VALVOLINE INC (VVV) FY 2021 MD&A

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.

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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:

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.

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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:

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:

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

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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

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•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

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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:

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Sales

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

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:

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.

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Net operating expenses

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

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:

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.

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EBITDA and Adjusted EBITDA

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

(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

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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.

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 add 132 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:

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(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

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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.

Global Products

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

(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.

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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:

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

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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.

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.

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Debt

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

(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:

(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.

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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.

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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.

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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:

•Mortality — The mortality assumption for Valvoline's U.S. pension and other postretirement plans is utilizes the Society of Actuaries PRI-2012 mortality base tables and a mortality improvement scale that follows the 2021 Trustees Report of the Social Security Administration Intermediate Alternative as reflected in the MSS-2021 improvement scale. Valvoline's international plans utilize mortality assumptions similar to the U.S., whereby the assumptions are generally based upon country-specific base mortality tables updated for the most currently available improvement scales that have been published by reliable authorities in each

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jurisdiction. Valvoline believes the updated mortality improvement scales provide a reasonable assessment of current mortality trends and is an appropriate estimate of future mortality projections.

Other assumptions, including the rate of compensation increase and healthcare cost trend rate, do not have a significant impact on Valvoline's pension and other postretirement benefit plan costs and obligations based upon current plan provisions that have generally frozen benefits and limited costs.

Business combinations

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Income taxes

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Customer incentives