under the new guidance are outlined below.

Valvoline determines if an arrangement contains a lease at inception primarily based on whether or not the Company has the right to control the asset during the contract period. For all agreements where it is determined that a lease exists, the related lease assets and liabilities are recognized within the Consolidated Balance Sheets as either operating or finance leases at the commencement date.

The lease liability is measured based on the present value of future payments over the lease term, and the right-of-use asset is measured as the lease liability, adjusted for prepaid lease payments, lease incentives, and initial direct costs (e.g., commissions). Valvoline's leases generally have terms ranging from less than one year to more than 20 years, and leases with an initial term of 12 months or less are included in the measurement of its right-of-use asset and lease liability balances. The lease term includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

Fixed rental payments, including variable payments based on a rate or index, are included in the determination of the lease liability. Many leases also require the payment of taxes, insurance, operating expenses, and maintenance. In instances where these other components are fixed, they are included in the measurement of the lease liability due to Valvoline's election to combine lease and non-lease components and account for them as a single component. Otherwise, these components are recognized along with other variable lease payments in the Consolidated Statements of Comprehensive Income in the period in which the obligation for those payments is incurred.

As most leases do not provide the rate implicit in the lease, the Company estimates its incremental borrowing rate to best approximate the rate of interest that Valvoline would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Valvoline applies the incremental borrowing rate to groups of leases with similar lease terms in determining the present value of future payments. In determining the incremental borrowing rate, the Company considers information available at the commencement date, including lease term, interest rate yields for specific interest rate environments and the Company's credit spread.

Business combinations

The Company allocates the purchase consideration to the identifiable assets acquired and liabilities assumed in business combinations based on their acquisition-date fair values. The excess of the purchase consideration over the amounts assigned to the identifiable assets and liabilities is recognized as goodwill, or if the fair value of the net assets acquired exceeds the purchase consideration, a bargain purchase gain is recorded. Factors giving rise to goodwill generally include operational synergies that are anticipated as a result of the business combination and growth expected to result in economic benefits from access to new customers and markets. The fair values of identifiable intangible assets acquired in business combinations are generally determined using an income approach, requiring financial forecasts and estimates as well as market participant assumptions.

The incremental financial results of the businesses that Valvoline has acquired are included in the Company’s consolidated financial results from the respective dates of each acquisition.

Goodwill and other intangible assets

Valvoline evaluates goodwill for impairment annually as of July 1 or when events and circumstances indicate an impairment may have occurred. This assessment consists of evaluating each reporting unit’s fair value compared to its carrying value. Valvoline's historical reporting units were evaluated as a result of the realignment of its global operations during the third quarter of fiscal 2021. As a result, Valvoline determined its reporting units were Retail Services and Global Products, consistent with its realigned operating and reportable segments. In connection with the identification of its current operating and reportable segments and reporting units, goodwill balances and activity presented herein were reclassified to conform to the current presentation and were subject to assessment for goodwill impairment at the reporting unit level.

In evaluating goodwill for impairment, Valvoline has the option to first perform a qualitative assessment to determine whether further impairment testing is necessary or to perform a quantitative assessment by comparing the fair value

of a reporting unit to its carrying amount, including goodwill. Under the qualitative assessment, the Company is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. Qualitative factors considered include macroeconomic conditions, industry and market conditions, cost factors, and overall financial performance, among others.

Under the quantitative assessment, if the fair value of a reporting unit is less than its carrying amount, then the amount of the impairment loss, if any, is measured as the excess of the carrying value of the reporting unit’s goodwill over its fair value, not to exceed the total goodwill allocated to the reporting unit. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a discounted cash flow (“DCF”) analysis, and a number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market shares, sales volumes and prices, costs to produce, tax rates, capital spending, discount rate, weighted average cost of capital, terminal values, and working capital changes. Several of these assumptions vary among reporting units, and the cash flow forecasts are generally based on approved strategic operating plans. The market approach is performed using the Guideline Public Companies method based on earnings multiple data. The Company also performs a reconciliation between market capitalization and the estimated aggregate fair value of the reporting units, including consideration of a control premium.

Valvoline performed a quantitative assessment during fiscal 2021 and determined that the fair values of the Company's reporting units were substantially in excess of carrying values and no impairment existed.

Acquired finite-lived intangible assets principally consist of certain trademarks and trade names, reacquired franchise rights, and customer relationships. Intangible assets acquired in an asset acquisition are carried at cost, less accumulated amortization. For intangible assets acquired in a business combination, the estimated fair values of the assets acquired are used to establish the carrying values, which are determined using assumptions from the perspective of a market participant and generally an income approach. These intangible assets are amortized on a straight-line basis over their estimated useful lives. Valvoline evaluates finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable, and any assets not expected to be recovered through undiscounted future net cash flows are written down to current fair value.

Equity method investments

Investments in companies, including joint ventures, where Valvoline has the ability to exert significant influence over, but not control, operating and financial policies of the investee are accounted for using the equity method of accounting. Judgment regarding the level of influence over each investment includes considering key factors such as the Company’s ownership interest, representation on the board of directors, and participation in policy-making decisions. The Company’s proportionate share of the net income or loss of these companies is included within Equity and other income, net in the Consolidated Statements of Comprehensive Income.

The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. Factors considered by the Company when reviewing an equity method investment for other-than-temporary impairment include the length of time and extent to which the fair value of the equity method investment has been less than its carrying amount, the investee’s financial condition and near-term prospects, and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.

Pension and other postretirement benefit plans

Valvoline sponsors defined benefit pension and other postretirement plans in the U.S and in certain other countries. The Company's U.S. pension plans are closed to new participants and the accrual of pension benefits has been frozen since September 30, 2016. In addition, most international pension plans are closed to new participants while those that remain open relate to areas where local laws require such plans. Valvoline also sponsors retiree healthcare and life insurance plans for certain qualifying participants with amendments effective in fiscal 2017 to limit annual per capita costs.

Valvoline recognizes the funded status of each applicable plan within the Consolidated Balance Sheets whereby each unfunded plan is recognized as a liability and each funded plan is recognized as either an asset or liability based on its funded status. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation. Changes in the fair value of plan assets and net actuarial gains or losses are recognized upon remeasurement as of September 30, the annual measurement date, and whenever a remeasurement is triggered. The remaining components of pension and other postretirement benefits income or expense are recorded ratably throughout the year.

The fair value of plan assets represents the current market value of assets held by irrevocable trust funds for the sole benefit of participants, and the benefit obligation is the actuarial present value of the benefits expected to be paid upon retirement, death, or other distributable event based on estimates. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain key assumptions that require significant judgment, including, but not limited to, estimates of discount rates, rate of compensation increases, interest rates and mortality rates. Actuarial gains and losses may be related to actual results that differ from assumptions as well as changes in assumptions, which may occur each year.

Due to the freeze of U.S. pension benefits effective September 30, 2016, continuing service costs are limited to certain international pension plans, and are reported in the same caption of the Consolidated Statements of Comprehensive Income as the related employee costs. All components of net periodic benefit income or costs other than service cost are recognized below operating income within Net pension and other postretirement plan (income) expenses in the Consolidated Statements of Comprehensive Income.

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in Selling, general and administrative expensesin the Consolidated Statements of Comprehensive Income.

Revenue recognition

Revenue is recognized for the amount that reflects the consideration the Company is expected to be entitled to receive based on when control of the promised good or service is transferred to the customer. Revenue recognition is evaluated through the following five steps: (i) identification of the contract(s) with a customer; (ii) identification of the performance obligation(s) in the contract(s); (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligation(s) in the contract(s); and (v) recognition of revenue when or as a performance obligation is satisfied.

Nature of goods and services

Valvoline generates all revenues from contracts with customers, primarily as a result of the sale and service delivery of engine and automotive maintenance products to its customers. Valvoline derives its sales from its broad line of products and complementary services through the following three principal activities managed across its two reportable segments: (i) engine and automotive maintenance products, (ii) company-operated service center operations, and (iii) franchised service center operations. Valvoline’s sales are generally to mass market and auto parts retail, installer, industrial, distributor, franchise, and end consumers to facilitate vehicle and equipment preventive maintenance.

Valvoline's sales are predominantly comprised of products and services sold at a point in time with approximately 98% recognized either through ship-and-bill performance obligations or company-operated service center operations. The remainder of the Company's sales generally relate to franchise fees, including royalties, transferred over time. The following table summarizes Valvoline's sales by timing of revenue recognized for the fiscal years ended September 30:

Franchised revenues transferred over time 50 40 43

Below is a summary of the key considerations for Valvoline's material revenue-generating activities:

Engine and automotive maintenance products

Engine and automotive maintenance products primarily include lubricants, antifreeze, chemicals, filters, and other complementary products for use across a wide array of vehicles and engines. The Company’s customers typically enter into a sales agreement which outlines a framework of terms and conditions that apply to all current and future purchase orders for the customer submitted under such sales agreement. In these situations, the Company’s contract with the customer is the sales agreement combined with the customer purchase order as specific products and quantities are not indicated until a purchase order is submitted. As the Company’s contract with the customer is typically for a single purchase order under the supply agreement to be delivered at a point in time, the duration of the contract is almost always one year or less.

The Company’s products are distinct and separately identifiable on customer purchase orders, with each product sale representing a separate performance obligation that is generally delivered simultaneously. The Company has elected to not disclose information about remaining performance obligations as substantially all of the Company's product sales contracts have a duration of one year or less. Valvoline is the principal to these contracts as the Company has control of the products prior to transfer to the customer. Accordingly, revenue is recognized on a gross basis.

The Company determines the point in time at which control is transferred and the performance obligation is satisfied by considering when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the product, which generally coincides with the transfer of title and risk of loss to the customer and is typically determined based on delivery terms within the underlying contract.

Customer payment terms vary by region and customer and are generally 30 to 60 days after delivery. Valvoline does not provide extended payment terms greater than one year and therefore, does not adjust the promised amount of consideration for the effects of a significant financing component.

Company-operated service center operations

Performance obligations related to company-operated service center operations primarily include the sale of engine and automotive maintenance products and related services. These performance obligations are distinct and are delivered simultaneously at a point in time. Accordingly, sales from company-operated service center operations is recognized when payment is tendered at the point of sale, which coincides with the completion of product and service delivery and the transfer of control and benefits from the performance obligations to the customer.

Franchised service center operations

The primary performance obligations related to franchised service center operations include product sales as described above and the license of intellectual property, which provides access to the Valvoline brand and proprietary information to operate service center stores over the term of a franchise agreement. Other franchise performance obligations do not result in material revenue. Each performance obligation is distinct, and franchisees generally receive and consume the benefits provided by the Company’s performance over the course of the franchise agreement, which typically ranges from 10 to 15 years. Billings and payments occur monthly. Variable consideration is not disclosed as remaining performance obligations qualify for the sales-based royalty and usage-based exemptions.

In exchange for the license of Valvoline intellectual property, franchisees generally remit initial fees upon opening a service center store and royalties at a contractual rate of the applicable service center store sales over the term of the franchise agreement. The license provides access to the intellectual property over the term of the franchise agreement and is considered a right-to-access license of symbolic intellectual property as substantially all of its

utility is derived from association with the Company’s past and ongoing activities. The license granted to operate each franchised service center store is the predominant item to which the royalties relate and represents a distinct performance obligation which is recognized over time as the underlying sales occur, as this is the most appropriate measure of progress toward complete satisfaction of the performance obligation.

Variable consideration

The Company only offers an assurance-type warranty with regard to the intended functionality of products sold, which does not represent a distinct performance obligation within the context of the contract. Product returns and refunds are generally not material and are not accepted unless the item is defective as manufactured. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which Valvoline expects to receive.

The nature of Valvoline’s contracts with customers often give rise to variable consideration consisting primarily of promotional rebates and customer pricing discounts based on achieving certain levels of sales activity that generally decrease the transaction price. The Company determines the transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable consideration, or amounts payable to the customer when there is a basis to reasonably estimate the amount and it is probable there will not be a significant reversal. Variable consideration is recorded as a reduction of the transaction price at the time of sale and is primarily estimated utilizing the most likely amount method that is expected to be earned as the Company is able to estimate the anticipated discounts within a sufficiently narrow range of possible outcomes based on its extensive historical experience with certain customers, similar programs and management’s judgment with respect to estimating customer participation and performance levels. Variable consideration is reassessed at each reporting date and adjustments are made, when necessary.

The reduction of transaction price due to customer incentives was $402 million, $332 million, and $346 million in the Consolidated Statements of Comprehensive Income for the years ended September 30, 2021, 2020, and 2019, respectively. Reserves for these customer programs and incentives were $71 million and $64 million as of September 30, 2021 and 2020, respectively, and are recorded within Accrued expenses and other liabilities in the Consolidated Balance Sheets.

Allocation of transaction price

In each contract with multiple performance obligations, Valvoline allocates the transaction price, including variable consideration, to each performance obligation on a relative standalone selling price basis, which is generally determined based on the directly observable data of the Company’s standalone sales of the performance obligations in similar circumstances to similar customers. The amount allocated to each performance obligation is recognized as sales commensurate with the transfer of control to the customer.

Shipping and handling activities that occur after the customer has obtained control are treated as fulfillment activities (i.e., an expense) rather than as a performance obligation.Accordingly, amounts billed for shipping and handling are a component of the transaction price included in net sales, while costs incurred are included in cost of sales. Shipping and handling costs recorded in sales were $10 million in fiscal 2021, $9 million in fiscal 2020, and $10 million in fiscal 2019. Furthermore, the Company excludes taxes collected from customers from sales, which are reflected in accrued expenses until remitted to the appropriate governmental authority.

Incremental direct costs of obtaining a contract, primarily sales commissions, are expensed when incurred due to the short-term nature of individual contracts, which would result in amortization periods of one year or less. These costs are not material and are recorded within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.

Expense recognition

Cost of sales are expensed as incurred andinclude costs associated with operation of the Company's plants, distribution network and retail service center stores, including depreciation, occupancy, labor and benefits, material and production, inbound and outbound freight, purchasing and receiving, inspection, warehousing, and all other distribution network costs.Selling, general and administrative expenses are recognized as incurred and include

sales and marketing costs, research and development costs, advertising, customer support, and other administrative costs. Advertising costs were $90 million in fiscal 2021, $72 million in fiscal 2020 and $73 million in fiscal 2019, and research and development costs were $15 million in fiscal 2021 and $13 million in both fiscal 2020 and 2019.

Stock-based compensation

The Company recognizes expense related to stock-based compensation, net of actual forfeitures, over the requisite vesting period based on the grant date fair value of new or modified awards. The Company’s outstanding stock-based compensation awards are primarily classified as equity, with a small portion of liability-classified awards based on award terms and conditions.

Income taxes

Income tax expense is provided based on income before income taxes. The Company estimates its tax expense based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about the recognition and realization of deferred tax assets and liabilities resulting from the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax laws or rates occur, deferred tax assets and liabilities are adjusted in the period changes are enacted through income tax expense. Valvoline records valuation allowances related to its deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

Valvoline records estimated incremental withholding taxes on undistributed earnings to account for certain of its non-U.S. subsidiaries as being immediately subject to tax, while certain other outside basis differences restricted by regulations, operational or investing needs for non-U.S. subsidiaries are indefinitely reinvested. If these outside basis differences were no longer to be indefinitely reinvested in the future, the Company may be subject to additional income and withholding taxes, which are not practicable to estimate.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being sustained upon examination by authorities. Interest and penalties related to unrecognized tax benefits are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law and until such time that the related tax benefits are recognized. Interest and penalties were not material to any of the periods presented herein.

Derivatives

Valvoline’s derivative instruments consist of currency exchange and interest rate swap agreements, each of which is described further below.

Currency derivatives

The Company's currency exchange contracts are used to manage non-functional currency denominated balance sheet exposures and exchange on currency for another at a fixed rate on a future date of generally a month or less. These contracts are not designated as hedging instruments and are accounted for as either assets or liabilities in the Consolidated Balance Sheets at fair value with the resulting gains or losses recognized as adjustments to earnings within Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income. Gains and losses are recognized as exchange rates change the fair value of these instruments and upon settlement to offset the remeasurement gain or loss on the related currency-denominated exposures in the same period. The Company classifies its cash flows related to currency exchange contracts as investing activities in the Consolidated Statements of Cash Flows.

Interest rate swap agreements

The Company's interest rate swap agreements effectively modify its exposure to interest rate risk by converting floating rate debt to a fixed rate for the term of the swap agreements, reducing the impact of interest rate changes on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount.

Valvoline's interest rate swap agreements are designated as cash flow hedges with effectiveness of the hedges assessed at inception and quarterly thereafter. To the extent the hedging relationship is highly effective, the unrealized gains or losses on the swaps are recorded in Accumulated other comprehensive income and reclassified into earnings within Net interest and other financing expenses when the payments occur. The Company classifies its cash flows related to interest rate swap agreements as operating activities in the Consolidated Statements of Cash Flows.

The fair values of the interest rate swaps are reflected as an asset or liability in the Consolidated Balance Sheets and the change in fair value is reported in Accumulated other comprehensive income. The fair values of the interest rate swaps are estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date. The Company does not offset fair value amounts recognized in its Consolidated Balance Sheets for presentation purposes.

Fair value measurements

Fair value is defined as an exit price, representing an amount that would be received to sell an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance prioritizes the inputs used to measure fair value into the following three-tier fair value hierarchy for which an instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement:

•Level 1 - Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

•Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Valvoline's assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which may include the Company's own financial data, such as internally developed pricing models, DCF methodologies, as well as instruments for which the fair value determination requires significant management judgment.

Certain investments which measure fair value using the net asset value (“NAV”) per share practical expedient are not classified within the fair value hierarchy and are separately disclosed.

Valvoline measures its financial assets and financial liabilities at fair value based on one or more of the following three valuation techniques:

•Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

•Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost)

•Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option pricing and excess earnings models)

The Company generally uses a market approach, when practicable, in valuing financial instruments. In certain instances, when observable market data is lacking, the Company uses valuation techniques consistent with the income approach whereby future cash flows are converted to a single discounted amount. The Company uses multiple sources of pricing as well as trading and other market data in its process of reporting fair values.

The fair values of accounts receivables and accounts payable approximate their carrying values due to the relatively short-term nature of the instruments. Valvoline's notes receivable primarily consist of variable-rate interest term loans extended to franchisees to provide financial assistance as a response to the COVID-19 pandemic. These notes bear interest comparable with the market rates within Valvoline's variable rate borrowings, and accordingly, their carrying amounts approximate fair value.

The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.

Currency translation

Operations outside the United States are measured primarily using the local currency as the functional currency. Upon consolidation, the results of operations of the subsidiaries and affiliates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates for the year while assets and liabilities are translated at year-end exchange rates. Adjustments to translate assets and liabilities into U.S. dollars are recorded in the stockholders’ equity section of the Consolidated Balance Sheets as a component of Accumulated other comprehensive income and are included in net earnings only upon sale or substantial liquidation of the underlying non-U.S. subsidiary or affiliated company.

Earnings per share

Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted-average number of common shares outstanding during the reported period. Diluted EPS is calculated similar to basic EPS, except that the weighted-average number of shares outstanding includes the number of shares that would have been outstanding had potentially dilutive common shares been issued. Potentially dilutive securities include stock appreciation rights and nonvested stock-based awards. Nonvested market and performance-based share awards are included in the weighted-average diluted shares outstanding each period if established market or performance criteria have been met at the end of the respective periods.

Share repurchases

Shares that are repurchased are retired and returned to the status of authorized, unissued shares. The excess of the repurchase price over the par value of shares acquired is recognized in Retained earnings.

Recent accounting pronouncements

The following standards relevant to Valvoline were either issued or adopted in the current year, or are expected to have a meaningful impact on Valvoline in future periods.

Recently adopted

In June 2016, the Financial Accounting Standards Board ("FASB") issued updated guidance that changes the recognition of credit losses from an incurred or probable loss methodology to a current expected credit loss model that results in the immediate recognition of credit losses that are expected to occur over the life of the financial instruments that are within the scope of the guidance, principally trade and other receivables for Valvoline. The new credit loss guidance was adopted on October 1, 2020 using the required modified retrospective approach. Under this approach, the new accounting guidance is applied prospectively from the date of adoption through a cumulative effect adjustment in retained deficit, while prior period financial statements continue to be reported in accordance with the previous guidance. Adoption did not have a material impact on the Company's consolidated financial statements and resulted in a $2 million, net of tax, cumulative effect of accounting change that increased retained

deficit and allowances for credit losses. Refer to Note 16 for additional information regarding the Company's trade and other receivables and its allowances for credit losses.

Issued but not yet adopted

In March 2020, the FASB issued guidance regarding the effects of reference rate reform on financial reporting. This guidance provides temporary optional expedients and exceptions to accounting guidance for certain contract modifications and hedging arrangements to ease financial reporting burdens as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference rates to alternative reference rates.

The Company has interest rate swap hedging arrangements and long-term debt as described in Notes 3 and 8 in the Notes to Consolidated Financial Statements, respectively, for which existing payments are LIBOR-based. This guidance is available to be adopted on a prospective basis through the end of calendar 2022 to simplify the accounting for arrangements modified for the transition to alternative reference rates. The Company expects to adopt this guidance to the extent its arrangements are modified for the underlying reference rate prior to the end of calendar 2022 and does not expect adoption will have a material impact on its condensed consolidated financial statements.

The FASB issued other accounting guidance during the period that is not currently applicable or not expected to have a material impact on Valvoline’s financial statements, and therefore, is not described above.

NOTE 3 – FAIR VALUE MEASUREMENTS

Recurring fair value measurements

The Company’s financial assets and liabilities accounted for at fair value on a recurring basis are summarized below by level within the fair value hierarchy:

(In millions) Total Level 1 Level 2 Level 3 NAV (a)

Cash and cash equivalents

Money market funds $ 13 $ 13 $ — $ — $ —

Time deposits 87 — 87 — —

Prepaid expenses and other current assets

Currency derivatives 3 — 3 — —

Other noncurrent assets

Non-qualified trust funds 11 — 4 — 7

Interest rate swap agreements 2 2

Total assets at fair value $ 116 $ 13 $ 96 $ — $ 7

Accrued expenses and other liabilities

Currency derivatives $ 3 $ — $ 3 $ — $ —

Interest rate swap agreements 1 — 1 — —

Other noncurrent liabilities

Deferred compensation obligations 24 — — — 24

Total liabilities at fair value $ 28 $ — $ 4 $ — $ 24

(In millions) Total Level 1 Level 2 Level 3 NAV (a)

Cash and cash equivalents

Money market funds $ 296 $ 296 $ — $ — $ —

Prepaid expenses and other current assets

Currency derivatives 3 — 3 — —

Other noncurrent assets

Non-qualified trust funds 16 — 8 — 8

Total assets at fair value $ 454 $ 296 $ 150 $ — $ 8

Accrued expenses and other liabilities

Currency derivatives $ 2 $ — $ 2 $ — $ —

Interest rate swap agreements 1 — 1 — —

Other noncurrent liabilities

Deferred compensation obligations 25 — — — 25

Total liabilities at fair value $ 28 $ — $ 3 $ — $ 25

(a)Funds measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy.

Money market funds

Money market funds trade in an active market and are valued using quoted market prices, which are Level 1 inputs.

Time deposits

Time deposits are balances held with financial institutions at face value plus accrued interest, which approximates fair value and are categorized as Level 2.

VVV US Equity

VVV · 10-K · period ended 2021-09-30

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

VVV US Equity☆

VVV · 10-K · period ended 2021-09-30

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

VVV US Equity