100 Valvoline Way

Lexington, KY 40509

December 15, 2017

Dear Valvoline Inc. Shareholder:

On behalf of our Board of Directors and management, we cordially invite you to attend the 2018 Annual Meeting of Shareholders of Valvoline Inc. The meeting will be held on Wednesday, January 31, 2018, at 11:00 a.m. (ET), at Valvoline’s principal office, 100 Valvoline Way, Lexington, KY 40509.

We are pleased to provide access to our proxy materials via the Internet under the U.S. Securities and Exchange Commission’s “notice and access” rules. As a result, we are mailing to most of our shareholders a Notice of Internet Availability of Proxy Materials (“Notice”) instead of a paper copy of this Proxy Statement, a proxy card and our 2017 Annual Report. The Notice contains instructions on how to access those documents over the Internet, as well as instructions on how to request a paper copy of our proxy materials. All shareholders who do not receive a Notice, including shareholders who have previously requested to receive paper copies of proxy materials, will receive a paper copy of the proxy materials by mail. We believe that this approach provides a convenient way for you to access our proxy materials and vote your shares, while reducing the costs of printing and distributing our proxy materials and conserving natural resources.

The attached Notice of Annual Meeting and Proxy Statement describe the business to be conducted at the Annual Meeting. Whether or not you plan to attend the Annual Meeting, it is important that your shares be represented and voted at the meeting. We encourage you to promptly vote and submit your proxy via the Internet or by telephone using the instructions on the Notice, or, if you received paper copies of the proxy materials, you may also vote by following the instructions on the proxy card and signing and returning it in the pre-addressed postage-paid envelope provided for your convenience. If you attend the Annual Meeting, you can vote in person even if you previously submitted your proxy.

We appreciate your continued confidence in Valvoline and look forward to seeing you at the meeting.

Sincerely,

 

Samuel J. Mitchell, Jr. Chief Executive Officer				Stephen F. Kirk Chairman of the Board

Notice of Annual Meeting of Shareholders

 

 

 

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING TO BE HELD ON JANUARY 31, 2018. This Proxy Statement and our 2017 Annual Report to Shareholders are available at http://investors.valvoline.com/financial-reports/proxy.

 

Table of Contents

 

 

Questions and Answers About the Annual Meeting

 

 

 

 

 

Proposal One - Election of Directors

 

Proposal and Required Vote

Our Board currently consists of the following eight members all of whom were elected at the 2017 Annual Meeting of Shareholders: Richard J. Freeland, Stephen F. Kirk, Stephen E. Macadam, Vada O. Manager, Samuel J. Mitchell, Jr., Charles M. Sonsteby, Mary J. Twinem and William A. Wulfsohn. At the end of Valvoline’s fiscal year on September 30, 2017, Mr. Wulfsohn retired as Chairman of our Board and notified the Board that he would not stand for re-election upon the expiration of his term as a director at the Annual Meeting. Each of the other seven directors on the current Board has been nominated for election at the Annual Meeting. The Board has resolved to reduce its size from eight to seven members effective as of the date of the Annual Meeting to eliminate the vacancy that would otherwise result from Mr. Wulfsohn’s decision not to stand for re-election. See the “Corporate Governance—Valvoline’s Board of Directors” section of this Proxy Statement for further information about the structure, operations and roles of our Board. The Governance and Nominating Committee (“G&N Committee”) of our Board has confirmed that all seven nominees will be available to serve as directors upon election and recommends their election.

Directors are elected at each annual meeting of shareholders and hold office until the following annual meeting of shareholders and until their successors have been elected and qualified. Pursuant to our Articles, a director nominee in an uncontested election must receive the affirmative vote of a majority of votes cast with respect to that director nominee in order to be elected to our Board. Therefore, to be elected at the Annual Meeting, a director nominee must receive more votes cast “for” his or her election than votes cast “against” his or her election. Abstentions and broker non-votes will not be counted as votes cast. Nominees elected at the Annual Meeting will serve until our 2019 Annual Meeting of Shareholders and will hold office until their successors are elected and qualified.

Pursuant to the Board’s resignation policy in our Corporate Governance Guidelines (published on our website at http://investors.valvoline.com/governance), any nominee who is serving as a director at the time of an uncontested election who fails to receive a greater number of votes “for” his or her election than votes “against” his or her election will tender his or her resignation for consideration by the Board no later than two weeks following the certification of the shareholder vote. The Board will decide, through a process managed by the G&N Committee, whether to accept the resignation within 90 days following the shareholder meeting. The Company will then promptly disclose the Board’s decision and reasons therefor. As a condition to his or her nomination, each person nominated by the G&N Committee must agree in advance to abide by the policy. Each of the current members of our Board, other than Mr. Wulsohn, has been nominated for election at the Annual Meeting and has agreed to abide by this policy.

If no voting specification is made on a properly returned or voted proxy card, Samuel J. Mitchell, Jr. or Julie M. O’Daniel (as proxies named on the proxy card) will cast the votes represented by such proxy card FOR each of the seven nominees named in this Proxy Statement. Should any of the nominees be unable or unwilling to stand for election at the time of the Annual Meeting, the proxies may vote for a replacement nominee recommended by the Board, or the Board may reduce the number of directors to be elected at the Annual Meeting.

Information Concerning Director Nominees

The seven individuals nominated for election as directors at the Annual Meeting are Richard J. Freeland, Stephen F. Kirk, Stephen E. Macadam, Vada O. Manager, Samuel J. Mitchell, Jr., Charles M. Sonsteby and Mary J. Twinem. Each of these nominees is currently a member of our Board and has agreed to stand for election. Background information about each director nominee is set forth below, including information regarding the specific experiences, characteristics, attributes and skills considered in connection with the nomination of each director nominee, all of which the Board believes provide the Company with perspective and judgment needed to guide, monitor and execute its strategies.

 

 

 

 

 

The Board unanimously recommends that shareholders vote FOR the election of each director nominee.				✓

 

Proposal Two - Ratification of Independent Registered Public Accounting Firm

 

The Audit Committee of our Board of Directors (the “Audit Committee”) reviews our accounting firm’s qualifications, performance and independence in accordance with regulatory requirements and guidelines to determine whether to reappoint such firm as our independent registered public accounting firm. We refer to the fiscal years ending September 30, 2016, 2017 and 2018 as “fiscal 2016,” “fiscal 2017” and “fiscal 2018,” respectively. Based on its review, the Audit Committee has recommended to the Board, and the Board has approved, the appointment of Ernst & Young LLP to audit Valvoline’s Consolidated Financial Statements and Internal Control Over Financial Reporting for fiscal 2018. See the “Corporate Governance—Valvoline’s Board of Directors—Committees” section of this Proxy Statement for further information about the role and responsibilities of our Audit Committee.

The following table presents the aggregate fees (including out-of-pocket costs) for professional services rendered by the member firms of Ernst & Young LLP and their respective affiliates (collectively, “EY”) for fiscal 2017. All audit fees incurred by Valvoline during fiscal 2016 were included in the consolidated financial statements of our former parent, Ashland Global Holdings Inc. (“Ashland”), as reflected in the Form 10-K filed by Ashland for its fiscal year ended September 30, 2016. The fees paid to EY shown in the table below were all pre-approved in accordance with Audit Committee procedures discussed in the “Audit Committee Matters” section of this Proxy Statement.

 

		2017				2016
Audit Fees (1)		$	3,327,000			$	N/A
Audit-Related Fees (2)		$	17,000			$	N/A
Tax Fees (3)		$	113,000			$	N/A
All Other Fees (4)		$	0			$	N/A
Total		$	3,457,000			$	N/A

 

(1)

Audit fees include fees and expenses associated with the annual audit of Valvoline’s consolidated financial statements and internal controls over financial reporting and review of Valvoline’s interim consolidated financial statements. Audit fees also include fees associated with various audit requirements of Valvoline’s foreign subsidiaries (statutory audit requirements). Audit fees in fiscal 2017 also included fees related to comfort letters; consents; assistance with and review of documents filed with the SEC; and assistance with and review of documents issued in connection with our debt offering.

 

(2)	Audit-related fees included fees related to reviews of our franchise disclosure filings and access to EY’s on-line accounting research tool.

 

(3)	Tax fees include fees principally incurred for assistance with U.S. tax compliance.

 

(4)	There were no other fees.

Our shareholders are being asked to ratify the appointment of EY as Valvoline’s independent registered public accounting firm for fiscal 2018. The appointment of EY will be deemed ratified if the number of votes cast “for” ratification exceed the number of votes cast “against” it. Abstentions and broker non-votes will not be counted as votes cast “for” or “against” ratification. If our shareholders fail to ratify the appointment of EY, the Audit Committee may, but is not required to, reconsider the selection of such firm. Even if the appointment is ratified, the Audit Committee may, in its discretion, direct the appointment of a different accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and our shareholders.

The Company has been advised by EY that neither the firm, nor any covered person of the firm, has any financial interest, direct or indirect, in any capacity in Valvoline or its subsidiaries.

One or more representatives of EY will be present at the Annual Meeting to respond to questions from shareholders and will be given the opportunity to make a statement.

If no voting specification is made on a properly returned or voted proxy card, Samuel J. Mitchell, Jr. or Julie M. O’Daniel (as proxies named on the proxy card) will cast the votes represented by such proxy card FOR the ratification of EY as Valvoline’s independent registered public accounting firm for fiscal 2018.

 

The Board unanimously recommends that shareholders vote FOR the ratification of EY as Valvoline’s independent registered public accounting firm for fiscal 2018.
				✓

 

Proposal Three - Non-Binding Advisory Resolution Approving Executive Compensation

 

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, under Section 14A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we are seeking your vote, on a non-binding advisory basis, on the compensation of our named executive officers as described in the Compensation Discussion and Analysis, compensation tables and narrative disclosure, as provided in this Proxy Statement. Specifically, shareholders are being asked to vote upon, and the Board has approved and unanimously recommends, the following non-binding advisory resolution:

RESOLVED, that the compensation paid to Valvoline’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.

The Board believes that our executive compensation program is well-designed, appropriately aligns executive pay with company performance and incentivizes desirable executive performance. This proposal gives you an opportunity to express your own view of our 2017 executive compensation practices. While the vote does not address any specific item of compensation and is not binding on the Board, the Board and its Compensation Committee (the “Compensation Committee”) value the opinions of our shareholders and will consider the outcome of the vote when making future compensation decisions.

The advisory resolution approving our executive compensation shall be deemed approved if the number of votes cast “for” the resolution exceed the number of votes cast “against” the resolution. Abstentions and broker non-votes will not be counted as votes cast “for” or “against” the resolution.

If no voting specification is made on a properly returned or voted proxy card, Samuel J. Mitchell, Jr. or Julie M. O’Daniel (as proxies named on the proxy card) will cast the votes represented by such proxy card FOR the approval of the resolution.

 

The Board unanimously recommends that shareholders vote FOR the advisory resolution on our executive compensation.
				✓

 

Proposal Four - Approval of the Valvoline Inc. Employee Stock Purchase Plan

 

We are seeking your vote to approve the Valvoline Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved and adopted by our Board on November 14, 2017, subject to approval by the shareholders at the Annual Meeting, and will become effective upon receiving shareholder approval at the Annual Meeting.

The purpose of the ESPP is to provide eligible employees of the Company and certain of its subsidiaries an opportunity to use payroll deductions to purchase shares of our common stock and thereby acquire an ownership interest in the Company. The ESPP is intended to qualify as an “employee stock purchase plan” meeting the requirements of Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”).

The maximum aggregate number of shares of our common stock that may be purchased under the ESPP will be 2,000,000 shares, subject to adjustment as provided for in the ESPP. The share pool for the ESPP represents 1% of the total number of shares of our common stock outstanding as of December 4, 2017. In determining the number of shares to reserve for the ESPP, our Board of Directors considered the potential dilutive impact to shareholders, the projected participation rate over the ten-year term of the ESPP, equity plan guidelines established by certain proxy advisory firms and advice provided by Deloitte, the compensation consultant to the Compensation Committee.

Summary of Material Terms of the ESPP

A summary of the material terms of the ESPP is set forth below. The summary is qualified in its entirety by reference to the full text of the ESPP, which is filed with this Proxy Statement as Appendix A.

Authorized Shares

Subject to adjustment as provided in the ESPP, a total of 2,000,000 shares of our common stock will be made available for sale under the ESPP. In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company’s capitalization, or other distribution with respect to our shareholders other than normal cash dividends, an automatic adjustment will be made in a manner that complies with Section 423 of the Code in the number and kind of shares as to which outstanding options then unexercised will be exercisable, in the available shares reserved for sale under the ESPP, and in the purchase period limit, in order to maintain the proportionate interest of the participants before and after the event.

As of December 4, 2017, the closing price of our common stock on the NYSE was $24.43 per share.

Plan Administration

Our Compensation Committee will administer the ESPP, and will have full and exclusive authority to interpret the terms of the ESPP and determine eligibility to participate, subject to the conditions of the ESPP.

Eligibility

Generally, employees of the Company and any of its designated subsidiaries are eligible to participate in the ESPP, subject to the procedural enrollment and other requirements in the ESPP. However, our Compensation Committee may, in its discretion, determine on a uniform basis prior to the beginning of an offering period that employees will not be eligible to participate if they: (i) have not completed at least two years of service since their last hire date (or such lesser period of time as may be determined by our Compensation Committee in its discretion), (ii) customarily work not more than twenty hours per week (or such lesser period of time as may be determined by our Compensation Committee in its discretion), (iii) customarily work not more than five months per calendar year (or such lesser period of time as may be determined by our Compensation Committee in its discretion), or (iv) are highly compensated employees within the meaning of Section 414(q) of the Code.

No employee may be granted options to purchase shares of our common stock under the ESPP if such employee (i) immediately after the grant would own capital stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock, or (ii) holds rights to purchase shares of our common stock under all of our employee stock purchase plans (as defined in Section 423 of the Code) that accrue at a rate that exceeds $25,000 worth of shares of our common stock for each calendar year.

 

For purposes of the ESPP, designated subsidiaries include any subsidiary (within the meaning of Section 424(f) of the Code) of the Company that has been designated by our Compensation Committee as eligible to participate in the ESPP.

As of September 30, 2017, approximately 4,850 employees would be eligible to participate in the ESPP, including all of the Company’s executive officers.

Offering Periods

Pursuant to the terms of the ESPP, on the first trading day of an offering period, each eligible employee will be granted an option to purchase shares of our common stock on the last day of such offering period. Unless and until our Compensation Committee determines otherwise in its discretion, offering periods will be consecutive six month periods. If the ESPP is approved at the Annual Meeting, it is anticipated that the first offering period will commence during 2018.

Contributions

The ESPP permits each participant to purchase shares of our common stock through payroll deductions of up to 15% of his or her eligible compensation; provided, however, that a participant may not purchase more than 1,500 shares of our common stock during each offering period, subject to adjustment as provided in the ESPP. No interest will accrue on a participant’s contributions to the ESPP. A participant may decrease (but not increase) the rate of his or her contributions once per offering period. A participant’s payroll deduction authorization will remain in effect for subsequent offering periods unless the participant’s participation in the ESPP terminates or the participant withdraws from an offering period, as described below.

Purchases

Unless a participant terminates employment or withdraws from the ESPP or an offering period before the last trading day of an offering period, the participant’s option will automatically be exercised on the last trading day of each offering period. The number of shares of our common stock purchased will be determined by dividing the payroll contributions accumulated in the participant’s account by the applicable purchase price; provided, however, that a participant may not purchase more than 1,500 shares of our common stock during each offering period, subject to adjustment as provided in the ESPP. No fractional shares of our common stock will be purchased. Any contributions accumulated in a participant’s account which are not sufficient to purchase a full share of our common stock will be refunded to the participant, without interest.

Until otherwise determined by our Compensation Committee, the purchase price of the shares during each offering period will be 85% of the lower of (i) the fair market value per share of our common stock on the first trading day of each offering period or (ii) the fair market value per share of our common stock on the last trading day the offering period (which we refer to as the “purchase date”).

Withdrawals; Termination of Employment

A participant may end his or her participation at any time during an offering period and all, but not less than all, of his or her accrued contributions not yet used to purchase shares of our common stock will be returned to him or her, as soon as administratively practicable. If a participant withdraws from an offering period, he or she must re-enroll in the ESPP in order to re-commence participation in a subsequent offering period.

If a participant ceases to be an eligible employee for any reason, he or she will be deemed to have elected to withdraw from the ESPP and his or her contributions not yet used to purchase shares of our common stock will be returned to him or her, as soon as administratively practicable.

Stockholders Rights

No participant will have any voting, dividend, or other stockholder rights with respect to shares of common stock subject to any option granted under the ESPP until such shares have been purchased and delivered to the Participant.

 

Holding Period

Unless otherwise determined by our Compensation Committee, participants in the ESPP will be required to hold the shares of our common stock acquired under the ESPP for the one-year period after the purchase date. During such holding period, a participant may not sell or transfer shares of common stock acquired under the ESPP.

Non-Transferability

A participant may not assign, transfer, pledge or otherwise dispose of in any way (other than by will or the laws of descent and distribution) his or her rights with regard to options granted under the ESPP or contributions credited to his or her account.

Corporate Transactions

The ESPP provides that in the event of a reorganization, merger, or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation (or survives as a direct or indirect subsidiary of such other constituent corporation or its parent), or upon a sale of substantially all of the property or stock of the Company to another corporation, a successor corporation may assume or substitute each outstanding option. If the successor corporation refuses to assume or substitute for the outstanding option, the offering period then in progress will be shortened, and a new purchase date will be set. The Company will notify each participant that the purchase date has been changed and that the participant’s option will be exercised automatically on the new purchase date unless prior to such date the participant has withdrawn from the offering period.

Amendment; Termination

Our Compensation Committee, in its sole discretion, may amend, suspend, or terminate the ESPP at any time and for any reason. If the ESPP is terminated, our Compensation Committee, in its discretion, may elect to terminate the outstanding offering period either immediately or upon completion of the purchase of shares of our common stock on the next purchase date (which may be sooner than originally scheduled, if determined by our Compensation Committee in its discretion), or may elect to permit the offering period to expire in accordance with its terms. If the offering period is terminated prior to expiration, all amounts then credited to participants’ accounts that have not been used to purchase shares of our common stock will be returned to the participants as soon as administratively practicable.

Our Compensation Committee may change the offering periods, designate separate offerings, limit the frequency and/or number of changes in the amount withheld during an offering period, permit contributions in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company’s processing of properly completed contribution elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of our common stock for each participant properly correspond with contribution amounts, and establish such other limitations or procedures as our Compensation Committee determines in its sole discretion advisable that are consistent with the ESPP. Such modifications will not require shareholder approval or the consent of any ESPP participants.

In addition, if our Compensation Committee determines that the ongoing operation of the ESPP may result in unfavorable financial accounting consequences, our Compensation Committee may, in its discretion and, to the extent necessary or desirable, modify, amend or terminate the ESPP to reduce or eliminate such accounting consequence. Such modifications or amendments will not require shareholder approval or the consent of any ESPP participants.

The ESPP automatically terminates on January 31, 2028, unless terminated earlier by the Compensation Committee.

Sub-Plans

Consistent with the requirements of Section 423 of the Code, our Compensation Committee may amend the terms of the ESPP, or an offering, or provide for separate offerings under the ESPP to, among other things, reflect the impact of local law outside of the United States as applied to one or more eligible employees of a designated subsidiary and may, where appropriate, establish one or more sub-plans to reflect such amended provisions.

 

Certain Federal Income Tax Effects

The following summary briefly describes U.S. federal income tax consequences of options granted under the ESPP, but is not a detailed or complete description of all U.S. federal tax laws or regulations that may apply, and does not address any local, state or other country laws. Therefore, no one should rely on this summary for individual tax compliance, planning or decisions. Participants in the ESPP should consult their own professional tax advisors concerning tax aspects of options granted under the ESPP. The discussion below concerning tax deductions that may become available to the Company under U.S. federal tax law is not intended to imply that the Company will necessarily obtain a tax benefit from those deductions. Taxation of equity-based payments in other countries is complex, does not generally correspond to U.S. federal tax laws, and is not covered by the summary below.

The ESPP is intended to qualify as an “employee stock purchase plan” meeting the requirements of Section 423 of the Code. Under these provisions, a participant will not recognize taxable income until he or she sells or otherwise disposes of the shares purchased under the ESPP. If a participant disposes of the shares acquired under the ESPP more than two years from the option grant date (i.e., the first day of the offering period) and more than one year from the date the stock is purchased, then the participant must treat as ordinary income the amount by which the lesser of (i) the fair market value of the shares at the time of disposition, or (ii) the fair market value of the shares at the option grant date, exceeds the purchase price. Any gain in addition to this amount will be treated as a capital gain. If a participant holds shares at the time of his or her death, the holding period requirements are automatically deemed to have been satisfied and he or she will realize ordinary income in the amount by which the lesser of (i) the fair market value of the shares at the time of death, or (ii) the fair market value of the shares at the option grant date, exceeds the purchase price. The Company will not be allowed a deduction if the holding period requirements are satisfied.

If a participant disposes of shares before expiration of two years from the date of grant and one year from the date the stock is purchased, then the participant is deemed to have a disqualifying disposition and must treat as ordinary income the excess of the fair market value of the shares on the purchase date over the purchase price. Any additional gain or loss will be treated as long-term or short-term capital gain or loss, depending on the participant’s holding period with respect to such shares. The Company will be allowed a deduction equal to the amount of ordinary income recognized by the participant in a disqualifying disposition.

New Plan Benefits

As of the date of this Proxy Statement, no employee has been granted any options under the proposed ESPP. Accordingly, the benefits to be received pursuant to the ESPP by the Company’s executive officers and employees are not determinable at this time.

If no voting specification is made on a properly returned or voted proxy card, Samuel J. Mitchell, Jr. or Julie M. O’Daniel (as proxies named on the proxy card) will cast the votes represented by such proxy card FOR the approval of the Valvoline Inc. Employee Stock Purchase Plan.

 

The Board of Directors unanimously recommends that shareholders vote FOR the approval of the Valvoline Inc. Employee Stock Purchase Plan.
				✓

 

Corporate Governance

 

Valvoline’s Board of Directors

Composition

Our business and affairs are managed under the direction of our Board. Our Corporate Governance Guidelines require that two-thirds of our directors be independent, as defined in our Director Independence Standards (published on our investor relations website at http://investors.valvoline.com/governance) (“Independence Standards”), which incorporate the requirements of SEC rules and NYSE listing standards. Within this framework, the G&N Committee is charged with determining and refreshing, as appropriate, the composition of our Board. The G&N Committee seeks to fill our Board with exceptionally talented and diverse directors, with expertise and leadership experience in the markets in which we operate.

Our Board currently consists of the following eight members, all of whom were elected at the 2017 Annual Meeting of Shareholders: Richard J. Freeland, Stephen F. Kirk, Stephen E. Macadam, Vada O. Manager, Samuel J. Mitchell, Jr., Charles M. Sonsteby, Mary J. Twinem and William A. Wulfsohn. At the end of fiscal 2017, Mr. Wulfsohn resigned as Chairman of the Board and notified the Board that he would not stand for re-election upon the expiration of his term as a Director at the Annual Meeting. Each of the other seven directors on the Board has been nominated for re-election at the Annual Meeting. The Board expresses its gratitude to Mr. Wulfsohn for his dedicated service and counsel to the Company as it transitioned from a long-time business unit of Ashland to an independent, publicly traded company. The Board has resolved to reduce its size from eight to seven members effective as of the date of the Annual Meeting to eliminate the vacancy that would otherwise result from Mr. Wulfsohn’s decision not to stand for re-election. See the “Proposal One—Election of Directors” section of this Proxy Statement.

During fiscal 2017, nine meetings of the Board were held. Each director attended at least 75% of the total meetings of the Board and the Committee(s) on which he or she served. Overall attendance at Board and Committee meetings was 100%.

Leadership Structure

Our By-Laws provide the Board flexibility in determining the appropriate leadership structure for the Company. Currently, Mr. Mitchell serves as our Chief Executive Officer and Mr. Kirk serves as Chairman of the Board (Mr. Wulfsohn served in that role from the date of our IPO through fiscal 2017). With the Company’s recent IPO and separation from Ashland, the Board believes that separating the roles of Chairman and Chief Executive Officer is in the best interest of the Company because it allows Mr. Mitchell to guide our newly public company and focus on operating and managing the day-to-day activities of our business, while Mr. Kirk can focus on Board leadership independent of management.

The Board will periodically review and reassess our Board leadership structure and determine whether it is in the Company’s and our shareholders’ best interest to continue the separate roles of Chairman and Chief Executive Officer. In the event that the Board combines the role of Chairman and Chief Executive Officer, our Corporate Governance Guidelines require the Board to appoint a lead independent director.

Independence

Our Corporate Governance Guidelines require that two-thirds of our directors be independent, as defined in the Independence Standards. The Independence Standards incorporate the requirements of SEC rules and NYSE listing standards, and were adopted by our Board to assist in its determination of director independence. Pursuant to these rules, our Board must make an affirmative determination that those members of the Board who serve as independent directors have no material relationship with our company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). Members of the Audit and Compensation Committees are also subject to heightened standards for independence under SEC rules and NYSE listing standards.

Our Board annually reviews director independence in accordance with these requirements. In making its independence determinations, the Board considered relationships and transactions between each director, on the one hand, and Valvoline, its subsidiaries and its affiliates, on the other hand, including the director’s commercial, economic, charitable and familial relationships. As a result of this review, the Board affirmatively determined that

 

Messrs. Freeland, Kirk, Macadam, Manager and Sonsteby and Ms. Twinem are each independent of Valvoline and its affiliates. Mr. Mitchell was determined not to be independent because he currently serves as Chief Executive Officer of the Company, and Mr. Wulfsohn was determined not to be independent because he serves as Chief Executive Officer of Ashland, Valvoline’s controlling shareholder through May 12, 2017.

In determining the independence of Mr. Freeland, our Board considered transactions entered into in the ordinary course of business with Cummins Inc., a company in which Mr. Freeland serves as an executive officer. In Cummins’ last fiscal year, Valvoline paid $1.64 million to Cummins and Valvoline received $36.59 million from Cummins, representing 0.01% and 0.2%, respectively, of Cummins’ consolidated gross revenues of $17.5 billion for such fiscal year. Similarly, the amount the Company paid to Cummins and the amount received by the Company from Cummins in each of the two preceding fiscal years did not exceed the greater of $1 million or 2% of Cummins’ consolidated gross revenues in such fiscal years. All transactions with Cummins were made at arms-length, included standard commercial terms, and Mr. Freeland did not personally benefit from any of such transactions. The Board concluded that Mr. Freeland was independent, because the transactions were not material to Cummins such that Mr. Freeland could be unduly influenced by, and thus not independent of, Valvoline management. The G&N Committee determined that the transactions with Cummins were not “Related Person Transactions” as defined in the Company’s Related Person Transaction Policy.

In addition, the Board determined that Messrs. Manager and Sonsteby and Ms. Twinem each satisfy the heightened independence standards applicable to audit committee members, including those under Exchange Act Rule 10A-3. Similarly, the Board determined that Messrs. Freeland, Kirk, Macadam, Manager and Sonsteby and Ms. Twinem each satisfy the heightened independence standards applicable to compensation committee members as set forth in NYSE listing standards.

Committees

Our Board of Directors has established three standing committees: an Audit Committee, a Compensation Committee and a G&N Committee (each a “Committee” and, collectively, the “Committees”) to assist in the performance of the Board’s various functions. All committee members are appointed by our Board upon recommendation of the G&N Committee.

Listed below are the members of each of the three standing committees. As discussed above in “—Independence,” our Board has determined that all of the members of these Committees are independent as defined by our Independence Standards, including, in the case of Audit and Compensation Committee members, the heightened standards for independence under SEC rules and NYSE listing standards.

 

Audit Committee
Vada O. Manager		Charles M. Sonsteby*		Mary Twinem
Compensation Committee(1)
Richard J. Freeland		Stephen F. Kirk		Stephen E. Macadam
Vada O. Manager		Charles M. Sonsteby		Mary J. Twinem*
Governance and Nominating Committee
Richard J. Freeland		Stephen F. Kirk		Stephen E. Macadam
Vada O. Manager*		Charles M. Sonsteby		Mary J. Twinem

 

*

Chair

(1)	On November 14, 2017, Ms. Twinem became Chair of the Compensation Committee. Prior to such time, Mr. Kirk served as Chair of the Compensation Committee.

The responsibilities of each of our Committees are described below. Each of the Committees operates under a written charter; must meet at least four times a year, plus additional meetings as circumstances require; has authority to retain independent legal, accounting or other advisors; makes regular reports to the Board; and reviews its own performance annually. The charter of each Committee is available on our investor relations website at http://investors.valvoline.com/governance.

 

Audit Committee		Number of Meetings in Fiscal 2017: 11

The Board has established the Audit Committee in accordance with Section 3(a)(58) of the Exchange Act. The Audit Committee is currently composed of three members and the Board has determined that each member of the Audit Committee is “independent” and “financially literate,” as such terms are defined by NYSE listing standards. In addition, the Board has determined that each member of the Audit Committee is an “audit committee financial expert” as that term is defined by SEC rules. A director may not serve on the Audit Committee if he or she serves on the audit committee of more than two other public companies, unless the Board determines that such simultaneous service and time commitment would not impair the director’s ability to effectively serve on the Audit Committee.

The Audit Committee is responsible for, among other things, assisting the Board in fulfilling its oversight responsibilities with respect to:

 

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overseeing the integrity of our financial reporting process, including earnings releases and the filing of financial reports;

 

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reviewing the quality and adequacy of accounting and financial controls;

 

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selecting and evaluating the performance of our internal auditors, who report directly to the Audit Committee;

 

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approving fees and services of our independent registered public accounting firm;

 

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overseeing our internal audit function, including the head of internal audit;

 

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reviewing the effectiveness of our legal and regulatory compliance programs;

 

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reviewing our enterprise risk assessment and management policies, including the Company’s major enterprise and financial risk exposures and steps taken by management to monitor and mitigate such risks;

 

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evaluating significant financial matters and decisions, such as capital structure, dividend policy, offerings of corporate securities, major borrowings, credit facilities, derivatives and swaps policies (including entry into swaps in reliance on

 

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the end-user exception), post audits of capital investments, capital projects, commercial commitments and merger, acquisition and divestiture activities;

 

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overseeing funding and investment policy related to employee benefit plans.

 

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reviewing and investigating any matters pertaining to the integrity of executive management, and overseeing compliance by management with laws, regulations and our Global Standards of Business Conduct;

 

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reviewing the Company’s policies, programs and practices with respect to environmental, health and safety risks;

 

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reviewing the Company’s cyber security risks and programs established to manage such risks; and

 

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establishing and maintaining procedures for handling complaints regarding accounting, internal auditing controls and auditing matters, including procedures for confidential, anonymous submission of such complaints.

 

Compensation Committee		Number of Meetings in Fiscal 2017: 6

The Compensation Committee is currently composed of six members and the Board has determined that each member of the Compensation Committee is “independent” as such term is defined by NYSE listing standards and SEC rules and qualifies as a “non-employee director” pursuant to Rule 16b-3 under the Exchange Act and as an “outside director” pursuant to Section 162(m) of the Code.

The Compensation Committee is responsible for, among other things:

 

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overseeing the implementation and administration of the Company’s compensation plans;

 

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adopting, amending, terminating and otherwise designing employee benefits plans;

 

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ensuring that Valvoline’s executive compensation programs are appropriately competitive, support organizational objectives and shareholder interests and emphasize pay for performance linkage;

 

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reviewing, evaluating and approving compensation of all key senior executives, including the corporate goals and objectives with respect to CEO compensation;

 

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reviewing compensation policies and practices for all employees, and assessing risks associated with such policies and practices;

 

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approving any employment agreements, consulting arrangements, severance or retirement arrangements, change-in-control agreements and/or special or supplemental benefits covering any current or former executive officer;

 

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overseeing the execution of CEO and senior management development and succession plans;

 

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reviewing and approving any perquisites provided to executive officers;

 

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reviewing and recommending to the Board of Directors’ the form and amount of director compensation; overseeing regulatory compliance on compensation matters, including the Company’s policies on structuring compensation programs to preserve tax deductibility;

 

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overseeing the preparation of the annual report on executive compensation;

 

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overseeing compliance with NYSE requirements relating to shareholder approval of equity compensation plans; and

 

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determining the independence and compensation of, and overseeing the work completed by, any compensation consultant, independent legal counsel or other advisor that it retains.

 

Governance and Nominating Committee		Number of Meetings in Fiscal 2017: 5

The G&N Committee is currently composed of six members and the Board has determined that each member is “independent” as such term is defined by NYSE listing standards. The G&N Committee is responsible for, among other things:

 

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identifying qualified nominees (i) for shareholder election and (ii) for election by the Board to fill any vacancies that occur between annual meetings of shareholders, in each case, consistent with criteria approved by the Board relating to personal and professional integrity, ability, judgment, expertise, experience and diversity;

 

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reviewing potential director candidates and nominations for re-election and reporting the results of such reviews to the Board;

 

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identifying board members qualified to fill any vacancies on a committee of the Board;

 

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reviewing appropriateness of directors’ continued service on the Board or the committees of the Board;

 

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reviewing transactions pursuant to the Company’s Related Person Transaction Policy set forth in the Company’s Corporate Governance Guidelines;

 

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recommending stock ownership guidelines for employees and non-employee directors and programs and procedures relating to director evaluation, retention and retirement;

 

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defining and reviewing the responsibilities of the Board with respect to the Company’s corporate governance, including review of proposed amendments to the Company’s articles or by-laws and the conduct of the meetings of the Board, the committees of the Board and the Company’s shareholders;

 

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reviewing and recommending policies and procedures to ensure the Board and its committees are properly constituted and organized;

 

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reviewing all Board committee charters;

 

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reviewing and, if necessary, making recommendations as to shareholder proposals; and

 

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reviewing the succession process for senior management.

 

Compensation Committee Interlocks and Insider Participation

None of the members of the Compensation Committee (Ms. Twinem and Messrs. Freeland, Kirk, Macadam, Manager and Sonsteby) (i) was an officer or employee of Valvoline at any time during or prior to fiscal 2017 or (ii) is or was a participant in a “related person” transaction with Valvoline since the beginning of fiscal 2017. No executive officer of the Company served on the compensation committee or board of any company that employed any member of Valvoline’s Compensation Committee or Board of Directors.

The Board’s Operations

Chairman of the Board.     During fiscal 2017, Mr. Wulfsohn served as our Non-Executive Chairman of the Board. In connection with Mr. Wulfsohn’s resignation as Chairman, Mr. Kirk was unanimously appointed by the Board to serve as our Non-Executive Chairman, effective October 1, 2017. The Chairman of the Board organizes Board activities to effectively provide guidance to, and oversight and accountability of, management. To fulfill that role, the Chairman of the Board, among other things, creates and maintains an effective working relationship with the Chief Executive Officer and the other members of senior management and the Board, assures that the Board agenda is appropriately directed to the matters of greatest importance to the Company and provides senior management with the Board’s advice, direction and opinions. The Non-Executive Chairman preserves the distinction between management and oversight, maintaining the responsibility of management to develop corporate strategy and the responsibility of the Board to review and express its views on corporate strategy.

Board and Committee Meetings.    The Board and Committees must hold regularly scheduled meetings. Directors are expected to attend all meetings of the Board and of the Committees on which they serve. Non-management directors meet in executive session at each regularly scheduled meeting of the Board, and at other times as they may determine appropriate.

Evaluation of Board Effectiveness.    The Board must conduct annual self-evaluations to determine whether it and its Committees are functioning effectively. The G&N Committee receives comments from all directors and reports to the Board with an annual assessment of the Board’s performance, with a focus on the Board’s contribution to the Company and areas in which the Board or its Committees can improve. We may also engage independent, third-party governance experts from time to time to conduct interviews and/or assessments regarding the structure and effectiveness of our Board and its committees. The Committees of our Board of Directors have all adopted charters defining their respective purposes and responsibilities. Pursuant to these charters, the Committees must review their respective performances at least annually and each of the Committees has authority to engage independent legal, accounting or other advisors.

The Board’s Role in Risk Oversight

The Board has an active role, as a whole, and also at the committee level, in overseeing management of the Company’s risk. The Board approves and monitors the fundamental financial and business strategies of the Company and maintains policies and procedures designed to ensure that the assets of the Company are properly safeguarded and enterprise risks are properly managed, that appropriate financial and other controls are maintained, that processes are in place for maintaining the integrity of the Company and that the Company’s business is conducted in compliance with applicable laws and regulations. Management is responsible for the day-to-day management of risk, and members of our senior management regularly report to the Board and its Committees on current and emerging risks and the Company’s approach to avoiding and mitigating risk exposure. The Board reviews in detail the Company’s most significant risks and whether management is responding consistently within the Company’s overall risk management and mitigation strategy. While the Board is ultimately responsible for overall risk oversight at our Company, the Committees assist the Board in fulfilling its oversight responsibilities in certain areas. In particular, the Audit Committee has primary responsibility for monitoring the Company’s major financial risk exposures and the steps the Company has taken to control such exposures, including the Company’s risk management policies and processes. The Audit Committee also assists the Board in fulfilling its oversight responsibility with respect to environmental, health and safety risks and programs. The Compensation Committee monitors the risks associated with our compensation policies and procedures. The G&N Committee is charged with reviewing and recommending governance policies and procedures, including Board and Committee structure,

 

leadership and membership, that ensure independence of the Board as it exercises its corporate governance and risk oversight roles. The G&N Committee also reviews transactions pursuant to our Related Person Transaction Policy (which is further described in “—Other Governance Policies and Practices—Related Person Transaction Policy”).

Other Governance Policies and Practices

Overview of Governance Principles

We are committed to adhering to sound corporate governance practices. We have adopted Corporate Governance Guidelines, which include our Related Person Transaction Policy. These Guidelines provide the framework for our Board of Directors’ governance of the Company and include a general description of our Board’s purpose, responsibilities and member qualification standards. As further discussed in “—Valvoline’s Board of Directors—Independence,” our Corporate Governance Guidelines require that at least two-thirds of our directors be independent. Our Related Person Transaction Policy requires our directors and executive officers to identify annually and on an as needed basis potential transactions with related persons or their firms that meet certain criteria set forth in our Related Person Transaction Policy.

We also require compliance with our code of business conduct, entitled “Global Standards of Business Conduct,” which applies to all of our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions, as well as employees of Valvoline Instant Oil Change (“VIOC”) stores. Our Global Standards of Business Conduct promote honest and ethical conduct, compliance with applicable laws, rules and regulations, prompt reporting of violations of the standards set forth therein and full, fair, accurate, timely and understandable disclosure in reports filed with the SEC.

Our Corporate Governance Guidelines (including our Related Person Transaction Policy), Global Standards of Business Conduct and Committee charters are published on our investor relations website at http://investors.valvoline.com/governance. These documents are also available in print at no cost to any shareholder who requests them. We intend to post any amendments or waivers to our Global Standards of Business Conduct (to the extent applicable to our directors and executive officers) on our investor relations website or in a Current Report on Form 8-K.

Related Person Transaction Policy

Federal securities laws require us to describe any transaction since the beginning of the last fiscal year, or any currently proposed transaction, in which the Company was or is to be a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest. Related persons are directors and executive officers, nominees for director and any immediate family members of directors, executive officers or nominees for director. We are also required to describe our policies and procedures for the review, approval or ratification of any Related Person Transaction.

Pursuant to our written Related Person Transaction Policy (the “Policy”), the G&N Committee is responsible for reviewing the material facts of all transactions that could potentially be “transactions with related persons.” The Policy covers any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness) in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any fiscal year, (2) the Company is a participant, and (3) any related person has or will have a direct or indirect interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). Transactions between the Company and any firm, corporation or entity in which a related person is an executive officer or general partner, or in which any related persons collectively hold more than 10% of the ownership interests, are also subject to review under the Policy.

Under the Policy, our directors and executive officers are required to identify annually potential transactions with related persons or their firms that meet the criteria set forth in the Policy, and management is required to forward all such disclosures to the G&N Committee. The G&N Committee reviews each disclosed transaction. The G&N Committee has discretion to approve, disapprove or otherwise act if a transaction is deemed to be a Related Person Transaction subject to the Policy. Only disinterested members of the G&N Committee may participate in the determinations made with regard to a particular transaction. If it is impractical to convene a meeting of the G&N

 

Committee, the Chair of the G&N Committee is authorized to make a determination and promptly report such determination in writing to the other G&N Committee members. All determinations made under the Policy are required to be reported to the full Board of Directors.

Under the Policy and consistent with SEC regulations, certain transactions are not Related Person Transactions, even if such transactions exceed $120,000 in a fiscal year. Those exceptions are:

 

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Compensation to a director or executive officer which is or will be disclosed in our Proxy Statement;

 

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Compensation to an executive officer which is approved by the Compensation Committee and would have been disclosed in our Proxy Statement if the executive officer was a “named executive officer”;

 

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A transaction in which the rates or charges involved are determined by competitive bids, or which involves common, contract carrier or public utility services at rates or charges fixed in conformity with law or governmental authority;

 

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A transaction that involves services as a bank depository of funds, transfer agent, registrar, indenture trustee or similar services; and

 

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A transaction in which the related person’s interest arises solely from the ownership of Valvoline stock and all shareholders receive the same benefit on a pro rata basis.

Other than the transactions with Ashland described in the “Certain Relationships and Related Person Transactions” section, below, the G&N Committee determined that there were no other Related Person Transactions that were required to be reported under Item 404(a) of Regulation S-K, nor are there any currently proposed.

Section 16(a) Beneficial Ownership Reporting Compliance

Pursuant to Section 16 of the Exchange Act, the Company’s directors and certain executive officers are required to report, within specified due dates, their initial ownership of the Company’s Common Stock and all subsequent acquisitions, dispositions or other transfers of interest in such securities, if and to the extent reportable events occur which require reporting by such due dates. The Company is required to identify in its Proxy Statement whether it has knowledge that any person required to file such a report may have failed to do so in a timely manner. Based on that review, all of the Company’s directors and all executive officers subject to the reporting requirements satisfied such requirements in full, except for the filings on either Form 3, Form 4 or Form 5 which were filed late by the Company on behalf of the following directors: for Richard J. Freeland, one Form 4; for Stephen F. Kirk, one Form 4; for Stephen E. Macadam, one Form 4; for Vada O. Manager, three Forms 4; for Charles M. Sonsteby, three Forms 4; and Mary J. Twinem one Form 4. These transactions that were reported late pertain to the deferral of Board fees and retainers invested in the Valvoline Common Stock Fund available within the Company’s 2016 Deferred Compensation Plan for Non-Employee Directors or the payment of dividend equivalents on holdings under the aforementioned stock fund.

Communication with Directors

As set forth in our Corporate Governance Guidelines, the Board believes that management is responsible for communicating on behalf of the Company. However, at the request of management, individual Board members may meet or otherwise communicate with shareholders and other interested parties. Persons interested in communicating with the Board, or with a specific member or Committee of the Board, may do so by writing to the General Counsel of Valvoline, 100 Valvoline Way, P.O. Box 55270, Lexington, KY 40555-1000. Communications directed to our General Counsel will be reviewed and distributed to individual directors, as appropriate, depending on the subject matter and facts and circumstances outlined in the correspondence. Communications that are not related to the duties and responsibilities of the Board, or are otherwise inappropriate, will not be forwarded to the directors, although all communications directed to the Board will be available to any director upon request.

Attendance at Annual Meeting

Although Valvoline does not have a formal policy regarding attendance by directors at Valvoline’s annual meetings of shareholders, Valvoline strongly encourages all directors to attend. All of Valvoline’s then current directors were present at the prior year’s annual meeting of shareholders.

 

Shareholder Recommendations for and Nominations of Directors

Pursuant to our Corporate Governance Guidelines and the G&N Committee’s charter, the G&N Committee is responsible for reviewing all director nominees and making recommendations to the full Board. Shareholders who wish to do so may recommend candidates for consideration by the G&N Committee. Shareholders also have the right under our By-laws to directly nominate candidates to stand for election at annual meetings of shareholders, without any action or recommendation on the part of the G&N Committee or our Board. Shareholders who wish to recommend candidates for consideration by the G&N Committee or to directly nominate candidates for election may do so pursuant to the applicable procedures summarized below.

Shareholder Recommendations for Directors.    The G&N Committee considers director candidates recommended by other directors, employees and shareholders, and is authorized, at its discretion, to engage a professional search firm to identify and suggest director candidates. Written suggestions for director candidates should be sent via registered, certified or express mail to the Corporate Secretary of Valvoline at 100 Valvoline Way, P.O. Box 55270, Lexington, KY 40555-1000. Recommendations should be received no later than September 1, 2018, to be considered by the G&N Committee in connection with its review of candidates for election at our 2019 Annual Meeting of Shareholders. Suggestions for director candidates should include the information described in Section 3.03 of our Amended and Restated By-laws (“By-laws”), and any other relevant information, as to the proposed candidate. The G&N Committee will review all director candidates in accordance with its charter and Valvoline’s Corporate Governance Guidelines, and it will identify qualified individuals consistent with criteria approved by the Board of Directors. As further described in its charter, the G&N Committee seeks candidates of the highest personal and professional integrity who exhibit the following personal and professional qualifications: (1) significant experience in the lubricants, automobile or consumer marketing industries, (2) experience in product or process innovation, (3) international business expertise, (4) diverse experience in policy-making in business, government, education and/or technology, or in areas that are relevant to the Company’s global business and strategy, (5) an inquisitive and objective nature, practical wisdom and mature judgment and (6) the ability to work with the Company’s existing directors and management. Individuals recommended by shareholders in accordance with these procedures will be evaluated by the G&N Committee in the same manner as individuals who are recommended through other means.

Shareholder Nominations of Directors.    Our By-laws permit eligible shareholders to directly nominate candidates for election at annual meetings of shareholders. Our By-laws require that the Company be given advance written notice of shareholder nominations for election to the Board of Directors. Such notice must contain the information required by our By-laws with respect to the nominee and the shareholder and must be timely. To be timely for purposes of an annual meeting, such notice must be received at least 90 but not more than 120 days before the first anniversary of the prior year’s annual meeting; provided, however, if the annual meeting is to be held more than 30 days earlier or more than 60 days later than such anniversary date, notice must be received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of (i) the 90th day prior to such annual meeting and (ii) the 10th day following the day on which public announcement of such meeting is first made. Based on the January 31, 2018, date for our upcoming Annual Meeting, shareholder nominations must be received no earlier than October 3, 2018, and no later than November 2, 2018, to be considered timely for our 2019 annual meeting of shareholders, assuming such meeting will be held no more than 30 days before and no more than 60 days after January 31, 2019. The chairman of an annual meeting of shareholders may refuse to acknowledge the nomination of any person not made in compliance with our By-laws. Shareholders should send all director nominations for the 2019 Annual Meeting of Shareholders via registered, certified or express mail to the Corporate Secretary of Valvoline at 100 Valvoline Way, P.O. Box 55270, Lexington, KY 40555-1000.

A copy of our By-laws has been filed with the SEC and is available on the SEC’s website, http://www.sec.gov, or may be obtained by written request to: Valvoline’s Corporate Secretary, 100 Valvoline Way, Lexington, KY 40509.

Certain Relationships and Related Person Transactions

Relationship with Ashland

On September 22, 2015, Ashland announced that its board of directors approved proceeding with a plan to split Ashland into two independent, publicly traded companies comprised of its Valvoline business and its specialty

 

chemical business. Valvoline was incorporated in May 2016 as a subsidiary of Ashland in connection with the Separation. Following a series of restructuring steps, prior to the initial public offering of Valvoline (the “IPO”), Ashland contributed its Valvoline business to Valvoline including substantially all of the historical Valvoline business previously reported by Ashland as well as certain other assets and liabilities. On September 28, 2016, Valvoline completed the IPO at which time Valvoline issued and sold 34,500,000 shares of its common stock to the public and Ashland continued to hold 170,000,000 shares or approximately 83% of the outstanding shares of common stock of Valvoline. On May 12, 2017, Ashland distributed all of its remaining interest in Valvoline to Ashland stockholders (the “Stock Distribution”), marking the completion of Valvoline’s Separation from Ashland. Effective upon the Stock Distribution, Ashland no longer owns any shares of Valvoline common stock.

Immediately prior to the completion of the IPO, we and Ashland entered several agreements relating to the IPO and our relationship with Ashland after the IPO. These agreements, the material terms of which are summarized below, include a separation agreement, a transition services agreement, a reverse transition services agreement, a tax matters agreement, a registration rights agreement and an employee matters agreement. These agreements were prepared while we were still a wholly owned subsidiary of Ashland. Accordingly, during the period in which the terms of those agreements were prepared, we did not have an independent board of directors or a management team that was independent of Ashland. As a result, the terms of the agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. Copies of these agreements have been incorporated by reference as exhibits to our Annual Report on Form 10-K for fiscal 2016, which was filed with the SEC on December 19, 2016. The following descriptions are qualified in their entirety by reference to the full text of such agreements.

Separation Agreement

On September 22, 2016, Valvoline entered into a separation agreement with Ashland to facilitate the separation of Valvoline and Ashland into two separate companies (the “Separation”). The separation agreement sets forth the agreements between Valvoline and Ashland regarding the principal actions to be taken in connection with the Separation. It also sets forth other agreements that govern aspects of the relationship between Valvoline and Ashland following the Separation.

Transfer of Assets and Assumption of Liabilities.    The separation agreement identifies certain transfers of assets and assumptions of liabilities that were necessary in advance of the Separation so that Valvoline and Ashland retain the assets of, and the liabilities associated with, their respective businesses. However, certain liabilities that are not associated with Ashland’s and Valvoline’s respective businesses have been allocated regardless of which business they are associated with (if any). For example, Valvoline has assumed responsibility for certain Ashland qualified and nonqualified pension and retirement plans as well as a portion of the trusts or other funding vehicles that have been established to fund such plans. Ashland has retained, or assumed from Valvoline, substantially all liabilities arising from or relating to the exposure of any person to asbestos from the manufacture, production, sale, distribution, conveyance or placement in the stream of commerce on or prior to the date of the Separation of any product or other item, as well as from repair, use, abatement or disposal on or prior to the date of the Separation of any building material or equipment containing asbestos, regardless of whether related to Ashland’s business or Valvoline’s business. In addition, Ashland has retained, or assumed from Valvoline, all environmental liabilities, known or unknown, arising from or relating to Ashland’s business or any other historical business of Ashland, other than Valvoline’s business, arising or relating to events, conduct or conditions occurring prior to, or after, the date of the Separation.

The separation agreement also provides for the settlement or extinguishment of certain liabilities and other obligations between Valvoline and Ashland.

Intercompany Arrangements.    All agreements, arrangements, commitments and understandings, including most intercompany accounts payable or accounts receivable, between Valvoline, on the one hand, and Ashland, on the other hand, have terminated effective as of the Separation, except specified agreements and arrangements that are intended to survive the Separation.

Shared Liabilities.    The tax matters agreement, employee matters agreement and shared environmental liabilities agreement describe certain liabilities that will be shared between Valvoline and Ashland following the Separation.

 

These agreements respectively specify the portion of the economic costs of such liabilities between Valvoline and Ashland and establish a process for managing, defending and resolving, as well as sharing the costs related to, such liabilities between Valvoline and Ashland.

Representations and Warranties.    In general, neither Valvoline nor Ashland have made any representations or warranties regarding any assets or liabilities transferred or assumed, any consents or approvals that may be required in connection with these transfers or assumptions, the value or freedom from any lien or other security interest of any assets transferred, the absence of any defenses relating to any claim of either party or the legal sufficiency of any conveyance documents. Except as expressly set forth in the separation agreement, all assets have been transferred on an “as is,” “where is” basis.

Further Assurances.    Valvoline and Ashland have agreed to use reasonable best efforts to affect any transfers contemplated by the separation agreement that have not been consummated prior to the Separation as promptly as practicable. In addition, Valvoline and Ashland have agreed to use reasonable best efforts to affect any transfer or re-transfer of any asset or liability that was improperly transferred or retained as promptly as practicable following the Separation.

Exchange of Information.    Valvoline and Ashland have agreed to provide each other with information reasonably necessary to comply with reporting, disclosure, filing or other requirements of any national securities exchange or governmental authority, for use in judicial, regulatory, administrative and other proceedings and to satisfy audit, accounting, regulatory, litigation and other similar requests. Valvoline and Ashland also have agreed to use reasonable best efforts to retain such information in accordance with Ashland’s record retention policies as in effect on the date of the separation agreement. Each party also has agreed to use its reasonable best efforts to assist the other with its financial reporting and audit obligation for an agreed period of time.

Release of Claims.    Valvoline and Ashland each have agreed to release the other and its affiliates, successors and assigns, and all persons that prior to the Separation have been the other’s shareholders, directors, officers, agents and employees, and their respective heirs, executors, administrators, successors and assigns, from any claims against any of them that arise out of or relate to events, circumstances or actions occurring or failing to occur or any conditions existing at or prior to the time of the Separation. These releases are subject to exceptions set forth in the separation agreement.

Indemnification.    Valvoline and Ashland each have agreed to indemnify the other and each of the other’s current and former directors, officers and employees, and each of the heirs, executors, successors and assigns of any of them, against certain liabilities incurred in connection with the Separation and Valvoline’s and Ashland’s respective businesses. The amount of either Valvoline’s or Ashland’s indemnification obligations will be reduced by any insurance proceeds the party being indemnified receives. The separation agreement also specifies procedures regarding claims subject to indemnification.

Transition Services Agreement

In order to help ensure an orderly transition, on September 22, 2016, Valvoline entered into a transition services agreement pursuant to which Ashland provides Valvoline with various corporate support services, including certain accounting, human resources, information technology, office and building, risk, security, tax and treasury services. Ashland may also provide Valvoline with additional services that Valvoline and Ashland may identify from time to time in the future. In general, the services began following the completion of the IPO and cover a period not expected to exceed 24 months.

Ashland agreed to perform the services with the same standard of quality and care as it uses in servicing its own business, and in any event with at least the same level of quality and care as such services were provided to the Valvoline business during the preceding year. Valvoline and Ashland agreed to cooperate in connection with the performance of the services, provided that such cooperation does not unreasonably disrupt Valvoline’s or Ashland’s operations, and Ashland agreed to use commercially reasonable efforts, at Valvoline’s expense, to obtain any third-party consents required for the performance of the services.

 

The services are being provided by Ashland without representation or warranty of any kind. Ashland has no liability with respect to its furnishing of the services except to the extent occasioned by its bad faith, willful misconduct, fraud, gross negligence or willful breach of the agreement.

Under the transition services agreement, Valvoline and Ashland are each obligated to maintain the confidentiality of the other’s confidential information for five years following the termination of the transition services agreement, subject to certain exceptions. Valvoline and Ashland retain all rights, title and interest in and to their respective intellectual property used in the provision of services under the agreement.

The transition services agreement specifies the costs to Valvoline for the services. These costs are consistent with expenses that Ashland has historically allocated or incurred with respect to such services, plus a mark-up of five percent.

Reverse Transition Services Agreement

In order to help ensure an orderly transition, on September 22, 2016, Valvoline entered into a reverse transition services agreement pursuant to which Valvoline provides Ashland with various corporate support services, including certain human resources, information technology, office and building, security and tax services, as well as certain regulatory compliance services required during the period in which Valvoline remains a majority-owned subsidiary of Ashland. Valvoline may also provide Ashland with additional services that Valvoline and Ashland may identify from time to time in the future. In general, the services began following the completion of the IPO and cover a period not expected to exceed 24 months.

Valvoline agreed to perform the services with the same standard of quality and care as it uses in servicing its own business, and in any event with at least the same level of quality and care as such services were provided to Ashland’s specialty ingredients and performance materials businesses (collectively, the “Chemicals business”) during the preceding year. Valvoline and Ashland agreed to cooperate in connection with the performance of the services, provided that such cooperation does not unreasonably disrupt Valvoline’s or Ashland’s operations, and Valvoline agreed to use commercially reasonable efforts, at Ashland’s expense, to obtain any third-party consents required for the performance of the services.

The services are being provided by Valvoline without representation or warranty of any kind. Valvoline has no liability with respect to its furnishing of the services except to the extent occasioned by Valvoline’s bad faith, willful misconduct, fraud, gross negligence or willful breach of the agreement.

Under the reverse transition services agreement, Valvoline and Ashland are each obligated to maintain the confidentiality of the other’s confidential information for five years following the termination of the reverse transition services agreement, subject to certain exceptions. Valvoline and Ashland retain all rights, title and interest in and to their respective intellectual property used in the provision of services under the agreement.

The reverse transition services agreement specifies the costs to Ashland for the services. These costs are consistent with expenses that Ashland has historically allocated or incurred with respect to such services, plus a mark-up of five percent.

Tax Matters Agreement

On September 22, 2016 Valvoline entered into a tax matters agreement with Ashland that governs the rights, responsibilities and obligations of Valvoline and Ashland with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests) (the “Tax Matters Agreement”).

Valvoline was included in the U.S. federal consolidated group tax return, and possibly certain combined or similar group tax returns, with Ashland (the “Ashland Group Returns”) for the period starting approximately on the date of the closing of the IPO and through the date of the Stock Distribution. This period is referred to as the “Interim Period.” Under the Tax Matters Agreement, Ashland will generally make all necessary tax payments to the relevant tax authorities with respect to the Ashland Group Returns, and Valvoline will make tax sharing payments to Ashland. The amount of Valvoline’s tax sharing payments will generally be determined as if Valvoline and each of its relevant subsidiaries included in the Ashland Group Returns filed its own consolidated, combined or separate tax returns for the Interim Period that include only Valvoline and/or its relevant subsidiaries, as the case may be.

 

For taxable periods that begin on or after May 13, 2017, the day after the Stock Distribution, Valvoline is no longer included in any Ashland Group Returns and files tax returns that include only Valvoline and/or its subsidiaries, as appropriate. Valvoline is not be required to make tax sharing payments to Ashland for those taxable periods. Nevertheless, Valvoline has joint and several liability with Ashland to the Internal Revenue Service for the consolidated U.S. federal income taxes of the Ashland consolidated group for the taxable periods in which Valvoline was part of the Ashland consolidated group.

The Tax Matters Agreement also generally provides that Valvoline will indemnify Ashland for the following taxes:

 

•

Taxes of Valvoline for all taxable periods that begin on or after May 13, 2017, the day after the Stock Distribution;

 

•

Taxes of Valvoline for the Interim Period that are not attributable to Ashland Group Returns;

 

•

Taxes for any tax period prior to the completion of the IPO (the “Pre-IPO Period”) that arise on audit or examination and are directly attributable to the Valvoline business;

 

•

Certain U.S. federal, state or local taxes for the Pre-IPO Period of Ashland and/or its subsidiaries for that period that arise on audit or examination and are directly attributable to neither the Valvoline business nor the Chemicals business; and

 

•

Transaction Taxes (as described below) that are allocated to Valvoline under the Tax Matters Agreement.

The Tax Matters Agreement also provides that Valvoline will indemnify Ashland for any taxes (and reasonable expenses) resulting from the failure of the Stock Distribution to qualify for non-recognition of gain and loss or certain reorganization transactions related to the Separation or the Stock Distribution to qualify for their intended tax treatment (“Transaction Taxes”), where the taxes result from (1) breaches of covenants that Valvoline has agreed to in connection with these transactions (including covenants containing the restrictions described below that are designed to preserve the tax-free nature of the stock distribution), (2) the application of certain provisions of U.S. federal income tax law to the stock distribution with respect to acquisitions of Common Stock or (3) any other actions that Valvoline knows or reasonably should expect would give rise to such taxes. The Tax Matters Agreement also requires Valvoline to indemnify Ashland for a portion of certain other Transaction Taxes allocated to Valvoline based on its market capitalization relative to the market capitalization of Ashland.

Valvoline will generally have either sole control, or joint control with Ashland, over any audit or examination related to taxes for which Valvoline is required to indemnify Ashland.

The Tax Matters Agreement imposes certain restrictions on Valvoline and its subsidiaries (including restrictions on share issuances or repurchases, business combinations, sales of assets and similar transactions) that are designed to preserve the tax-free nature of the stock distribution. These restrictions will apply for the two-year period after the Stock Distribution. However, Valvoline will be able to engage in an otherwise restricted action if Valvoline obtains an appropriate opinion from counsel or ruling from the IRS.

Employee Matters Agreement

On September 22, 2016, Valvoline entered into an employee matters agreement with Ashland that addresses employment, compensation and benefits matters, including the allocation and treatment of assets and liabilities relating to Valvoline’s employees and the compensation and benefit plans and programs in which Valvoline’s employees participated prior to the Stock Distribution, as well as other human resources, employment and employee benefit matters.

Employment-Related Liabilities.    Valvoline generally has assumed responsibility for all employment-related liabilities of or relating to Valvoline’s current and former employees and, to the extent incurred prior to August 1, 2016, former employees who were employed by a terminated, divested or discontinued Valvoline business, former U.S. employees of any other terminated, divested or discontinued business and former U.S. employees of a shared resource group.

Benefit and Welfare Plans.    Following the completion of the IPO and prior to the Stock Distribution, Valvoline established benefit plans for its employees that generally recognize all service, compensation and other factors affecting benefit determinations to the same extent recognized under the corresponding Ashland benefit plan.

 

Pension and Retirement Plans.    Valvoline has assumed responsibility for certain Ashland qualified and nonqualified pension and retirement plans as well as a portion of the trusts or other funding vehicles that have been established to fund such plans. Specifically, Valvoline has assumed all liabilities and assets relating to the Ashland Hercules Pension Plan, other than liabilities and assets relating to active employees who are covered by the Hopewell collective bargaining agreement. In addition, Valvoline has assumed responsibility for certain excess and supplemental pension plans and, has assumed responsibility for the portions of the Ashland nonqualified deferred compensation plans that relate to its employees and non-employee directors. Valvoline has established a 401(k) Plan and received a trust-to-trust transfer of its employees’ account balances from the Ashland 401(k) plan.

Labor Matters.    Valvoline has assumed and will comply with any collective bargaining arrangements that cover its employees.

Registration Rights Agreement

On September 22, 2016, Valvoline entered into a registration rights agreement with Ashland pursuant to which Valvoline granted Ashland registration rights with respect to shares of Common Stock, including customary demand and piggyback registration rights. This registration rights agreement terminated during fiscal 2017 following the Stock Distribution. Ashland may transfer these rights to any Ashland entity, or, in connection with an equity-for-debt exchange, to a third-party lender or any transferee that acquires at least 5% of the issued and outstanding shares of Common Stock and executes an agreement to be bound by the registration rights agreement.

 

Executive Compensation

 

 

Executive Summary

Impact of Separation

Prior to the IPO in September 2016, Valvoline was a wholly-owned subsidiary of Ashland. The final separation occurred on May 12, 2017, at which time we became an independent public company. Based on the shares of Ashland common stock outstanding as of May 5, 2017, the record date for the distribution, each share of Ashland common stock received 2.745338 shares of Valvoline common stock.

Due to the timing of the IPO, fiscal 2017 compensation for the Named Executive Officers was largely determined by the Personnel & Compensation Committee of Ashland’s Board of Directors (the “Ashland P&C Committee”) based on recommendations from Ashland senior leadership (including Mr. Mitchell, in his capacity prior to IPO as Senior Vice President and President, Valvoline). However, following the IPO and establishment of the Valvoline Compensation Committee, a thorough review of current compensation practices was conducted and a number of changes were made to more closely reflect Valvoline’s philosophy as an independent public company:

Changes to the 2017 Compensation Program

 

		What We Did				Why We Did It
Annual Incentive Plan		•		Removed safety modifier.		•		Safety is fundamental to all that we do at Valvoline and a requirement in the daily course of business. It is not necessary to incentivize it in our annual incentive plan.
		•		Increased the Operating Segment participants’ Corporate Operating Income weighting from 20% to 30% with a corresponding reduction from 70% to 60% to their Operating Segment goals.		•		Foster increased collaboration and alignment of Operating Segments to the overall success of Valvoline.
Long-term Incentive Plan		•		Removed Return on Investment (“ROI”) and introduced Earnings per Share (“EPS”) as core metric.		•		EPS has greater line of sight for participants and closely aligns with shareholder value creation.
		•		Changed TSR from 50% of the total weighting to a 25% modifier.		•		Based on our status as a newly independent company, emphasizes financial and operational objectives.
						•		Relative TSR is still important and will be used to adjust final payouts to maintain alignment with shareholders.
		•		Peer group for relative TSR measurement changed from materials companies in S&P 500 and S&P 400 indices to the entire S&P 500 index.		•		Prior group reflected Ashland’s status as a materials company. Valvoline is a branded consumer products and services company.
						•		Selection of S&P 500 increases robustness of relative TSR comparisons.
Stock Ownership Guidelines		•		Adopted new guidelines based on multiple of salary.		•		Preparation to be stand-alone company.
		•		Added stock retention provision.		•		Align with new Valvoline compensation philosophy.

 

At the time of final separation, all outstanding Ashland-denominated equity awards held by Valvoline employees were converted to Valvoline stock in a manner that preserved the pre-separation value of the award. The awards were converted using the volume-weighted average price (“VWAP”) for the 10 trading days starting on May 15, 2017 (first trading day following final separation). This resulted in an exchange ratio of 1 Ashland share to 5.380395 Valvoline shares, and an adjustment to the exercise price of outstanding SARs of 1/5.380395. A sample adjustment is shown below:

Example of Conversion of Outstanding Equity Awards

 

		Equity Awards Denominated in Ashland (Pre-seperation)				Exchange Ratio				Equity Awards Denominated in Valvoline (Post-seperation)
Restricted Stock, Restricted Stock Units, or Performance Units		100 shares		x		5.380395		=		538 shares
SARs		100 shares		x		5.380395		=		538 shares
		with								with
		Exercise price of $100.00		÷		5.380395		=		Exercise price of $18.59

 

(1)	Restricted stock awards and SARs were rounded down to the nearest whole unit; restricted stock units and performance stock units were rounded to three decimal places. The exercise price of SARs was rounded up to the nearest penny.

2017 Highlights

Valvoline delivered strong results for fiscal 2017. Below are a few of our significant accomplishments:

 

FY17 Financial Highlights				FY17 Operational Highlights				FY17 Strategic Highlights
•		Sales from operating segments increased 8% year-over-year.		•		Successful completion of final separation from Ashland.		•		Packaging innovation in Core North America segment.
•		Total adjusted EBITDA(1) up 13% year-over-year		•		Sustained performance in Q4 despite hurricane disruptions.		•		Investment in digital and marketing infrastructure.
•		Strong free cash flow(1) generation of $196 million.		•		Premium mix in Core North America improved 440 basis points.		•		SG&A investments to establish infrastructure as a standalone public company.
•		Total lubricant volume grew 3% to 179.7 million gallons.		•		Added 59 VIOC stores for a total of 1,127 overall; strong store-level execution with 7.4% same-store sales growth.		•		Reduced pension risk related to assumed obligations from Ashland.

 

(1)

For a reconciliation of adjusted EBITDA and free cash flow, non-GAAP measures, refer to the “Five-Year Selection Financial Information” and Table reconciling net income to EBITDA and Adjusted EBITDA on Pages 26-27 in Item 6 of Part II of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.

 

Compensation Philosophy

During the year, the Compensation Committee adopted a new Compensation Philosophy that is intended to more closely reflect Valvoline’s status as an independent public company and to align our compensation program with the interests of our shareholders. This newly adopted philosophy supports our business strategy, financial objectives, and corporate vision to deliver profitable growth.

 

Objectives		•		Attract, retain, and motivate a high-performing employee population.
		•		Link a meaningful portion of compensation to sustained long-term performance that will create shareholder value.
		•		Provide transparency to key stakeholders.
		•		Mitigate risk through sound design and decision making.
Supports Profitable Growth		•		Balancing short-term financial goals with long-term value creation.
		•		Routinely evaluating compensation program effectiveness.
		•		Ensuring participants are not motivated to take excessive risk.
		•		Recognizing individual contributions and potential through pay decisions.
Use of Multiple Levels to Deliver   Total Compensation		•		Base salary attracts and retains by providing a market competitive fixed income.
		•		Annual incentive programs focus executives on short-term financial performance.
		•		Long-term incentive awards align executive with shareholder interests, link compensation with key business objectives and share price, and build meaningful executive ownership in the company.
Pay Positioning		•		Benchmark pay levels and practices against an appropriate peer group
		•		Targets the 50th percentile of the competitive range for target total direct compensation and allows company performance to drive actual compensation up or down.

 

Pay for Performance

This section describes how Valvoline’s short-term and long-term performance is linked to the NEOs’ fiscal 2017 compensation.

 

How do we link performance and pay?		•		A substantial portion of our NEOs’ pay is tied to short-and long-term incentives
		•		The performance metrics balance key short-term financial goals with long-term shareholder value creation
		•		For fiscal 2017, the annual incentive plan was based on Valvoline Operating Income and Working Capital Efficiency, with Operating Segment performance included for Messrs. Moughler and Puckett.
		•		Awards earned and distributed under our long-term incentive plan in fiscal 2017 were granted in November of 2015. As such, they include metrics (Return on Investment and relative Total Shareholder Return) and goals that reflect operations of Ashland prior to Valvoline’s final separation from Ashland.
		•		Performance-based long-term incentive awards made during fiscal 2017 are based on Valvoline EPS performance targets that reflect strong year-over-year growth.
How did we perform?		2017 Annual Incentive Plan
		•		Operating Income, as adjusted under the plan, of $410.5M, representing 95.9% achievement of the target goal
		•		Working Capital Efficiency of 12.67%, representing 100.0% achievement of the target goal
		2015-2017 Performance Stock Units (“PSUs”)
		•		Return on Investment (ROI) for Ashland of 10.1%, representing 111.6% achievement of the target goal
		•		Total Shareholder Return (TSR) for Ashland of 19.2%, representing the 53rd percentile of the performance group and 106.7% of target performance.

2017 Annual Incentive Plan⁽¹⁾

 

Executive

Incentive Metric

Weighting

Threshold

Target

Max

Actual

Payout%

Mr. Mitchell and Mses. Meixelsperger and O’Daniel

Valvoline Operating Income Valvoline Working Capital Efficiency

90% 10%

$371.3M 13.6%

$412.6M 13.0%

$443.5M 13.0%

$410.5M 12.67% Weighted Total

95.9% 100.0% 96.3%

Mr. Moughler

Valvoline Operating Income International Operating Segment Operating Income Valvoline Working Capital Efficiency

30% 60% 10%

$371.3M $78.9M 13.6%

$412.6M $87.7M 13.0%

$443.5M $94.3M 13.0%

$410.5M $86.1M 12.67% Weighted Total

95.9% 84.8% 100% 89.7%

Mr. Puckett

Valvoline Operating Income Quicklubes Operating Segment Operating Income Valvoline Working Capital Efficiency

30% 60% 10%

$371.3M $111.0M 13.6%

$412.6M $123.4M 13.0%

$443.5M $132.6M 13.0%

$410.5M $130.5M 12.67% Weighted Total

95.9% 142.7% 100.0% 124.4%

 

(1)

For fiscal 2017, operating income was calculated including pension income at planned levels and the Compensation Committee approved certain other adjustments for acquisitions, accounting and tax-related items with a net positive impact of less than $4 million for purposes of determining annual incentive payouts.

 

Payouts for 2015-2017 PSUs

 

Metric		Weighting		Adjusted Performance Measurement Period		Performance Target		Actual Achievement		Actual Payout as a Percentage of Target Payout
Ashland Return on Investment		50%		October 1, 2014 through March 31, 2017 (latest quarter prior to separation)		9.9%		10.1%		111.6%
Ashland Total Shareholder Return		50%		October 1, 2014 through May 12, 2017 (latest trading date prior to separation)		50th percentile		53rd percentile		106.7%
Weighted Performance Results: 109.2%

To reinforce our pay-for-performance philosophy, the total compensation program for the NEOs is highly incentive-based and therefore fluctuates based on financial results and stock price performance. This approach motivates executives to consider the impact of their decisions on both the short- and long-term performance of the Company and shareholder value creation, while taking appropriate types and amounts of risk.

For fiscal 2017, seventy-one percent (71%) of the CEO’s target compensation and fifty-nine percent (59%) of the other NEOs’ target compensation, on average, was at-risk.

Pay Mix of CEO and Other NEOs

 

 

What We Do vs. What We Don’t Do

 

What We Do		What We Don’t Do
✓  Emphasize pay-for-performance   ✓  Utilize a balance of short- and long-term incentives and cash- and equity-based compensation   ✓  Engage in rigorous goal-setting process for all incentive metrics   ✓  Apply robust stock ownership guidelines   ✓  Subject all equity awards to double-trigger change-in-control vesting provisions   ✓  Maintain a robust clawback policy   ✓  Use a representative and relevant peer group   ✓  Use an independent compensation consultant   ✓  Provide Board oversight of incentive compensation risk		×  No tax gross ups on change-in-control payments ×  No single-trigger change-in-control payments ×  No hedging or pledging of Company stock ×  No excessive perquisites ×  No re-pricing of equity awards ×  No share re-cycling ×  No employment agreements ×  No dividends or dividend equivalents on unearned PSUs

Elements of Valvoline’s Executive Compensation Program

Valvoline’s executive compensation program for 2017 consisted of the following elements for our NEOs:

 

		Element of Compensation		Purpose		Relevant Performance Metric
Annual Cash Compensation		Base Salary		To provide fair and competitive compensation representative of individual performance and level of responsibility.		Merit increase guidelines based on individual performance rating		Fixed
		Annual Incentive Compensation		To provide performance-based annual cash award based on Valvoline and Operating Segment performance in order to motivate and reward key employees for achieving our short-term business objectives.		Operating Income and Working Capital Efficiency		Variable
Long-Term Incentive		Stock Appreciation Rights		To align participants’ interests with shareholders.		Value only realized if stock price increases
		Time-Vested Restricted Stock Units		To enhance the program’s ability to retain participants and drive long-term behavior.		Time-vested
		Performance Stock Units		To provide performance-based equity compensation in the form of performance stock units to drive Valvoline’s long-term performance.		EPS and relative TSR
Benefits and Perquisites		Retirement Benefits		To provide tax-efficient means for building savings for retirement over the term of employment.				Fixed
		Health and Welfare Benefits		To provide access to medical care for employees and their families, as well as financial security to the families of employees who may become ill, disabled, or die during active employment.
		Executive Perquisites – Financial Planning		To address the complex tax and financial situations of our senior executives.
		Severance Pay Plan		To provide for protection of compensation in the event of a covered termination and secure restrictive covenants to protect the Company’s interests.
		Change in Control Agreements		To provide for protection of compensation, which allows executives to remain objective and act in the best interests of shareholders without regard for their future employment status in the event of a change in control and covered termination, and secure restrictive covenants to protect the Company’s interests.

 

How We Make Pay Decisions

Role of Consultant

The Compensation Committee directly engages Deloitte Consulting LLP (“Deloitte” or the “compensation consultant”) to serve as the outside advisor on executive compensation matters. Deloitte’s role includes, but is not limited to, assessment of the following items:

 

•

The competitiveness of total compensation provided to Valvoline’s key executives;

 

•

Executive stock ownership guidelines;

 

•

Change in control severance agreements for key executives;

 

•

Incentive compensation programs for risk;

 

•

Composition of the peer group used to benchmark executive compensation;

 

•

The degree of difficulty of the performance targets under incentive compensation plans;

 

•

Compensation-related disclosures, including this CD&A; and

 

•

The alignment of actual pay and performance.

In addition to the compensation services provided by Deloitte to the Compensation Committee, Deloitte affiliates provided certain services at the request of management consisting of (i) tax accounting assistance and (ii) valuation and modeling services. The total fees of compensation-related services and other services are shown in the table below.

Fees Paid to Consultant

 

		2017				%
Executive Compensation Fees		$	329,949				54	%
All Other Fees		$	285,069				46	%
Total		$	615,018				100	%

The Compensation Committee believes that, given the nature and scope of these projects, these additional services did not raise a conflict of interest and did not impair Deloitte’s ability to provide independent advice to the Compensation Committee concerning executive compensation matters.

In making this determination, the Compensation Committee considered, among other things, the following factors:

 

•

The types of non-compensation services provided by Deloitte;

 

•

The amount of fees for such non-compensation services, noting in particular that such fees are negligible when considered in the context of Deloitte’s total revenues for the period;

 

•

Deloitte’s policies and procedures concerning conflicts of interest;

 

•

Deloitte representatives who advise Valvoline’s Compensation Committee do not provide any non-compensation related services to Valvoline;

 

•

There are no other business or personal relationships between Valvoline management or members of the Valvoline Compensation Committee and the Deloitte representatives who provide compensation services to Valvoline; and

 

•

Neither Deloitte nor any of the Deloitte representatives who provide compensation services to Valvoline own any common stock or other securities of Valvoline.

Peer Group

As detailed in our compensation philosophy, we benchmark pay levels and practices against a peer group for the purposes of evaluating NEO compensation. Prior to the final separation of Valvoline from Ashland, a preliminary

 

group was used to make compensation decisions for fiscal 2017. The group was comprised of the following companies: Dr. Pepper Snapple Group, Energizer Holdings, Fortune Brands Home & Security, Inc., Innospec, Inc., LKQ Corporation, Monro Muffler Brake, Inc., Newell Brands, NewMarket Corporation, Olin Corporation, Pep Boys—Manny Moe & Jack, Scotts Miracle-Gro Company, Snap-On Inc., Spectrum Brands Holdings, The Church and Dwight Company, The Clorox Company, Tupperware Brands Corporation, and Valspar Corporation.

In June 2017, Deloitte performed a comprehensive review of our peer group using the following criteria:

 

•

Industry; specifically, companies that market consumer (durable and non-durable) goods, focus on the automotive industry, operate in the lubricants / chemical space, and/or maintain a large retail footprint or market primarily through retail channels.

 

•

Size;

 

•

Complexity;

 

•

Peer group similarity (including a “peer of peer” analysis); and

 

•

Competitive market for talent

The peer group was reviewed and approved by the Compensation Committee, with assistance from management, and is comprised of the following companies:

Peer Group

 

Company

Size(1)

Consumer Brand/Retail(2)

Chemical(3)

Automotive(4)

Valvoline

✓

✓

✓

✓

The Clorox Company

✓

✓

Spectrum Brands Holdings, Inc.

✓

✓

✓

Snap-on Incorporated

✓

✓

✓

Church & Dwight Co., Inc.

✓

✓

✓

Cooper Tire & Rubber Company

✓

✓

✓

The Scotts Miracle-Gro Company

✓

✓

✓

Revlon, Inc.

✓

✓

✓

Edgewell Personal Care Company

✓

✓

✓

Tupperware Brands Corporation

✓

✓

Nu Skin Enterprises, Inc.

✓

✓

✓

NewMarket Corporation

✓

✓

✓

Central Garden & Pet Company

✓

✓

✓

Energizer Holdings, Inc.

✓

✓

W. R. Grace & Co.

✓

✓

✓

Monro Muffler Brake, Inc.

✓

✓

✓

Innospec Inc.

✓

✓

Quaker Chemical Corporation

✓

✓

WD-40 Company

✓

✓

 

(1)	Generally, between one-half and two times the size of Valvoline’s revenue

 

(2)	Markets durable and non-durable consumer products and/or maintains a large retail footprint or markets primarily through retail channels

 

(3)	Operates in lubricants / chemical space

 

(4)	Focuses on the automotive industry

 

Benchmarking / Survey Data

Over the course of the year, our Compensation Committee analyzes the total compensation of our executive officers. To facilitate this analysis, management works with the independent compensation consultant to provide the Compensation Committee with data that include base salaries, and short- and long-term incentive opportunities. The independent compensation consultant also provides information on performance metrics, long-term incentive vehicles and weightings of those vehicles, post-employment benefits, such as severance and retirement vesting provisions, and compensation trends, as necessary. This data reflects recent publicly available information for our peer group and other market survey data discussed further below. We believe that it provides the Compensation Committee with a sufficient basis to analyze both the level and design of the total compensation provided our executive officers. As stated in our compensation philosophy, we target the 50th percentile of the competitive range for target total direct compensation, with a significant element of compensation “at-risk”. Therefore, actual compensation levels are highly dependent on company, operating segment, and / or individual performance.

Where sufficient benchmark data is not available from public filings, we utilize published survey data as a supplementary source. The survey data focuses on consumer products and general industry companies and is size-adjusted based on revenues and a statistical regression analysis that is consistent with the corporate or business segment responsibilities for each executive.

Internal Pay Equity

In addition to being competitive with the external market, we believe that our executive compensation program should be internally consistent and equitable. In its review of total compensation, our Compensation Committee considers the relationship between our CEO’s total compensation and that of our other Named Executive Officers, as well as the consistency and pay equity among those Named Executive Officers. For 2017, the Compensation Committee concluded that our CEO’s compensation was reasonable compared to that of our other Named Executive Officers, and the 2017 compensation of each of our non-CEO Named Executive Officers was internally consistent and equitable in light of their respective roles, responsibilities, experience, and reporting relationships.

“Say on Pay”

We held our first annual meeting of shareholders on January 24, 2017. At this meeting, Valvoline shareholders voted on two proposals related to executive pay. The first proposal was a non-binding advisory vote on our executive compensation (“Say on Pay”) as disclosed in the Proxy Statement for fiscal 2016. The Say on Pay proposal received a FOR vote from 99.8% of votes cast. The second proposal was a recommendation to include a non-binding advisory vote on our executive compensation as disclosed in the Proxy Statement every year, which passed with over 99% of the votes cast. Based upon the strong shareholder support of the Board’s recommendation that shareholders be provided the option to vote on Say on Pay annually, our Board will hold a Say on Pay vote annually.

We anticipate ongoing dialogue with our shareholders regarding Valvoline’s executive compensation programs. We will consider any and all feedback pertaining to these programs in future decision making and program design.

Compensation Decisions for Fiscal 2017

Base Salary

Valvoline utilizes merit increase guidelines based on an individual’s performance and his or her position relative to the competitive market median to formulate recommendations. All employees, including the Valvoline NEOs, are generally subject to the same merit increase guidelines, and increases have historically been effective in Spring of each year. In preparation for the separation of Valvoline as an independent, publicly-traded company, the compensation consultant prepared a competitive assessment of Valvoline’s NEOs. The Compensation Committee reviewed the analysis and approved the base salaries below effective October 1, 2016, to recognize the size and scope of each executive’s respective role and motivate a continued high level of performance through and after the separation. In the case of Mr. Mitchell, he was provided an increase effective October 1, 2016 to recognize his promotion to Chief Executive Officer of Valvoline, prior to the completion of our initial public offering on September 28, 2016. The subsequent increase on May 1, 2017 was made in conjunction with the final separation, after which Mr. Mitchell became Chief Executive Officer of an independent, publicly-traded company.

 

Fiscal 2017 Base Salary

 

Executive		Effective Date				Base Salary
Samuel J. Mitchell, Jr.			10/1/2016			$	800,000
			5/1/2017			$	950,000
Mary E. Meixelsperger			10/1/2016			$	535,000
Julie M. O’Daniel			10/1/2016			$	380,000
Craig A. Moughler			10/1/2016			$	350,000
Anthony R. Puckett			10/1/2016			$	310,000

Annual Incentive

Under the annual incentive plan, target annual incentive opportunities for all Valvoline NEOs are expressed as a percentage of the base salary in effect at the end of the performance period. Mr. Mitchell’s target was increased by 10 percentage points to reflect his new role as CEO of an independent, publicly-traded company and Ms. O’Daniel’s target was increased by 8 percentage points to reflect her new role as General Counsel. All other NEOs’ target opportunities remained the same following final separation.

Changes in Target Annual Incentive Opportunity

 

Executive		FY16 Target Opportunity (% of Salary)				Increase				FY17 Target Opportunity (% of Salary)
Samuel J. Mitchell, Jr.			90	%			+10	%			100	%
Mary E. Meixelsperger			75	%			—				75	%
Julie M. O’Daniel			42	%			+8	%			50	%
Craig A. Moughler			50	%			—				50	%
Anthony R. Puckett			50	%			—				50	%

For fiscal 2017, the primary metrics for the annual incentive plan were Operating Income and Working Capital Efficiency, weighted 90% and 10%, respectively. Operating Income is a key indicator of Valvoline corporate and Operating Segment profitability. Operating Income may be adjusted by the Compensation Committee for unplanned or one-time items, such as gains or losses on the disposition of assets, impairment or restructuring charges or gains on divestitures of major businesses. Working Capital Efficiency focuses on three key cash flow drivers (accounts receivable, inventory and accounts payable) and is measured as a percentage of sales. This measurement was chosen because Working Capital Efficiency, like Operating Income, is an important measure of Valvoline’s ability to optimize cash flow. For the Operating Income metric, Mr. Mitchell and Mses. Meixelsperger and O’Daniel are measured on corporate performance, while Messrs. Moughler and Puckett are measured on performance at both the corporate and Operating Segment levels, 30% and 60%, respectively.

 

Performance Against 2017 IC Metrics

 

Metric		Threshold				Target				Maximum				Actual Achievement				Payout as a % of Target
Corporate Operating Income(1)(3)(4)		$	371.3M			$	412.6M			$	443.5M			$	410.5M				95.9	%
International Operating Segment Operating Income(1)(3)(4)		$	78.9M			$	87.7M			$	94.3M			$	86.1M				84.8	%
Quicklubes Operating Segment Operating Income(1)(3)(4)		$	111.0M			$	123.4M			$	132.6M			$	130.5M				142.7	%
Corporate Working Capital Efficiency(2)(3)			13.59%				12.94%				12.94%				12.67%				100.0	%

 

(1)	Threshold performance results in payout of 20% of target opportunity, maximum performance results in payout of 155.5% of target opportunity.

 

(2)	Threshold performance results in payout of 20% of target opportunity, target performance or better results in 100% of target opportunity.

 

(3)	Maximum aggregate payout opportunity is 150% of target opportunity ((155.5% * 90%) + (100% * 10%)).

 

(4)

For fiscal 2017, operating income was calculated including pension income at planned levels and the Compensation Committee approved certain other adjustments for acquisitions, accounting and tax-related items with a net positive impact of less than $4 million for purposes of determining annual incentive payouts.

Actual annual incentive awards are calculated as follows:

Payouts Under 2017 Annual Incentive Plan

 

Executive		FY17 Salary				FY17 Target Opportunity (% of Salary)				Target Annual Cash Incentive Opportunity				Actual as a % of Target Payout				Amount Earned for 2017
Samuel J. Mitchell, Jr.		$	950,000				100	%		$	950,000				96.3	%		$	914,945
Mary E. Meixelsperger		$	535,000				75	%		$	401,250				96.3	%		$	386,444
Julie M. O’Daniel		$	380,000				50	%		$	190,000				96.3	%		$	182,989
Craig A. Moughler		$	350,000				50	%		$	175,000				89.7	%		$	156,888
Anthony R. Puckett		$	310,000				50	%		$	155,000				124.4	%		$	192,805

Long-term Incentive

Target long-term incentive opportunities for the NEOs are shown below. Mr. Mitchell’s target long-term incentive opportunity was increased to reflect his new role as CEO of an independent, publicly-traded company. For fiscal 2017, we revised the long-term incentive opportunities for Messrs. Moughler and Puckett and Ms. O’Daniel from a fixed dollar amount to a percentage of base salary to align more closely with Valvoline leadership and market practice. The absolute change in value was negligible for Messrs. Moughler and Puckett. The increase for Ms. O’Daniel reflects her promotion to General Counsel.

Changes in Target Long-term Incentive Opportunity

 

Executive		FY16 Target Opportunity (% of Salary)				Change		FY17 Target Opportunity (% of Salary)
Samuel J. Mitchell, Jr.			135	%		40%			175	%
Mary E. Meixelsperger			140	%		—			140	%
Julie M. O’Daniel		$	75,000			Approximately 40%			75	%
Craig A. Moughler		$	142,000			—			50	%
Anthony R. Puckett		$	142,000			—			50	%

In fiscal 2017, our long-term incentive program for the NEOs consisted of 25% stock appreciation rights (“SARs”), 25% restricted stock units (“RSUs”), and 50% performance stock units (“PSUs”). The Compensation Committee

 

chose these vehicles and weightings to (a) align executive pay with shareholder value creation, (b) provide PSUs that directly link executive pay with the Company’s long-term goals, and (c) facilitate stock ownership and retention. Pursuant to the terms of the Awards, each recipient is subject to non-compete and non-solicitation covenants during employment and for 24-months following termination.

 

Prior to the final Separation of Valvoline, the Ashland P&C Committee approved the acceleration of performance certification for the 2015-2017 PSUs. The performance of the 2016-2018 PSUs and Mr. Mitchell’s award made under the Executive Performance Incentive and Retention Plan (“EPIRP”) in November of 2015 were also certified by Ashland’s P&C Committee and our Compensation Committee during fiscal 2017 pursuant to the award agreements.

2015-2017 PSUs

The 2015-2017 PSUs were designed to measure performance from October 1, 2014 to September 30, 2017. The Ashland P&C Committee determined that a sufficient portion of the performance period had elapsed as of final separation on May 12, 2017 to measure performance. Performance was certified as shown below, with all outstanding awards converted to RSUs that vested and settled in shares of Valvoline common stock on November 12, 2017, the original vesting date. Based on above-target ROI and relative TSR performance, the overall award was earned at 109.2% of target.

Payouts for 2015-2017 PSUs

 

Metric		Weighting		Adjusted Performance Measurement Period		Performance Target		Actual Achievement		Payout as a % of Target
Ashland Return on Investment		50%		October 1, 2014 through March 31, 2017 (latest quarter prior to separation)		9.9%		10.1%		111.6%
Ashland Relative TSR		50%		October 1, 2014 through May 12, 2017 (last trading date prior to separation)		50th percentile		53rd percentile		106.7%
Weighted Performance Results: 109.2%

 

2016-2018 PSUs

In anticipation of the final Separation, the 2016-2018 PSUs were designed to measure performance from October 1, 2015 through 120 days after the final Separation. Based on the timing of final Separation, one-third of the target award was converted to time-based RSUs, with the remaining two-thirds subject to performance conditions. The converted RSUs will vest and be settled in shares of Valvoline common stock on November 18, 2018, the original vesting date. ROI performance was slightly below target performance while relative TSR performance was below the 35th percentile threshold. Based on the combined performance results, the portion of the award subject to performance-criteria was earned at 48.4% of target.

Payouts for 2016-2018 PSUs

 

Metric		Weighting		Adjusted Performance Measurement Period		Performance Target		Actual Achievement		Payout as a % of Target
Ashland Return on Investment		50%		October 1, 2014 through March 31, 2017 (latest quarter prior to separation)		8.9%		8.8%		96.8%
Combined Ashland/Valvoline relative TSR		50%		October 1, 2014 through September 8, 2017 (120 trading days after separation)		50th percentile		22nd percentile		0%
Weighted Performance Results: 48.4%

EPIRP

The EPIRP was designed in a similar manner to the 2016-2018 PSUs, but the entire performance component of the award was based on relative Total Shareholder Return. The awards were granted at the maximum level, and the portion of the award subject to the performance condition was determined by the timing of Valvoline’s final separation from Ashland. Based on the final separation date, a total of one-sixth of the shares awarded converted to time-based RSUs. TSR performance was below the threshold performance level of the 35th percentile, resulting in no earned shares for the performance-based portion of the award.

Payouts for EPIRP

 

Metric		Adjusted Performance Measurement Period		Performance Target		Actual Achievement		Actual Payout as a Percentage of Target Payout
Combined Ashland/Valvoline Total Shareholder Return		October 1, 2014 through September 8, 2017 (120 trading days after separation)		50th percentile		22nd percentile		0%