NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Veritiv Corporation ("Veritiv" or the "Company") is a North American business-to-business full-service provider of value-added packaging products and services, as well as facility solutions, print and publishing products and services. Additionally, Veritiv provides logistics and supply chain management solutions to its customers. Veritiv was established on July 1, 2014 following the merger (the "Merger") of International Paper Company's xpedx distribution solutions business ("xpedx") and UWW Holdings, Inc., the parent company of Unisource Worldwide, Inc. ("Unisource"). On July 2, 2014, Veritiv's common stock began regular-way trading on the New York Stock Exchange under the ticker symbol "VRTV". Veritiv operates from 115 distribution centers primarily throughout the United States ("U.S."), Canada and Mexico.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include all of the Company's subsidiaries. All significant intercompany transactions between Veritiv's businesses have been eliminated. As a result of adopting Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326) on January 1, 2020, using the required modified retrospective basis, the accounting for credit losses for periods prior to 2020 has not been revised and results are reported in accordance with prior U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and certain financial statement disclosures. Estimates and assumptions are used for, but not limited to, revenue recognition, right-of-use ("ROU") asset and liability valuations, accounts and notes receivable valuations, inventory valuation, employee benefit plans, long-term incentive plans, income tax contingency accruals and valuation allowances, multi-employer pension plan ("MEPP") withdrawal liabilities, contingency accruals and goodwill and other intangible asset valuations. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results may ultimately differ from these estimates and assumptions.
Primarily beginning in April 2020, the COVID-19 pandemic has affected our operational and financial performance to varying degrees. As a result of the COVID-19 pandemic, the Company could continue to experience impacts including, but not limited to, charges from potential adjustments of the carrying amount of accounts and notes receivables and inventory, asset impairment charges and deferred tax valuation allowances. The extent to which the COVID-19 pandemic impacts the Company's business, results of operations, access to sources of liquidity and financial condition will depend on future developments. These developments, which are uncertain and difficult to predict, include, but are not limited to, the duration, spread and severity of the COVID-19 pandemic, the effects of the COVID-19 pandemic on the Company's employees, customers, suppliers and vendors, measures adopted by local and federal governments or health authorities in response to the pandemic, the availability, adoption and effectiveness of vaccines and to what extent normal economic and operating conditions can resume and be sustained. Even after the COVID-19 pandemic has subsided, the Company may experience an impact to its business as a result of any economic recession, downturn, or volatility or long-term changes in customer behavior. Estimates are revised as additional information becomes available.
Summary of Significant Accounting Policies
Revenue Recognition
Veritiv applies the five step model to assess its contracts with customers. The Company's revenue is reported as net sales and is measured as the determinable transaction price, net of any variable consideration (e.g., sales incentives and rights to return product) and any taxes collected from customers and remitted to governmental authorities. When the Company enters into a sales arrangement with a customer, it believes it is probable that it will collect substantially all of the
consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. When management cannot conclude collectability is probable for shipments to a particular customer, revenue associated with that customer is not recognized until cash is collected or management is otherwise able to establish that collectability is probable. As a normal business practice, Veritiv does not enter into contracts that require more than one year to complete or that contain significant financing components. See Note 2, Revenue Recognition and Credit Losses, for additional information regarding the Company's revenue recognition practices.
Purchase Incentives
Veritiv enters into agreements with suppliers that entitle Veritiv to receive rebates, allowances and other discounts based on the attainment of specified purchasing levels or sales to certain customers. Purchase incentives are recorded as a reduction to inventory and recognized in cost of products sold when the sale occurs. During the year ended December 31, 2021, approximately 28% of the Company's purchases were made from ten suppliers.
Distribution Expenses
Distribution expenses consist of storage, handling and delivery costs including freight to the Company's customers' destinations. Handling and delivery costs were $271.0 million, $273.6 million and $346.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Integration Expenses
Integration costs are expensed as incurred and include internally dedicated integration management resources, retention compensation, information technology conversion costs and other costs to integrate its businesses. See Note 4, Restructuring and Integration Charges, for additional information regarding the Company's integration activities.
Cash and Cash Equivalents
The Company considers all highly liquid, unrestricted investments with original maturities to the Company of three months or less to be cash equivalents, including investments in money market funds with no restrictions on withdrawals. The Company held no cash equivalents as of December 31, 2021. As of December 31, 2020, the Company's cash and cash equivalents included a $75.0 million investment in a money market fund that was highly liquid and qualified as a cash equivalent.
Trade Accounts Receivable, Notes Receivable and Related Allowances
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) on January 1, 2020, using the required modified retrospective approach. Accordingly, 2019 has not been adjusted to conform to the new guidance. Upon adoption, the Company recorded a $0.3 million decrease to retained earnings as the cumulative effect adjustment from applying the standard.
Under Topic 326
The Company performs an assessment of its financial assets which consist primarily of accounts receivable and identifies pools (i.e., groups of similar assets within the accounts receivable portfolio) based on the Company’s internal risk ratings, geographical locations and historical loss information. The Company’s pools are classified by reportable segment, risk level and the geographical location of the Company’s customers. The risk characteristics of each segment are determined by the impact of economic and structural fluctuations that are specific to the industry sectors served by the Company, competition from other suppliers and the nature of the products and services provided to the Company’s customers. The Print and Publishing segments are faced with industry-wide decreases in demand for products and services due to the increasing use of e-commerce and other on-line product substitutions. The risk characteristics of the Facility Solutions segment include revenue declines and delinquency rates attributable to changes in the travel industry, constraints and restrictions for large venues, return-to-office and in-person school activities. The risk characteristics of the Packaging segment include changes in customer buying habits and product preferences. The Company considered the Packaging and Facility Solutions segments to be a single pool as they share similar risk characteristics.
The Company’s allowance for credit losses reflects the best estimate of expected losses to the Company's accounts receivable portfolio determined on the basis of historical experience, current conditions, reasonable and supportable forecasts and specific allowances for known troubled accounts. In developing the allowance for credit losses, the Company utilizes internal risk ratings that are determined based on a number of factors including a periodic evaluation of each customer’s financial condition where possible. In addition to leveraging the internally developed risk ratings and historical experience, the expected credit loss estimates are developed using quantitative analyses, where meaningful, and qualitative analyses to forecast the impact that external factors and economic indicators may have on the amount that the Company expects to collect.
Under prior guidance
Accounts receivable are recognized net of allowances. The allowance reflects the best estimate of losses inherent in the Company's accounts receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other available evidence.
Inventories
The Company's inventories are primarily comprised of finished goods and predominantly valued at cost as determined by the last-in first-out ("LIFO") method. Such valuations are not in excess of market. Elements of cost in inventories include the purchase price invoiced by a supplier, plus inbound freight and related costs and reduced by estimated volume-based discounts and early pay discounts available from certain suppliers. Approximately 80% and 76% of inventories were valued using the LIFO method as of December 31, 2021 and 2020, respectively. If the first-in, first-out method had been used, total inventory balances would be increased by approximately $134.5 million and $93.2 million at December 31, 2021 and 2020, respectively.
The Company reduces the value of obsolete inventory based on the difference between the LIFO cost of the inventory and the estimated market value using assumptions of future demand and market conditions. To estimate the net realizable value, the Company considers factors such as the age of the inventory, the nature of the products, the quantity of items on-hand relative to sales trends, current market prices and trends in pricing, its ability to use excess supply in another channel, historical write-offs and expected residual values or other recoveries.
Veritiv maintains some of its inventory on a consignment basis in which the inventory is physically located at the customer's premises or a third-party distribution center. Veritiv had $24.1 million and $20.5 million of consigned inventory as of December 31, 2021 and 2020, respectively, valued on a LIFO basis, net of reserves.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for replacements and major improvements are capitalized, whereas repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred. The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining software for internal use. Costs related to the development of internal use software, other than those incurred during the application development stage, are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Land is not depreciated, and construction-in-progress ("CIP") is not depreciated until ready for service. Leased property and leasehold improvements are amortized on a straight-line basis over the lease term or useful life of the asset, whichever is less. Upon retirement or other disposal of property and equipment, the cost and related amount of accumulated depreciation or accumulated amortization are eliminated from the asset and accumulated depreciation or accumulated amortization accounts, respectively. The difference, if any, between the net asset value and the proceeds is included in net income (loss) on the Consolidated Statements of Operations.
The following tables summarize the Company's property and equipment: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except for estimated useful life) | | | | | | As of December 31, |
Estimated Useful Life | | 2021 | | 2020 |
Land, buildings and improvements | 1 | to | 40 | years | | $ | 94.6 | | | $ | 100.7 | |
Machinery and equipment | 3 | to | 15 | years | | 156.1 | | | 164.9 | |
Finance leases | | | | | | 112.2 | | | 111.8 | |
Internal use software | 3 | to | 5 | years | | 122.8 | | | 188.6 | |
CIP | | | | | | 9.6 | | | 4.6 | |
Less: Accumulated depreciation and amortization | | | | | | (332.4) | | | (375.9) | |
Property and equipment (net of accumulated depreciation and amortization) | | | | | | $ | 162.9 | | | $ | 194.7 | |
| | | | | | | | |
Unamortized internal use software costs, including amounts recorded in CIP | | | | | | $ | 10.5 | | | $ | 24.6 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Depreciation expense (1) | $ | 36.6 | | | $ | 36.8 | | | $ | 33.5 | |
Amortization expense - internal use software | 13.9 | | | 16.1 | | | 15.0 | |
Depreciation and amortization expense related to property and equipment | $ | 50.5 | | | $ | 52.9 | | | $ | 48.5 | |
| | | | | |
(1) Includes depreciation expense for finance leases. |
Leases
The Company determines if an arrangement is a lease at lease inception and reviews lease arrangements for finance or operating lease classification at their commencement date. Operating leases are reported as part of other non-current assets, other accrued liabilities and other non-current liabilities on the Consolidated Balance Sheets. Finance leases are reported as part of property and equipment and debt obligations on the Consolidated Balance Sheets. The Company does not include leases with a term of twelve months or less on the Consolidated Balance Sheets and does not separate lease and non-lease components for its delivery equipment leases. In order to value the ROU assets and related liabilities, the Company makes certain estimates and assumptions related to establishing the lease term, discount rates and variable lease payments (e.g., rent escalations tied to changes in the Consumer Price Index). The exercise of any lease renewal or asset purchase option is at the Company's sole discretion. The lease term for all of the Company's leases includes the noncancelable period of the lease and any periods covered by renewal options that the Company is reasonably certain to exercise. Certain leases include rent escalations pre-set in the agreements, which are factored into the lease payment stream. Similar to a variable lease payment, certain delivery equipment leases include a provision for an amount the Company may be required to pay at the end of the lease for any residual value deficiency incurred by the lessor upon resale of the underlying asset. The Company uses the implicit rate of interest when it is available; however, as most of the Company's leases do not provide an implicit rate of interest, the Company uses its incremental borrowing rate based on information available at the lease commencement date in determining the discounted value of the lease payments. Lease expense and depreciation expense are recognized on a straight-line basis over the lease term, or for a finance lease, over the shorter of the life of the underlying asset or the lease term. The Company’s decisions to cease operations in certain warehouse facilities and retail locations leads to different accounting treatment depending upon whether the leased properties are considered abandoned versus properties that the Company has the intent and ability to sublease. Abandoned ROU assets are assessed for impairment based on estimates of undiscounted operating cash flows until the anticipated cease-use date and any remaining lease expense is accelerated through the anticipated cease-use date. Leases for which the Company has the intent and ability to sublease are assessed for impairment and any remaining ROU asset values are amortized over the shorter of the remaining useful lives of the assets or lease term. The intent and practical ability to sublease and estimates of future cash flows attributable to the sublease are assessed considering the terms of the lease agreement, certain market conditions, remaining lease terms and the time required to sublease the facility and other factors. See Note 3, Leases, for additional information related to the Company's leases.
Goodwill and Other Intangible Assets
Goodwill relating to a single business reporting unit is included as an asset of the applicable segment. Goodwill arising from major acquisitions that involve multiple reportable segments is allocated to the reporting units based on the relative fair value of the reporting unit. Goodwill is reviewed by Veritiv for impairment on a reporting unit basis annually on October 1st or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The testing of goodwill for possible impairment is performed by completing a Step 0 test or electing to by-pass the Step 0 test and comparing the fair value of a reporting unit with its carrying value, including goodwill. The Step 0 test utilizes qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors include: macroeconomic conditions; industry and market considerations; overall financial performance and cost factors to determine whether a reporting unit is at risk for goodwill impairment. In the event a reporting unit fails the Step 0 goodwill impairment test, it is necessary to move forward with a comparison of the fair value of the reporting unit with its carrying value, including goodwill. If the fair value exceeds the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, a goodwill impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, any loss recognized will not exceed the total amount of goodwill allocated to the reporting unit.
Intangible assets acquired in a business combination are recorded at fair value. The Company's intangible assets may include customer relationships, trademarks and trade names and non-compete agreements. Intangible assets with finite useful lives are subsequently amortized using the straight-line method over the estimated useful lives of the assets. See the Impairment of Long-Lived Assets section below for the accounting policy related to the periodic review of long-lived intangible assets for impairment.
Impairment of Long-Lived Assets
Long-lived assets, including finite lived intangible assets, are tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. The Company assesses the recoverability of long-lived assets based on the undiscounted future cash flow the assets are expected to generate and recognizes an impairment loss when the estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When an impairment is identified, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. The calculation of lease impairment charges requires significant judgments and estimates, including estimated sublease rentals, discount rates and future cash flows based on the Company's experience and knowledge of the market in which the property is located, previous efforts to dispose of similar assets and an assessment of current market conditions.
Employee Benefit Plans
The Company sponsors and/or contributes to defined contribution plans, defined benefit pension plans and MEPPs in the U.S. Except for certain union employees who continue to accrue benefits under the U.S. defined benefit pension plan in accordance with their collective bargaining agreements, as discussed below, the defined benefit pension plans are frozen. In addition, the Company and its subsidiaries have various pension plans and other forms of retirement arrangements outside the U.S. See Note 9, Employee Benefit Plans, for additional information related to these plans and arrangements.
The determination of defined benefit pension and postretirement plan obligations and their associated costs requires the use of actuarial computations to estimate participant plan benefits to which the employees will be entitled. The Company's significant assumptions in this regard include discount rates, rate of future compensation increases, expected long-term rates of return on plan assets, mortality rates and other factors. Each assumption is developed using relevant company experience in conjunction with market-related data. All actuarial assumptions are reviewed annually with third-party consultants and adjusted as necessary.
For the recognition of net periodic postretirement cost, the calculation of the expected long-term rate of return on plan assets is derived using the fair value of plan assets at the measurement date. Actual results that differ from the
Company's assumptions are accumulated and amortized on a straight-line basis only to the extent they exceed 10% of the higher of the fair value of plan assets or the projected benefit obligation, over the estimated remaining service period of active participants. The fair value of plan assets is determined based on market prices or estimated fair value at the measurement date.
The Company also makes contributions to MEPPs for its union employees covered by such plans. For these plans, the Company recognizes a liability only for any required contributions to the plans or surcharges imposed by the plans that are accrued and unpaid at the balance sheet date. The Company does not record an asset or liability to recognize the funded status of the plans. The Company records an estimated undiscounted charge when it becomes probable that it has incurred a withdrawal liability, as the final amount and timing is not assured. When a final determination of the withdrawal liability is received from the plan, the estimated charge is adjusted to the final amount determined by the plan.
Long-Term Incentive Compensation Plans
The Company measures and records compensation expense for all long-term incentive compensation awards based on the respective plans' grant date fair values over the vesting periods of the awards. Forfeitures are recognized when they occur. Performance-based plans require the Company to make estimates of its long-term future performance. See Note 14, Long-Term Incentive Compensation Plans, for additional information.
Income Taxes
Veritiv's income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. Veritiv records its global tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. Where treatment of a position is uncertain, liabilities are recorded based upon an evaluation of the more likely than not outcome considering technical merits of the position. Changes to recorded liabilities are made only when an identifiable event occurs that alters the likely outcome, such as settlement with the relevant tax authority or the expiration of statutes of limitation for the subject tax year. Significant judgments and estimates are required in determining the consolidated income tax expense.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and amount of valuation allowances against deferred tax assets. The realization of these assets is dependent on generating sufficient future taxable income.
Fair Value Measurements
Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
| | | | | |
Level 1 – | Quoted market prices in active markets for identical assets or liabilities. |
Level 2 – | Observable market-based inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
Level 3 – | Unobservable inputs for the asset or liability reflecting the reporting entity's own assumptions or external inputs from inactive markets. |
Foreign Currency
The assets and liabilities of the Company's foreign subsidiaries are translated from their respective local currencies to the U.S. dollars at the appropriate spot rates as of the balance sheet date. Changes in the carrying values of these assets and liabilities attributable to fluctuations in spot rates are recognized in foreign currency translation adjustment, a component of accumulated other comprehensive loss ("AOCL"). See Note 13, Shareholders' Equity, for the impacts of foreign currency translation adjustments on AOCL. The revenues and expenses of the foreign subsidiaries are translated using the monthly average exchange rates during the year. The gains or losses from foreign currency transactions are included in other (income) expense, net on the Consolidated Statements of Operations.
Treasury Stock
Common stock purchased for treasury is recorded at cost. Costs incurred by the Company that are associated with the acquisition of treasury stock are treated in a manner similar to stock issue costs and are added to the cost of the treasury stock. See Note 13, Shareholders' Equity, for additional information regarding the Company's treasury stock transactions.
Accounting for Derivative Instruments
The Company holds one interest rate cap agreement which is subject to Accounting Standards Codification ("ASC") 815, Derivatives and Hedging. For those instruments that are designated and qualify as hedging instruments, a company must designate the instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation. A cash flow hedge refers to hedging the exposure to variability in expected future cash flows attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the gains and losses resulting from changes in the fair value of the derivative instrument are reported as a component of AOCL in the Company's Consolidated Balance Sheets and in the Consolidated Statements of Comprehensive Income (Loss), until reclassified into the same Consolidated Statements of Operations line item in the same period the hedged transaction affects earnings. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. See Note 6, Debt and Note 13, Shareholders' Equity, for additional information regarding the Company's derivative instrument.
Recently Issued Accounting Standards
Recently Adopted Accounting Standards
Effective January 1, 2021, the Company adopted ASU 2019-12, Income Taxes (Topic 740). The standard removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The update also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The amendments in this update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. The adoption did not materially impact the Company's financial statements and disclosures.
Recently Issued Accounting Standards Not Yet Adopted
ASU 2020-04, Reference Rate Reform (Topic 848) - This standard provides temporary optional expedients and exceptions to accounting guidance for certain contract modifications and hedging arrangements to ease financial reporting burdens as the market transitions from the London Interbank Offered Rate ("LIBOR") and other interbank reference rates to alternative reference rates. The guidance is available for prospective application upon its issuance and can generally be applied to contract modifications and hedging relationships entered into March 12, 2020 through December 31, 2022. The Company has an interest rate cap arrangement, which currently carries an insignificant value, and long-term debt for which existing payments are based on LIBOR. The Company recently amended its ABL Facility to, among other things, update certain provisions to facilitate the transition from LIBOR to a new replacement benchmark rate. Currently, the Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
Effective January 1, 2022, the Company will adopt ASU 2021-10, Government Assistance (Topic 832). The standard increases the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity's accounting for the assistance, and (3) the effect of the assistance on an entity's financial statements. The amendments in this update are effective for annual periods beginning after December 15, 2021. An entity should apply the amendments in this update either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2)
retrospectively to those transactions. Currently, the Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
2. REVENUE RECOGNITION AND CREDIT LOSSES
Revenue Recognition
Veritiv applies the five step model to assess its contracts with customers. The Company's revenue is reported as net sales and is measured as the determinable transaction price, net of any variable consideration (e.g., sales incentives and rights to return product) and any taxes collected from customers and remitted to governmental authorities. Certain revenues are derived from shipments which are made directly from a manufacturer to a Veritiv customer. The Company is considered to be a principal to these transactions because, among other factors, it maintains control of the goods after they leave the supplier and before they are received at the customer's location, in most cases it selects the supplier and sets the price to the customer, and it bears the risk of the customer defaulting on payment or rejecting the goods. Revenues from these sales are reported on a gross basis on the Consolidated Statements of Operations and have historically represented approximately 35% of Veritiv's total net sales. As a normal business practice, Veritiv does not enter into contracts that require more than one year to complete or that contain significant financing components. The Company considers handling and delivery as activities to fulfill its performance obligations. Billings for third-party freight are accounted for as net sales and handling and delivery costs are accounted for as distribution expenses. Veritiv enters into incentive programs with certain of its customers, which are generally based on sales to those same customers. Estimates of the variable consideration are based primarily on contract terms, current customer forecasts as well as historical experience. Veritiv follows the expected value method when estimating its retrospective incentives and records the estimated amount as a reduction to gross sales when revenue is recognized.
Customer product returns are estimated based on historical experience and the identification of specific events necessitating an adjustment. The estimated return value is recognized as a reduction of gross sales and related cost of products sold. The estimated inventory returns value is recognized as part of inventories, while the estimated customer refund liability is recognized as part of other accrued liabilities on the Consolidated Balance Sheets. As of December 31, 2021 and 2020, estimated inventory returns were not significant.
A customer contract liability will arise when Veritiv has received payment for goods and services but has not yet transferred the items to a customer and satisfied its performance obligations. Veritiv records a customer contract liability for performance obligations outstanding related to payments received in advance for customer deposits on equipment sales and other sale arrangements requiring prepayment, which are included in accounts payable and other accrued liabilities on the Consolidated Balance Sheets. Veritiv expects to satisfy these remaining performance obligations and recognize the related revenues upon delivery of the goods and services to the customer's designated location within 12 months following receipt of the payment. Most equipment sales deposits are held for approximately 90 days and other sale arrangements requiring prepayment initially cover a 60 - 90 day period but can be renewed by the customer.
See the table below for a summary of the changes to the customer contract liabilities balance: | | | | | | | | | | | |
| Customer Contract Liabilities |
(in millions) | 2021 | | 2020 |
Balance at January 1, | $ | 12.2 | | | $ | 11.7 | |
Payments received | 52.2 | | | 53.2 | |
Revenue recognized from beginning balance | (10.4) | | | (11.6) | |
Revenue recognized from current year receipts | (32.2) | | | (41.1) | |
Balance at December 31, | $ | 21.8 | | | $ | 12.2 | |
Revenue Composition
Veritiv's revenues are primarily derived from purchase orders and rate agreements associated with (i) the delivery of standard listed products with observable standalone sale prices or (ii) transportation and warehousing services. Revenue generally consists of a single performance obligation to transfer a promised good or service and is short-term in nature. Revenues are recognized when control of the promised goods or services is transferred to Veritiv's customers and in an
amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Sales transactions with customers are designated free on board destination and revenue is recorded at the point in time when the product is delivered to the customer's designated location or when the customer has otherwise obtained the benefit of the goods, when title and risk of loss are transferred. Revenues from Veritiv's transportation services are recognized upon completion of the related delivery services and revenues from warehousing services are recognized over time as the storage services are provided. The Company is able to serve a wide variety of customers, from large national companies to small local customers, through its distribution network.
Historically, the Company's ten largest customers have generated approximately 10% - 15% of its consolidated annual net sales. Veritiv's principal markets are concentrated primarily across North America with net sales in the U.S., Canada and Mexico of approximately 86%, 11% and 2%, respectively. Veritiv evaluated the nature of the products and services provided to its customers as well as the nature of the customer and the geographical distribution of its customer base and determined that the best representative level of disaggregated revenue is the product category basis. The following is a brief description of the Company's four reportable segments, organized by major product category. This segment structure is consistent with the way the Chief Operating Decision Maker, who is Veritiv's Chief Executive Officer, makes operating decisions and manages the growth and profitability of the Company's business. The Company also has a Corporate & Other category, which includes certain assets and costs not primarily attributable to any of the reportable segments, as well as the Veritiv logistics solutions business which provides transportation and warehousing solutions.
•Packaging – The Packaging segment provides custom and standard packaging solutions for customers based in North America and in key global markets. This segment services its customers with a full spectrum of packaging product materials within flexible, corrugated and fiber, ancillary packaging, rigid and equipment categories. The business is strategically focused on higher growth industry sectors including manufacturing, food and beverage, wholesale and retail, healthcare and transportation, as well as specialty sectors based on industry and product expertise. This segment also provides supply chain solutions, structural and graphic packaging design and engineering, automation, workflow and equipment services and kitting.
•Facility Solutions – The Facility Solutions segment sources and sells cleaning, break-room and other supplies in product categories that include towels and tissues, food service, personal protective equipment, cleaning chemicals and skincare, primarily in North America. Additionally, the Company offers total cost of ownership solutions with re-merchandising, budgeting and compliance reporting and inventory management.
•Print – The Print segment sells and distributes commercial printing, writing, copying, digital, specialty products and graphics consumables primarily in North America. Veritiv's broad geographic platform of operations coupled with the breadth of paper and graphics products, including exclusive private brand offerings, provides a foundation to service national, regional and local customers across North America.
•Publishing – The Publishing segment sells and distributes coated and uncoated commercial printing papers to publishers, retailers, converters, printers and specialty businesses for use in magazines, catalogs, books, directories, gaming, couponing, retail inserts and direct mail primarily in the U.S. This segment also provides print management, procurement and supply chain management solutions to simplify paper and print procurement processes for its customers.
Credit Losses and Other Allowances
When the Company enters into a sales arrangement with a customer, it believes it is probable that it will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. When management cannot conclude collectability is probable for shipments to a particular customer, revenue associated with that customer is not recognized until cash is collected or management is otherwise able to establish that collectability is probable. See Note 1, Business and Summary of Significant Accounting Policies, for additional information related to the Company's policy for credit losses.
The components of the accounts receivable allowances were as follows: | | | | | | | | | | | |
| As of December 31, |
(in millions) | 2021 | | 2020 |
Allowance for credit losses | $ | 23.7 | | | $ | 31.4 | |
Other allowances (1) | 10.7 | | | 10.2 | |
Total accounts receivable allowances | $ | 34.4 | | | $ | 41.6 | |
(1) Includes amounts reserved for credit memos, customer discounts, customer short pays and other miscellaneous items.
Below is a rollforward of the Company's accounts receivable allowances. Accounts receivable are written-off when management determines they are uncollectible. | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Balance at January 1, | $ | 41.6 | | | $ | 43.8 | | | $ | 62.0 | |
Add / (Deduct): | | | | | |
Provision for expected credit losses (1) | 4.4 | | | 7.3 | | | 13.8 | |
Net write-offs and recoveries | (13.1) | | | (6.5) | | | (29.5) | |
Other adjustments (2) | 1.5 | | | (3.0) | | | (2.5) | |
| | | | | |
Balance at December 31, | $ | 34.4 | | | $ | 41.6 | | | $ | 43.8 | |
(1) For the year ended December 31, 2019, this represents the provision for doubtful accounts.
(2) Other adjustments represent amounts reserved for returns and discounts, foreign currency translation adjustments and reserves for certain customer
accounts where revenue is not recognized because collectability is not probable, and may include accounts receivable allowances recorded in connection
with acquisitions. The 2020 amount includes the impact of the Company's adoption of ASU 2016-13 on January 1, 2020.
Below are rollforwards of the Company’s allowance for credit losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Packaging and Facility Solutions | | Print - High Risk | | Print - Medium/Low Risk | | | | | | | | |
(in millions) | U.S. | | Canada | | U.S. | | Canada | | U.S. | | Canada | | Publishing(1) | | Rest of world | | Corporate & Other(1) | | Total |
Balance at December 31, 2020 | $ | 14.4 | | | $ | 0.5 | | | $ | 10.2 | | | $ | 0.7 | | | $ | 2.2 | | | $ | 0.0 | | | $ | 1.6 | | | $ | 1.0 | | | $ | 0.8 | | | $ | 31.4 | |
Add / (Deduct): | | | | | | | | | | | | | | | | | | | |
Provision for expected credit losses | 4.8 | | 0.6 | | (1.7) | | (0.1) | | 0.5 | | 0.0 | | (0.1) | | 0.0 | | 0.4 | | 4.4 |
Write-offs charged against the allowance | (7.3) | | (0.1) | | (4.7) | | (0.1) | | (0.5) | | — | | (0.6) | | 0.0 | | (0.5) | | (13.8) |
Recoveries of amounts previously written off | 0.7 | | — | | 0.0 | | 0.0 | | 0.0 | | — | | — | | — | | 0.0 | | 0.7 |
Other adjustments(2) | — | | 0.0 | | 2.4 | | 0.0 | | (1.4) | | 0.0 | | — | | 0.0 | | — | | 1.0 |
Balance at December 31, 2021 | $ | 12.6 | | | $ | 1.0 | | | $ | 6.2 | | | $ | 0.5 | | | $ | 0.8 | | | $ | 0.0 | | | $ | 0.9 | | | $ | 1.0 | | | $ | 0.7 | | | $ | 23.7 | |
(1) Publishing and Corporate & Other have only U.S. operations.
(2) Other adjustments represent amounts reserved for foreign currency translation adjustments and reserves for certain customer accounts where revenue is not recognized because collectability is not probable and may include accounts receivable allowances recorded in connection with acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Packaging and Facility Solutions | | Print - High Risk | | Print - Medium/Low Risk | | | | | | | | |
(in millions) | U.S. | | Canada | | U.S. | | Canada | | U.S. | | Canada | | Publishing(1) | | Rest of world | | Corporate & Other(1) | | Total |
Balance at December 31, 2019 | $ | 13.3 | | | $ | 1.0 | | | $ | 11.9 | | | $ | 0.4 | | | $ | 0.9 | | | $ | 0.1 | | | $ | 1.3 | | | $ | 0.6 | | | $ | 0.9 | | | $ | 30.4 | |
Add / (Deduct): | | | | | | | | | | | | | | | | | | | |
Adoption impact - ASU 2016-13 | 1.0 | | (0.3) | | (0.2) | | 0.0 | | 0.1 | | (0.1) | | (0.1) | | — | | 0.0 | | 0.4 |
Provision for expected credit losses | 2.8 | | 0.1 | | 2.3 | | 0.3 | | 0.1 | | 0.0 | | 1.3 | | 0.4 | | 0.0 | | 7.3 |
Write-offs charged against the allowance | (3.0) | | (0.3) | | (2.4) | | 0.0 | | (0.1) | | — | | (0.9) | | — | | (0.1) | | (6.8) |
Recoveries of amounts previously written off | 0.3 | | — | | 0.0 | | 0.0 | | 0.0 | | — | | 0.0 | | — | | 0.0 | | 0.3 |
Other adjustments(2) | — | | 0.0 | | (1.4) | | 0.0 | | 1.2 | | 0.0 | | — | | 0.0 | | — | | (0.2) |
Balance at December 31, 2020 | $ | 14.4 | | | $ | 0.5 | | | $ | 10.2 | | | $ | 0.7 | | | $ | 2.2 | | | $ | 0.0 | | | $ | 1.6 | | | $ | 1.0 | | | $ | 0.8 | | | $ | 31.4 | |
(1) Publishing and Corporate & Other have only U.S. operations.
(2) Other adjustments represent amounts reserved for foreign currency translation adjustments and reserves for certain customer accounts where revenue is not recognized because collectability is not probable, and may include accounts receivable allowances recorded in connection with acquisitions.
The Company, under certain circumstances, enters into note receivable agreements with customers. Expected credit losses are recognized when collectability is uncertain; these losses are included in selling and administrative expenses on the Consolidated Statements of Operations. For the years ended December 31, 2021, 2020 and 2019, the Company recognized $0.3 million, $5.1 million and $1.1 million, respectively, in the provision for expected credit losses related to these notes receivable. At December 31, 2021 and 2020, the Company held $0.5 million and $2.2 million, respectively, in notes receivable, the majority of which is reflected within other current assets on the Consolidated Balance Sheets.
3. LEASES
The Company leases certain property and equipment used for operations to limit its exposure to risks related to ownership. The major leased asset categories include: real estate, delivery equipment, material handling equipment and computer and office equipment. As of December 31, 2021, the Company operated from 115 distribution centers of which 109 were leased. These facilities are strategically located throughout the U.S., Canada and Mexico in order to efficiently serve the customer base in the surrounding areas while also facilitating expedited delivery services for special orders. The Company also leases various office spaces for corporate and sales functions.
The Company's leased asset categories generally carry the following lease terms: | | | | | | | | | | | | | | |
Real estate leases | 3 | to | 10 | years |
Delivery equipment leases | 3 | to | 8 | years |
Other non-real estate leases | 3 | to | 5 | years |
The components of lease expense were as follows: | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Year Ended December 31, |
Lease Classification | Financial Statement Classification | 2021 | | 2020 | | 2019 |
Short-term lease expense(1) | Operating expenses | $ | 4.0 | | | $ | 2.3 | | | $ | 7.1 | |
| | | | | | |
Operating lease expense(2) | Operating expenses | $ | 100.9 | | | $ | 111.8 | | | $ | 113.9 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Finance lease expense: | | | | | | |
Amortization of right-of-use assets | Depreciation and amortization | $ | 14.7 | | | $ | 14.7 | | | $ | 10.8 | |
Interest expense | Interest expense, net | 2.8 | | | 3.0 | | | 2.3 | |
Total finance lease expense | | $ | 17.5 | | | $ | 17.7 | | | $ | 13.1 | |
| | | | | | |
Total Lease Cost | | $ | 122.4 | | | $ | 131.8 | | | $ | 134.1 | |
(1) Short-term lease expense is comprised of expenses related to leases with a term of twelve months or less, which includes expenses related to month-to
month leases.
(2) Sublease income and variable lease expense are not included in the above table as the amounts were not significant for the years ended December 31,
2021, 2020 and 2019.
Supplemental balance sheets and other information were as follows: | | | | | | | | | | | | | | |
(in millions, except weighted-average data) | | As of December 31, |
Lease Classification | Financial Statement Classification | 2021 | | 2020 |
Operating Leases: | | | | |
Operating lease right-of-use assets | Other non-current assets | $ | 375.6 | | | $ | 351.7 | |
| | | | |
Operating lease obligations - current | Other accrued liabilities | $ | 80.2 | | | $ | 81.9 | |
Operating lease obligations - non-current | Other non-current liabilities | 329.3 | | | 307.4 | |
Total operating lease obligations | | $ | 409.5 | | | $ | 389.3 | |
| | | | |
Weighted-average remaining lease term in years | | 6.2 | | 6.1 |
Weighted-average discount rate | | 4.5 | % | | 4.7 | % |
| | | | |
Finance Leases: | | | | |
Finance lease right-of-use assets | Property and equipment | $ | 66.3 | | | $ | 76.6 | |
| | | | |
Finance lease obligations - current | Current portion of debt | $ | 13.9 | | | $ | 13.4 | |
Finance lease obligations - non-current | Long-term debt, net of current portion | 58.9 | | | 68.9 | |
Total finance lease obligations | | $ | 72.8 | | | $ | 82.3 | |
| | | | |
Weighted-average remaining lease term in years | | 6.4 | | 7.1 |
Weighted-average discount rate | | 3.7 | % | | 3.7 | % |
Cash paid for amounts included in the measurement of lease liabilities was as follows: | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Year Ended December 31, |
Lease Classification | Financial Statement Classification | 2021 | | 2020 | | 2019 |
Operating Leases: | | | | | | |
Operating cash flows from operating leases | Operating activities | $ | 103.3 | | | $ | 111.1 | | | $ | 109.5 | |
| | | | | | |
Finance Leases: | | | | | | |
Operating cash flows from finance leases | Operating activities | $ | 2.8 | | | $ | 3.0 | | | $ | 2.3 | |
Financing cash flows from finance leases | Financing activities | 13.8 | | | 13.0 | | | 9.1 | |
Lease Commitments
Future minimum lease payments at December 31, 2021 were as follows: | | | | | | | | | | | | | | | |
| | | |
(in millions) | Finance Leases | | Operating Leases(1) | | | | |
2022 | $ | 16.4 | | | $ | 96.7 | | | | | |
2023 | 14.0 | | | 82.3 | | | | | |
2024 | 12.2 | | | 68.7 | | | | | |
2025 | 11.3 | | | 58.3 | | | | | |
2026 | 8.4 | | | 52.8 | | | | | |
Thereafter | 20.3 | | | 112.6 | | | | | |
Total future minimum lease payments | 82.6 | | | 471.4 | | | | | |
Amount representing interest | (9.8) | | | (61.9) | | | | | |
Total future minimum lease payments, net of interest | $ | 72.8 | | | $ | 409.5 | | | | | |
(1) Future sublease income of $3.3 million is excluded from the operating leases amount in the table above.
Total future minimum lease payments at December 31, 2021 for finance and operating leases, including the amount representing interest, are comprised of $492.9 million for real estate leases and $61.1 million for non-real estate leases.
At December 31, 2021, the Company had committed to additional future obligations of approximately $31.5 million for real estate operating leases that have not yet commenced and therefore are not included in the table above. These leases are expected to commence within the next three months with an average lease term of approximately seven years. At December 31, 2021, the Company also committed to future obligations of approximately $0.6 million for delivery equipment finance leases that are expected to commence within the next three months with terms of eight years.
Upon the Company's adoption of ASU 2016-02 on January 1, 2019, it recognized an increase to retained earnings of $2.7 million, primarily driven by the derecognition of the unamortized gain from the prior sale of a property.
4. RESTRUCTURING AND INTEGRATION CHARGES
2020 Restructuring Plan
During the second quarter of 2020, the Company initiated a restructuring plan in response to the impact of the COVID-19 pandemic on its business operations and the ongoing secular changes in its Print and Publishing segments. During the fourth quarter of 2020, the Company expanded the initial plan to further align its cost structure with ongoing business needs as the Company executes on its stated corporate strategy. The initial and expansion activities are collectively referred to as the "2020 Restructuring Plan." The 2020 Restructuring Plan includes (i) a reduction of the Company's U.S. salaried workforce by approximately 15% across all business segments and corporate functions, (ii) the closure of certain warehouse facilities and retail stores, (iii) adjustments to various compensation plans, (iv) repositioning of inventory to expand the Company's service radius and (v) other actions. The Company currently estimates it will incur total restructuring charges of between $70 million and $76 million in connection with the 2020 Restructuring Plan. Through December 31, 2021, the Company has incurred approximately $67.6 million in costs and charges, of which $15.4 million was incurred
during the year ended December 31, 2021. Initial charges were incurred and recorded in June 2020. The 2020 Restructuring Plan was substantially complete as of December 31, 2021 with remaining charges to be incurred through the end of 2022.
Other direct costs reported in the tables below include facility closing costs and other incidental costs associated with the development, communication, administration and implementation of these initiatives; costs incurred exclude any non-cash portion of restructuring gains or losses on asset disposals.
The following is a summary of the Company's 2020 Restructuring Plan liability activity: | | | | | | | | | | | | | | | | | |
(in millions) | Severance and Related Costs | | Other Direct Costs | | Total |
Balance at December 31, 2019 | $ | — | | | $ | — | | | $ | — | |
Costs incurred | 38.7 | | | 12.4 | | | 51.1 | |
Payments | (23.3) | | | (5.5) | | | (28.8) | |
Balance at December 31, 2020 | 15.4 | | | 6.9 | | | 22.3 | |
Costs incurred | 2.1 | | | 10.4 | | | 12.5 | |
Payments | (12.8) | | | (13.6) | | | (26.4) | |
Balance at December 31, 2021 | $ | 4.7 | | | $ | 3.7 | | | $ | 8.4 | |
In addition to the costs incurred and payments shown in the table above, in December 2021 and 2020 the Company prepaid Other Direct Costs of $3.3 million and $8.1 million, respectively, of which $3.3 million and $7.0 million, respectively, remained as a component of other current assets on the Consolidated Balance Sheets at December 31, 2021 and 2020. During the year ended December 31, 2021, the Company recovered $0.2 million of the December 31, 2020 prepaid Other Direct Costs as a result of forfeited agreements. For the year ended December 31, 2021, the Company recognized non-cash gains of $3.9 million for lease terminations and retirement of assets.
Merger of xpedx and Unisource
As of December 31, 2019, the integration and restructuring plans related to the Merger were complete.
Integration Expenses
During the year ended December 31, 2019, Veritiv incurred costs and charges related primarily to: internally dedicated integration management resources, retention compensation, information technology conversion costs and other costs to integrate its businesses. The following table summarizes the components of integration expenses: | | | | | | | | | | | | |
| | | | | | Year Ended December 31, |
(in millions) | | | | | | 2019 |
Integration management | | | | | | $ | 10.4 | |
Retention compensation | | | | | | 1.0 | |
Information technology conversion costs | | | | | | 3.4 | |
| | | | | | |
| | | | | | |
Other | | | | | | 2.7 | |
| | | | | | |
Total integration expenses | | | | | | $ | 17.5 | |
Veritiv Restructuring Plan: Merger Related
As part of the Merger, the Company executed a multi-year restructuring program of its North American operations intended to integrate the legacy xpedx and Unisource operations, generate cost savings and capture synergies across the combined company. The restructuring plan included initiatives to: (i) consolidate warehouse facilities in overlapping markets, (ii) improve efficiency of the delivery network, (iii) consolidate customer service centers, (iv) reorganize the field sales and operations functions and (v) restructure the corporate general and administrative functions. As part of its restructuring efforts, the Company evaluated its operations outside of North America to identify additional cost saving opportunities. Costs related to exiting a branded re-distribution business were included in restructuring charges, net, on the Consolidated Statements of Operations and totaled $10.8 million for the year ended December 31, 2019. Other direct costs
reported in the table below include facility closing costs, actual and estimated MEPP withdrawal charges and other incidental costs associated with the development, communication, administration and implementation of these initiatives.
The following table presents a summary of restructuring charges, net, related to restructuring initiatives that were incurred during the year ended December 31, 2019 and the cumulative recorded amounts since the initiative began: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Severance and Related Costs | | Other Direct Costs | | (Gain) Loss on Sale of Assets and Other (non-cash portion) | | Total |
2019 | $ | 9.1 | | | $ | 20.3 | | | $ | (0.6) | | | $ | 28.8 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Cumulative | 32.4 | | | 90.5 | | | (38.0) | | | 84.9 | |
The Company's Merger related restructuring liability as of December 31, 2021 was $22.2 million of which $18.8 million was related to MEPP withdrawal obligations that will be paid-out over an approximate 20-year period. The Company's Merger related restructuring liability as of December 31, 2020 was $24.0 million of which $20.0 million was related to MEPP withdrawal obligations. See Note 9, Employee Benefit Plans, for additional information regarding these MEPP transactions.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
At December 31, 2021 and 2020, the net goodwill balance of $99.6 million was allocated to the Company's Packaging reportable segment. There were no goodwill additions or impairments recognized during the years ended December 31, 2021, 2020 and 2019. Cumulatively, the Company has recognized non-cash pre-tax goodwill impairment charges for certain of its reportable segments as follows: Facility Solutions $1.9 million (in 2015) and for the Company’s logistics solutions business $6.1 million (in 2017).
Other Intangible Assets
The components of the Company's other intangible assets were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
(in millions) | | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Customer relationships | | | $ | 67.7 | | | $ | 25.0 | | | $ | 42.7 | | | $ | 67.7 | | | $ | 20.3 | | | $ | 47.4 | |
Trademarks/Trade names | | | 3.8 | | | 3.8 | | | — | | | 3.8 | | | 3.8 | | | — | |
Total | | | $ | 71.5 | | | $ | 28.8 | | | $ | 42.7 | | | $ | 71.5 | | | $ | 24.1 | | | $ | 47.4 | |
Upon retirement or full impairment of the intangible assets, the cost and related amount of accumulated amortization are eliminated from the asset and accumulated amortization accounts, respectively. The Company recorded amortization expense of $4.7 million, $4.8 million and $5.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Estimated aggregate amortization expense for each of the five succeeding years is as follows (in millions): | | | | | | | | |
Year | | Total |
2022 | | $ | 4.8 | |
2023 | | 4.8 | |
2024 | | 4.8 | |
2025 | | 4.8 | |
2026 | | 4.8 | |
6. DEBT
The Company's debt obligations were as follows: | | | | | | | | | | | |
| As of December 31, |
(in millions) | 2021 | | 2020 |
Asset-Based Lending Facility (the "ABL Facility") | $ | 440.8 | | | $ | 520.2 | |
Commercial card program | 2.1 | | | 1.3 | |
Finance leases | 72.8 | | | 82.3 | |
Total debt | 515.7 | | | 603.8 | |
Less: current portion of debt | (16.0) | | | (14.7) | |
Long-term debt, net of current portion | $ | 499.7 | | | $ | 589.1 | |
ABL Facility
On May 20, 2021, the Company amended its ABL Facility to extend the maturity date to May 20, 2026, adjust the pricing grid for applicable interest rates and update certain provisions to facilitate the transition from LIBOR to a new replacement benchmark rate. All other significant terms remained substantially the same. Previously, on April 9, 2020, the Company amended its ABL Facility to extend the maturity date to April 9, 2025, reduce the aggregate commitments from $1.4 billion to $1.1 billion and adjust the pricing grid for applicable interest rates. All other significant terms remained substantially the same. The ABL Facility is comprised of U.S. and Canadian sub-facilities of $1.1 billion and $150 million, respectively. The ABL Facility is available to be drawn in U.S. dollars, in the case of the U.S. sub-facility, and in U.S. dollars or Canadian dollars, in the case of the Canadian sub-facility, or in other currencies that are mutually agreeable. The ABL Facility provides for the right of the individual lenders to extend the maturity date of their respective commitments and loans upon the request of Veritiv and without the consent of any other lenders. The ABL Facility may be prepaid at Veritiv's option at any time without premium or penalty and is subject to mandatory prepayment if the amount outstanding under the ABL Facility exceeds either the aggregate commitments with respect thereto or the current borrowing base, in an amount equal to such excess. The Company's accounts receivable and inventories in the U.S. and Canada are collateral under the ABL Facility.
Availability under the ABL Facility is determined based upon a monthly borrowing base calculation which includes eligible customer receivables and inventory, less outstanding borrowings, letters of credit and certain designated reserves. As of December 31, 2021, the available additional borrowing capacity under the ABL Facility was approximately $557.2 million. As of December 31, 2021, the Company held $11.0 million in outstanding letters of credit.
The ABL Facility has a springing minimum fixed charge coverage ratio of at least 1.00 to 1.00 on a trailing four-quarter basis, which will be tested only when specified availability is less than the limits outlined under the ABL Facility. At December 31, 2021, the above test was not applicable and based on information available as of the date of this report it is not expected to be applicable in the next 12 months.
Under the terms of the ABL Facility, interest rates are based upon LIBOR or the prime rate plus a margin rate, or in the case of Canada, a banker's acceptance rate or base rate plus a margin rate. For the years ended December 31, 2021, 2020 and 2019, the weighted-average borrowing interest rates were 1.8%, 2.9% and 3.4%, respectively.
In conjunction with the May 20, 2021 amendment to the ABL Facility, the Company incurred and deferred $3.3 million of new financing costs associated with the transaction, reflected in other non-current assets on the Consolidated Balance Sheet. In conjunction with the April 9, 2020 amendment to the ABL Facility, the Company recognized a one-time charge of $0.6 million to interest expense, net, on the Consolidated Statements of Operations, for the write-off of a portion of the previously deferred financing costs associated with lenders in the ABL Facility that exited the amended ABL Facility. In addition, the Company incurred and deferred $3.4 million of financing costs associated with the April 9, 2020 transaction, reflected in other non-current assets on the Consolidated Balance Sheet. These deferred costs will be amortized to interest expense on a straight-line basis over the new amended term of the ABL Facility. Interest expense, net on the Consolidated Statements of Operations included $1.5 million, $2.1 million and $2.6 million of amortization and write-off charges related to deferred financing fees for the years ended December 31, 2021, 2020 and 2019, respectively.
Finance Lease Obligations
See Note 3, Leases, for additional information regarding the Company's finance leases.
Interest Rate Cap
The Company's indebtedness under the ABL Facility creates interest rate risk. The Company actively monitors this risk with the objective to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in the interest rate. As of and for the years ended December 31, 2021, 2020 and 2019, the Company held one interest rate cap for which impacts on the Company's financial results were not significant.
The Company is exposed to counterparty credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in the interest rate. The Company attempts to manage exposure to counterparty credit risk primarily by selecting only those counterparties that meet certain credit and other financial standards. The Company believes there has not been a material change in the creditworthiness of its counterparty and believes the risk of nonperformance by such party is minimal.
Commercial Card Program
The Company has a commercial purchasing card program that is used for business purpose purchasing and must be paid in-full monthly. At December 31, 2021, the card carried a maximum credit limit of $37.5 million. At December 31, 2021 and 2020, $2.1 million and $1.3 million, respectively, was outstanding on the commercial card. The net change in the outstanding balance is included in other financing activities on the Consolidated Statements of Cash Flows.
7. INCOME TAXES
The Company is subject to federal, state and local income taxes in the U.S., as well as income taxes in Canada, Mexico and other foreign jurisdictions. The domestic (U.S.) and foreign components of the Company's income (loss) before income taxes were as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Domestic (U.S.) | $ | 173.9 | | | $ | 30.8 | | | $ | (50.5) | |
Foreign | 23.6 | | | 12.2 | | | 21.7 | |
Income (loss) before income taxes | $ | 197.5 | | | $ | 43.0 | | | $ | (28.8) | |
Income tax expense (benefit) on the Consolidated Statements of Operations consisted of the following: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Current Provision: | | | | | |
U.S. Federal | $ | 32.7 | | | $ | 4.7 | | | $ | 0.7 | |
U.S. State | 8.5 | | | 3.9 | | | 0.5 | |
Foreign | 2.5 | | | 2.0 | | | 2.2 | |
Total current income tax expense | $ | 43.7 | | | $ | 10.6 | | | $ | 3.4 | |
| | | | | |
Deferred, net: | | | | | |
U.S. Federal | $ | 3.9 | | | $ | (2.6) | | | $ | (4.8) | |
U.S. State | 1.5 | | | (0.4) | | | 0.0 | |
Foreign | 3.8 | | | 1.2 | | | 2.1 | |
Total deferred, net | $ | 9.2 | | | $ | (1.8) | | | $ | (2.7) | |
Provision for income tax expense | $ | 52.9 | | | $ | 8.8 | | | $ | 0.7 | |
Reconciliation between the federal statutory rate and the effective tax rate is as follows (see Note 8, Related Party Transactions, for additional information related to the Tax Receivable Agreement ("TRA")): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Income (loss) before income taxes | $ | 197.5 | | $ | 43.0 | | $ | (28.8) |
Statutory U.S. income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Tax expense (benefit) using statutory U.S. income tax rate | $ | 41.5 | | $ | 9.0 | | $ | (6.0) |
Foreign income tax rate differential | 1.3 | | 0.6 | | 0.6 |
State tax (net of federal benefit) | 8.8 | | 2.6 | | 0.3 |
Non-deductible expenses | 3.5 | | 2.3 | | 2.4 |
Global Intangible Low Taxed Income | 1.8 | | (1.5) | | 2.8 |
Foreign-Derived Intangible Income | (1.5) | | | — | | | — | |
TRA | — | | (3.7) | | (0.1) |
Tax credits | (2.8) | | (1.9) | | (1.1) |
| | | | | |
| | | | | |
Impact of CARES Act | — | | | (2.4) | | | — | |
Stock compensation vesting | (1.0) | | 2.1 | | 1.3 |
| | | | | |
Change in valuation allowance - Foreign | 0.2 | | — | | 0.3 |
| | | | | |
Foreign taxes | 1.2 | | 1.6 | | 0.9 |
Bad debt | — | | — | | (0.9) |
Other | (0.1) | | 0.1 | | 0.2 |
Income tax provision | $ | 52.9 | | $ | 8.8 | | $ | 0.7 |
Effective income tax rate | 26.8 | % | | 20.5 | % | | (2.4) | % |
The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law on March 27, 2020 and makes significant economic stimulus changes and additional changes to the U.S. tax code, including, but not limited to, allowing the carryback of net operating losses ("NOLs" or "NOL") occurring in 2018, 2019 and 2020 to the prior five years and eliminating the taxable income limitation, changes to the interest expense limitation, a technical correction for qualified improvement property depreciation and providing additional employee retention credits.
Components of deferred income tax assets and liabilities were as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
(in millions) | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
Deferred income tax assets: | | | | | | | |
Accrued compensation | $ | 41.8 | | | $ | 0.0 | | | $ | 39.4 | | | $ | 3.6 | |
Finance leases | 8.9 | | | 9.4 | | | 10.8 | | | 9.9 | |
| | | | | | | |
Lease obligations | 91.2 | | | 15.6 | | | 90.2 | | | 12.1 | |
| | | | | | | |
| | | | | | | |
Net operating losses and credit carryforwards | 23.7 | | | 1.1 | | | 27.8 | | | 4.6 | |
Allowance for credit losses and doubtful accounts, respectively | 9.5 | | | 0.2 | | | 12.3 | | | 0.2 | |
Other | 5.4 | | | 1.0 | | | 8.3 | | | 1.0 | |
Gross deferred income tax assets | 180.5 | | | 27.3 | | | 188.8 | | | 31.4 | |
Less valuation allowance | (0.1) | | | (1.1) | | | (1.3) | | | (1.0) | |
Total deferred tax asset | $ | 180.4 | | | $ | 26.2 | | | $ | 187.5 | | | $ | 30.4 | |
| | | | | | | |
Deferred income tax liabilities: | | | | | | | |
Property and equipment, net | $ | (20.1) | | | $ | (8.4) | | | $ | (26.6) | | | $ | (8.8) | |
Lease assets | (84.6) | | | (14.9) | | | (82.9) | | | (11.6) | |
Inventory reserve | (20.5) | | | — | | | (17.9) | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other | (11.0) | | | — | | | (10.1) | | | — | |
Total deferred tax liability | $ | (136.2) | | | $ | (23.3) | | | $ | (137.5) | | | $ | (20.4) | |
Net deferred income tax asset | $ | 44.2 | | | $ | 2.9 | | | $ | 50.0 | | | $ | 10.0 | |
Deferred income tax asset valuation allowance is as follows: | | | | | | | | | | | | | | | | | |
(in millions) | U.S. | | Non-U.S. | | Total |
Balance at December 31, 2019 | $ | 2.4 | | | $ | 2.4 | | | $ | 4.8 | |
Additions | — | | | — | | | — | |
Subtractions | (1.1) | | | (1.6) | | | (2.7) | |
Currency translation adjustments | — | | | 0.2 | | | 0.2 | |
Balance at December 31, 2020 | 1.3 | | | 1.0 | | | 2.3 | |
Additions | — | | | 0.2 | | | 0.2 | |
Subtractions | (1.2) | | | — | | | (1.2) | |
Currency translation adjustments | — | | | (0.1) | | | (0.1) | |
Balance at December 31, 2021 | $ | 0.1 | | | $ | 1.1 | | | $ | 1.2 | |
The Merger resulted in a significant change in the ownership of the Company, which, pursuant to the Internal Revenue Code Section 382, imposes annual limits on the Company's ability to utilize its U.S. federal and state NOL carryforwards. The Company's NOLs will continue to be available to offset taxable income (until such NOLs are either utilized or expire) subject to the Section 382 annual limitation. If the annual limitation amount is not fully utilized in a particular tax year, then the unused portion from that particular tax year will be added to the annual limitation in subsequent years.
In general, it is the practice and intention of Veritiv to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2021, Veritiv's tax basis exceeded its financial reporting basis in certain investments in non-U.S. subsidiaries. The Company does not believe these temporary differences will reverse in the foreseeable future and, therefore, no deferred tax asset has been recognized with respect to these basis differences. Additionally, no deferred tax liability has been recognized for income and withholding tax liabilities associated with investments in non-U.S. subsidiaries where book basis exceeds tax basis. The amount of such temporary differences totaled approximately $20.3 million as of
December 31, 2021. The income and withholding tax liability associated with these temporary differences is not significant.
Veritiv applies a "more likely than not" threshold to the recognition and de-recognition of uncertain tax positions. A change in judgment related to prior years' uncertain tax positions is recognized in the period of such change.
The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. Total gross unrecognized tax benefits as of December 31, 2021, 2020 and 2019, as well as activity within each of the years, was not material.
In the U.S., Veritiv is generally subject to examination by the IRS for fiscal years 2016 and later and certain states for fiscal years 2017 and later; however, it may be subject to IRS and state tax authority adjustments for years prior to 2016 to the extent of losses or other tax attributes carrying forward from the earlier years. Veritiv Canada remains subject to examination by the Canadian Revenue Agency and certain provinces for fiscal years 2017 and later.
As of December 31, 2021, Veritiv has federal, state and foreign income tax NOLs available to offset future taxable income of $99.4 million, $62.6 million and $4.9 million, respectively. Federal NOLs begin expiring in 2024. State and foreign NOLs will expire at various dates from 2022 through 2041, with the exception of certain foreign NOLs that do not expire but instead have a full valuation allowance.
8. RELATED PARTY TRANSACTIONS
On March 3, 2021, Veritiv announced that its Board of Directors authorized a $50 million share repurchase program (the "2021 Share Repurchase Program"). Executing within the 2021 Share Repurchase Program, on March 9, 2021, Veritiv entered into a Share Repurchase Agreement with UWW Holdings, LLC (the "UWWH Stockholder"), pursuant to which the Company agreed to repurchase (the “Share Repurchase”) an aggregate of 553,536 shares of its common stock owned by the UWWH Stockholder for an aggregate purchase price of $23.2 million. The Share Repurchase closed on March 12, 2021 and the Company funded the Share Repurchase with cash on hand. Concurrently with the closing of the Share Repurchase, the UWWH Stockholder sold the remainder of its shares of Veritiv common stock to an unrelated third party.
In conjunction with the Merger, Veritiv and the UWWH Stockholder executed the TRA. The TRA set forth the terms by which Veritiv was generally obligated to pay the UWWH Stockholder an amount equal to 85% of the U.S. federal, state and Canadian income tax savings, if any, that Veritiv actually realized as a result of the utilization of Unisource's NOLs attributable to taxable periods prior to the date of the Merger. In January 2020 and 2019, Veritiv paid $0.3 million and $8.1 million, respectively, in principal and interest, to the UWWH Stockholder for the utilization of pre-merger NOLs in its 2018 and 2017 federal and state tax returns, respectively. In December 2020, the Company and the UWWH Stockholder agreed to settle the TRA. The Company paid the UWWH Stockholder a total of $12.0 million in settlement of all past and future liabilities that would have been owed under the TRA and the parties agreed to a mutual release of claims under the TRA. See Note 10, Fair Value Measurements, for additional information regarding the TRA.
The Company considers its stockholders that own more than 10.0% of its outstanding common stock to be related parties as defined within ASC 850, Related Party Disclosures. As a result of the Merger and related private placement, Georgia-Pacific LLC ("Georgia-Pacific"), as joint owner of the UWWH Stockholder, qualified as a related party. Effective with the November 19, 2020 sale of the Company's common stock by the UWWH Stockholder, Georgia-Pacific was no longer treated as a related party. The UWWH Stockholder beneficially owned 8.7% of Veritiv's outstanding common stock as of December 31, 2020.
Transactions with Georgia-Pacific
Veritiv purchases certain inventory items from, and sells certain inventory items to, Georgia-Pacific in the normal course of business. The following table summarizes the financial impact of the transactions with Georgia-Pacific during the prior year period when it was considered a related party:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in millions) | | 2020 | | 2019 |
Sales to Georgia-Pacific, reflected in net sales | | $ | 19.7 | | | $ | 23.4 | |
Purchases of inventory from Georgia-Pacific, recognized in cost of products sold | | 55.6 | | | 85.2 | |
9. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
Veritiv sponsors qualified defined contribution plans covering its employees in the U.S. and Canada. The defined
contribution plans allow eligible employees to contribute a portion of their eligible compensation (including salary and annual incentive plan bonus) to the plans and Veritiv makes matching contributions to participant accounts on a specified percentage of employee deferrals as determined by the provisions of each plan. During the years ended December 31, 2021, 2020 and 2019 Veritiv's contributions to these plans totaled $16.2 million, $9.3 million and $19.9 million, respectively. As part of the Company's cost-saving actions taken due to the COVID-19 pandemic, the Company's matching contributions for all salaried employees not covered by collective bargaining agreements were suspended effective May 1, 2020 and were resumed effective January 1, 2021.
Deferred Compensation Savings Plans
In conjunction with the Merger, Veritiv assumed responsibility for Unisource's legacy deferred compensation plans. In general, the payout terms varied for each employee agreement and are paid in monthly or annual installments ranging up to 15 years from the date of eligibility.
Effective January 1, 2015, the Company adopted the Veritiv Deferred Compensation Savings Plan which provides for the deferral of salaries, commissions or bonuses of eligible non-union employees and the deferral of cash and equity retainers for non-employee members of the Company's Board of Directors. Under this plan, eligible employees may elect to defer up to 85% of their base salary, commissions and annual incentive bonus. The amounts deferred are credited to notional investment accounts selected by participants. At the time a deferral election is made, participants elect to receive payout of the deferred amounts upon termination of employment or termination of Board service in the form of a lump sum or equal annual installments ranging from two to ten years. Currently, Veritiv does not make matching contributions to this plan.
The liabilities associated with these plans are summarized in the table below. | | | | | | | | | | | | | | |
| | As of December 31, |
(in millions) | | 2021 | | 2020 |
Other accrued liabilities | | $ | 4.0 | | | $ | 4.1 | |
Other non-current liabilities | | 19.3 | | | 19.7 | |
Total liabilities | | $ | 23.3 | | | $ | 23.8 | |
Defined Benefit Plans
At December 31, 2021 and 2020, Veritiv did not maintain any open defined benefit plans for its non-union employees. Veritiv maintains an open defined benefit pension plan in the U.S. for employees covered by certain collectively bargained agreements. Veritiv also assumed responsibility for Unisource's defined benefit plans, which include frozen cash balance accounts for certain former Unisource employees.
Effective December 1, 2021, the Company divided the U.S. Veritiv Pension Plan by establishing a new Veritiv Hourly Pension Plan to provide benefits to certain employees who were accruing a benefit under the U.S Veritiv Pension Plan pursuant to the terms of a collective bargaining agreement. Veritiv currently has the intent to subsequently terminate and settle the U.S. Veritiv Pension Plan. The Veritiv Hourly Pension Plan will remain open.
Benefit Obligations and Funded Status
The following table provides information about Veritiv's U.S. and Canadian defined benefit pension plans and Supplemental Executive Retirement Plans ("SERP"):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
(in millions) | U.S. | | Canada | | U.S. | | Canada |
Accumulated benefit obligation, end of year | $ | 68.0 | | | $ | 82.9 | | | $ | 68.6 | | | $ | 89.0 | |
| | | | | | | |
| | | | | | | |
Change in projected benefit obligation: | | | | | | | |
Benefit obligation, beginning of year | $ | 68.6 | | | $ | 95.3 | | | $ | 65.4 | | | $ | 87.6 | |
Service cost | 1.3 | | | 0.4 | | | 1.3 | | | 0.4 | |
Interest cost | 1.0 | | | 2.0 | | | 1.6 | | | 2.4 | |
Actuarial (gain) loss | 1.7 | | | (5.7) | | | 4.3 | | | 7.4 | |
Benefits paid | (0.6) | | | (4.6) | | | (0.4) | | | (4.6) | |
Settlements | (4.0) | | | — | | | (3.6) | | | — | |
Foreign exchange adjustments | — | | | 0.4 | | | — | | | 2.1 | |
Projected benefit obligation, end of year | $ | 68.0 | | | $ | 87.8 | | | $ | 68.6 | | | $ | 95.3 | |
| | | | | | | |
Change in plan assets: | | | | | | | |
Plan assets, beginning of year | $ | 63.4 | | | $ | 82.0 | | | $ | 59.2 | | | $ | 77.8 | |
Employer contributions | 0.0 | | | 0.3 | | | 0.1 | | | 0.4 | |
Investment returns | 6.9 | | | 11.1 | | | 8.9 | | | 6.7 | |
Benefits paid | (0.6) | | | (4.6) | | | (0.4) | | | (4.6) | |
Administrative expenses paid | (0.7) | | | — | | | (0.8) | | | — | |
Settlements | (4.0) | | | — | | | (3.6) | | | — | |
Foreign exchange adjustments | — | | | 0.2 | | | — | | | 1.7 | |
Plan assets, end of year | $ | 65.0 | | | $ | 89.0 | | | $ | 63.4 | | | $ | 82.0 | |
Funded status, end of year | $ | (3.0) | | | $ | 1.2 | | | $ | (5.2) | | | $ | (13.3) | |
Balance Sheet Positions | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
(in millions) | U.S. | | Canada | | U.S. | | Canada |
| | | | | | | |
Non-current assets | $ | — | | | $ | 5.7 | | | $ | — | | | $ | — | |
Other accrued liabilities | (0.1) | | | (0.2) | | | (0.1) | | | (0.2) | |
Defined benefit pension obligations | (2.9) | | | (4.3) | | | (5.1) | | | (13.1) | |
Net asset (liability) recognized | $ | (3.0) | | | $ | 1.2 | | | $ | (5.2) | | | $ | (13.3) | |
| | | | | | | |
Amounts included in AOCL - net actuarial (gain) loss, net of tax | $ | (0.5) | | | $ | (0.5) | | | $ | 0.2 | | | $ | 8.9 | |
| | | | | | | |
Net Periodic Cost
Total net periodic benefit cost (credit) associated with the defined benefit pension and SERP plans is summarized below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
(in millions) | U.S. | | Canada | | U.S. | | Canada | | U.S. | | Canada |
Components of net periodic benefit cost (credit): | | | | | | | | | | | |
Service cost | $ | 2.1 | | | $ | 0.4 | | | $ | 2.1 | | | $ | 0.4 | | | $ | 1.9 | | | $ | 0.3 | |
| | | | | | | | | | | |
Interest cost | $ | 1.0 | | | $ | 2.0 | | | $ | 1.6 | | | $ | 2.4 | | | $ | 2.1 | | | $ | 2.9 | |
Expected return on plan assets | (4.3) | | | (4.1) | | | (3.9) | | | (3.9) | | | (3.4) | | | (3.7) | |
| | | | | | | | | | | |
Settlement loss | 0.0 | | | 0.2 | | | 0.0 | | | 0.1 | | | — | | | — | |
Amortization of net loss | — | | | 0.2 | | | 0.0 | | | 0.2 | | | — | | | 0.2 | |
Total other components | $ | (3.3) | | | $ | (1.7) | | | $ | (2.3) | | | $ | (1.2) | | | $ | (1.3) | | | $ | (0.6) | |
Net periodic benefit cost (credit) | $ | (1.2) | | | $ | (1.3) | | | $ | (0.2) | | | $ | (0.8) | | | $ | 0.6 | | | $ | (0.3) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Changes to funded status recognized in other comprehensive (income) loss: | | | | | | | | | | | |
Net (gain) loss during year, net of tax | $ | (0.7) | | | $ | (9.4) | | | $ | (0.5) | | | $ | 3.4 | | | $ | (4.7) | | | $ | 0.8 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The components of net periodic benefit cost (credit) other than the service cost component are included in other (income) expense, net in the Company's Consolidated Statements of Operations. Amounts are generally amortized from AOCL over the expected future working lifetime of active plan participants.
Fair Value of Plan Assets
U.S. and Canada pension plan assets are primarily invested in broad-based mutual funds and pooled funds comprised of U.S. and non-U.S. equities, U.S. and non-U.S. high-quality and high-yield fixed income securities, hedge fund-of-funds and short-term interest bearing securities or deposits.
The underlying Level 1 investments of the U.S. plan assets are valued using quoted prices in active markets. The Level 2 investments are primarily valued by each fund’s third-party administrator based upon the valuation of the underlying securities and instruments and primarily by applying a valuation methodology based on observable market data as appropriate depending on the specific type of security or instrument held. The underlying investments of the Canada plan assets in equity and fixed income securities are measured at fair value using the Net Asset Value ("NAV") provided by the administrator of the fund and the Company has the ability to redeem such assets at the measurement date or within the near term without redemption restrictions. In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), investments that are measured at fair value using the NAV per share practical expedient have not been classified in the fair value hierarchy.
The following tables present Veritiv's plan assets using the fair value hierarchy which is reconciled to the amounts presented for the total pension benefit plan assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | | | As of December 31, 2020 |
(in millions) | Total | | Level 1 | | Level 2 | | | | Total | | Level 1 | | Level 2 | | |
Investments – U.S.: | | | | | | | | | | | | | | | |
Equity securities | $ | 3.3 | | | $ | 3.3 | | | $ | — | | | | | $ | 35.2 | | | $ | 35.2 | | | $ | — | | | |
Fixed income securities | 31.5 | | | 31.5 | | | — | | | | | 23.8 | | | 23.8 | | | — | | | |
Hedge Fund-of-Funds | 4.2 | | | — | | | 4.2 | | | | | 3.8 | | | — | | | 3.8 | | | |
Cash and short-term securities | 26.0 | | | 26.0 | | | — | | | | | 0.6 | | | 0.6 | | | — | | | |
Total | $ | 65.0 | | | $ | 60.8 | | | $ | 4.2 | | | | | $ | 63.4 | | | $ | 59.6 | | | $ | 3.8 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | As of December 31, 2020 | | | | | |
(in millions) | Total | | Level 1 | | | | | | Total | | Level 1 | | | | | |
Investments – Canada: | | | | | | | | | | | | | | | | |
Cash and short-term securities | $ | 0.7 | | | $ | 0.7 | | | | | | | $ | 1.1 | | | $ | 1.1 | | | | | | |
Investments measured at NAV: | | | | | | | | | | | | | | | | |
Equity securities | 61.9 | | | | | | | | | 53.9 | | | | | | | | |
Fixed income securities | 26.4 | | | | | | | | | 27.0 | | | | | | | | |
Total | $ | 89.0 | | | $ | 0.7 | | | | | | | $ | 82.0 | | | $ | 1.1 | | | | | | |
The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement. Valuation methodologies used for assets and liabilities measured at fair value are as follows:
* Equity Securities: Commingled funds are valued at the net asset value of units held at year end, as determined by a pricing vendor or the fund family. Mutual funds are valued at the net asset value of shares held at year end, as determined by the closing price reported on the active market on which the individual securities are traded, or a pricing vendor or the fund family if an active market is not available.
* Fixed Income Securities: Mutual funds are valued at the net asset value of shares held at year end, as determined by the closing price reported on the active market on which the individual securities are traded, or a pricing vendor or the fund family if an active market is not available.
* Hedge Fund-of-Funds: These investments represent limited partnership interests in private equity and hedge funds. The partnership interests are valued by the general partners based on the underlying assets in each fund.
* Cash and Short-term Securities: Cash and cash equivalents consist of U.S. and foreign currencies. Foreign currencies are reported in U.S. dollars based on currency exchange rates readily available in active markets. Short-term securities are valued at the net asset value of units held at year end.
The weighted-average asset allocations of invested assets within Veritiv's defined benefit pension plans were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2021 | | | | | Asset Allocation Range |
(in millions) | U.S. | | Canada | | U.S. | | Canada |
Equity securities | $ | 3.3 | | | $ | 61.9 | | | 0% | - | 15% | | 50% | - | 70% |
Fixed income securities | 31.5 | | | 26.4 | | | 45% | - | 55% | | 30% | - | 50% |
Hedge Fund-of-Funds | 4.2 | | | — | | | 0% | - | 10% | | —% | - | —% |
Cash and short-term securities | 26.0 | | | 0.7 | | | 35% | - | 45% | | 0% | - | 5% |
Total | $ | 65.0 | | | $ | 89.0 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2020 | | | | | Asset Allocation Range |
(in millions) | U.S. | | Canada | | U.S. | | Canada |
Equity securities | $ | 35.2 | | | $ | 53.9 | | | 45% | - | 60% | | 50% | - | 70% |
Fixed income securities | 23.8 | | | 27.0 | | | 30% | - | 50% | | 30% | - | 50% |
Hedge Fund-of-Funds | 3.8 | | | — | | | 0% | - | 10% | | —% | - | —% |
Cash and short-term securities | 0.6 | | | 1.1 | | | 0% | - | 5% | | 0% | - | 5% |
Total | $ | 63.4 | | | $ | 82.0 | | | | | | | | | |
Veritiv's current U.S. investment objectives reflect a recent realignment of the investment strategy to better address the separate needs of the legacy plan and the newly established Veritiv Hourly Pension Plan. The investment objective of the assets remaining in the legacy Veritiv Pension Plan is primarily to reduce the effects of volatility on the fair value of pension assets relative to pension obligations by investing a majority of plan assets in high quality fixed income securities and cash
equivalents in preparation for the currently intended plan termination. The investment objective of the assets that will be moved to the Veritiv Hourly Pension Plan include maximizing long-term returns at acceptable risk levels, diversifying among asset classes, as applicable, and among investment managers as well as establishing certain risk parameters within asset classes. Total returns are compared to the weighted-average return of a benchmark mix of investments. Individual fund investments are compared to historical three year, five year and ten year returns achieved by funds with similar investment objectives. Investment performance is evaluated at least quarterly.
Veritiv's current Canada investment objectives include maximizing long-term returns at acceptable risk levels, diversifying among asset classes, as applicable, and among investment managers as well as establishing certain risk parameters within asset classes. Veritiv's pension investment strategy is to reduce the effects of future volatility on the fair value of pension assets relative to pension obligations by increasing the allocation to high quality, longer-term fixed income securities and reducing the allocation to equity investments as the funded status improves. Total returns are compared to the weighted-average return of a benchmark mix of investments. Individual fund investments are compared to historical three year, five year and ten year returns achieved by funds with similar investment objectives. Investment performance is evaluated at least quarterly.
Assumptions
The determination of Veritiv's defined benefit obligations and pension expense is based on various assumptions, such as discount rates, expected long-term rates of return, rate of compensation increases, employee retirement patterns and payment selections, inflation, and mortality rates.
Veritiv's weighted-average discount rates for its U.S. plans were determined by using cash flow matching techniques whereby the rates of yield curves, developed from U.S. corporate yield curves, were applied to the benefit obligations to determine the appropriate discount rate. Veritiv's weighted-average discount rates for its Canadian plans were determined by using spot rates from yield curves, developed from high-quality bonds (rated AA or higher) by established rating agencies, matching the duration of the future expected benefit obligations.
Veritiv's weighted-average expected rate of return was developed based on several factors, including projected and historical rates of returns, investment allocations of pension plan assets and inflation expectations. Veritiv evaluates the expected rate of return assumptions on an annual basis.
The following table presents significant weighted-average assumptions used in computing the benefit obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 | | 2019 |
| U.S. | | Canada | | U.S. | | Canada | | U.S. | | Canada |
Discount rate | 2.54 | % | | 2.95 | % | | 2.15 | % | | 2.50 | % | | 2.98 | % | | 3.10 | % |
Rate of compensation increases | N/A | | 3.00 | % | | N/A | | 3.00 | % | | N/A | | 3.00 | % |
The following table presents significant weighted-average assumptions used in computing net periodic benefit cost (credit): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| U.S. | | Canada | | U.S. | | Canada | | U.S. | | Canada |
Discount rate | 2.13 | % | | 2.50 | % | | 2.98 | % | | 3.10 | % | | 4.01 | % | | 3.90 | % |
Rate of compensation increases | N/A | | 3.00 | % | | N/A | | 3.00 | % | | N/A | | 3.00 | % |
Expected long-term rate of return on assets | 7.15 | % | | 5.00 | % | | 7.15 | % | | 5.25 | % | | 7.15 | % | | 5.50 | % |
Interest crediting rate | 1.43 | % | | N/A | | 2.73 | % | | N/A | | 5.00 | % | | N/A |
Cash Flows
Veritiv expects to contribute $0.2 million and $0.4 million to its U.S. and Canadian defined benefit pension and SERP plans, respectively, during 2022. Future benefit payments under the defined benefit pension and SERP plans are estimated as follows: | | | | | | | | | | | |
(in millions) | U.S. | | Canada |
2022 | $ | 5.4 | | | $ | 3.1 | |
2023 | 4.4 | | | 3.2 | |
2024 | 4.2 | | | 3.4 | |
2025 | 4.3 | | | 3.6 | |
2026 | 4.3 | | | 3.7 | |
2027 – 2031 | 19.5 | | | 20.9 | |
| | | |
MEPPs
Veritiv's contributions to MEPPs, excluding the payment of any withdrawal liabilities, were $1.7 million, $2.0 million and $2.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. It is reasonably possible that changes to Veritiv employees covered under these plans might result in additional contribution obligations. Any such obligations would be governed by the specific agreement between Veritiv and any such plan. Veritiv's contributions did not represent more than 5% of total contributions to any MEPPs for the plan years in which Forms 5500 were available. At the date these Consolidated Financial Statements were issued, Forms 5500 were not available for the plan year ended in 2021.
The risks of participating in these MEPPs are different from a single employer plan in the following aspects:
•Assets contributed to the MEPPs by one employer may be used to provide benefits to employees of other participating employers,
•If a participating employer ceases contributing to the plan, the unfunded obligations of the plan may be inherited by the remaining participating employers, and
•If the Company stops participating in any of the MEPPs, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company records an estimated undiscounted charge when it becomes probable that it has incurred a MEPP withdrawal liability. Final charges for MEPP withdrawals are not known until the plans issue their respective determinations. As a result, these estimates may increase or decrease depending upon the final determination. Charges not related to the Company's restructuring efforts are recorded as distribution expenses. Initial amounts are recorded as other non-current liabilities on the Consolidated Balance Sheets.
See the table below for a summary of the net withdrawal charges and the year-end balance sheet liability positions:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | Restructuring charges, net | | Distribution expenses | | Total Net Charges |
2021 | $ | — | | | $ | 0.5 | | | $ | 0.5 | |
2020 | — | | | 7.2 | | | 7.2 | |
2019 | 1.5 | | | 6.6 | | | 8.1 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| As of December 31, | | |
| | | | | |
(in millions) | Other accrued liabilities | | Other non-current liabilities | | |
2021 | $ | 1.8 | | | $ | 41.4 | | | |
2020 | 1.8 | | | 42.7 | | | |
During the fourth quarter of 2021, in the course of negotiations for a collective bargaining agreement, Veritiv negotiated a complete withdrawal from the Minneapolis Food Distributors Ind Pension Plan to take effect on July 31, 2022
and recognized an estimated complete withdrawal liability of $0.5 million as of December 31, 2021. The withdrawal charge was recorded in distribution expenses as it was not related to a restructuring activity. As of December 31, 2021, the Company has not yet received the determination letter for the complete withdrawal from the Minneapolis Food Distributors Ind Pension Plan. The Company expects that payments will occur over an approximate 3-year period.
During the first quarter of 2020, Veritiv negotiated the complete withdrawal from the Western Pennsylvania Teamsters and Employers Pension Fund (the "Western Pennsylvania Fund") related to the second bargaining unit at its Warrendale, Pennsylvania location and recognized an estimated complete withdrawal liability of $7.1 million in distribution expenses, as it was not related to a restructuring activity.
During the second quarter of 2019, in the course of negotiations for a collective bargaining agreement, Veritiv negotiated a partial withdrawal from the Western Pennsylvania Fund and recognized an estimated partial withdrawal liability of $6.5 million in distribution expenses, as it was not related to a restructuring activity. Also during the second quarter of 2019, Veritiv recognized an estimated complete withdrawal liability of $1.8 million in restructuring charges, net related to the closing of its Philadelphia, Pennsylvania location for those employees who participated in the Warehouse Employees Local Union 169 and Employer's Joint Pension Trust MEPP ("Local 169 MEPP"). In the fourth quarter of 2019, Veritiv received the estimated determination letter from the Local 169 MEPP assessing a complete withdrawal liability of $1.8 million, which was equal to the amount recognized during the second quarter of 2019 and is payable in 80 quarterly installments beginning in December 2019.
As of December 31, 2021, the Company has not yet received the determination letters for the partial and subsequent full withdrawal from the Western Pennsylvania Fund. The Company expects that payments will occur over an approximate 20-year period, which could run consecutively.
Veritiv's participation in the MEPPs for the year ended December 31, 2021, is outlined in the table below. The "EIN" and "Pension Plan Number" columns provide the Employer Identification Number and the three-digit plan number for each applicable plan. The Pension Protection Act zone listed below is based on the latest information Veritiv received from the plan and is certified by the plan's actuary. Plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded and plans in the green zone are at least 80% funded. There were no changes in the status of any zones based on the information provided to Veritiv during 2021. The "FIP/RP Status Pending/Implemented" column indicates plans for which a financial improvement plan or a rehabilitation plan is either pending or has been implemented. The last column lists the expiration date(s) of the collective-bargaining agreement(s). Contributions in the table below, for the years ended December 31, 2021, 2020 and 2019, exclude $1.8 million, $1.9 million and $2.0 million, respectively, related to payments made for accrued withdrawal liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pension Fund | EIN | | Pension Plan Number | | Pension Protection Act Zone Status | | FIP/RP Status Pending/ Implemented | | Veritiv's Contributions | | Surcharge Imposed | | Expiration Date(s) of Collective Bargaining Agreement(s) |
| | | | 2021 | | 2020 | | 2019 | | |
Western Conference of Teamsters Pension Trust Fund (1) | 91-6145047 | | 001 | | Green | | No | | $ | 0.9 | | | $ | 1.1 | | | $ | 1.3 | | | No | | 9/30/2021 - 10/31/2023 |
| | | | | | | | | | | | | | | | | |
Teamsters Pension Plan of Philadelphia & Vicinity | 23-1511735 | | 001 | | Yellow | | Implemented | | 0.4 | | | 0.4 | | | 0.4 | | | Yes | | 7/31/2022 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Western Pennsylvania Teamsters and Employers Pension Plan | 25-6029946 | | 001 | | Red | | Implemented | | — | | | 0.1 | | | 0.2 | | | Yes | | Partial exit during 2019; complete exit during 2020 |
Contributions for individually significant plans | | | | | | | | | 1.3 | | | 1.6 | | | 1.9 | | | | | |
Contributions to other multi-employer plans | | | | | | | | | 0.4 | | | 0.4 | | | 0.5 | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total contributions | | | | | | | | | $ | 1.7 | | | $ | 2.0 | | | $ | 2.4 | | | | | |
(1) As of December 31, 2021, there were eight collective bargaining units participating in the Western Conference of Teamsters Pension Trust. As of
December 31, 2021, four were then in negotiations.
10. FAIR VALUE MEASUREMENTS
At December 31, 2021 and 2020, the carrying amounts of cash and cash equivalents, receivables, payables, other components of other current assets and other accrued liabilities, and the short-term debt associated with the commercial card program approximate their fair values due to the short maturity of these items. Cash and cash equivalents may include highly-liquid investments with original maturities to the Company of three months or less that are readily convertible into known amounts of cash.
Debt and Other Obligations
Borrowings under the ABL Facility are at variable market interest rates, and accordingly, the carrying amount approximates fair value, which is a Level 2 measurement. The fair value of the debt-related interest rate cap was derived from a discounted cash flow analysis based on the terms of the agreement and Level 2 data for the forward interest rate curve adjusted for the Company's credit risk and was not significant for the periods presented in this report. See Note 6, Debt, for additional information regarding the Company's ABL Facility and other obligations.
Goodwill and Other Intangibles
The fair value analyses used for the determination of goodwill and intangible asset impairments, as described in Note 1, Business and Summary of Significant Accounting Policies, relied upon both Level 2 data (publicly observable data such as market interest rates, the Company's stock price, the stock prices of peer companies and the capital structures of peer companies) and Level 3 data (internal data such as the Company's operating and cash flow projections).
Goodwill is reviewed for impairment on a reporting unit basis annually as of October 1st or more frequently when indicators are present or changes in circumstances suggest that the carrying amount of the asset may not be recoverable. The Company performed a quantitative goodwill impairment test during the fourth quarter of 2021 and 2020, which required a determination of whether the fair value of the reporting unit was less than its carrying value. The determination of the reporting unit's fair value was based on an income approach that utilized discounted cash flows and required management to make significant assumptions and estimates related to the forecasts of future revenues, profit margins and discount rates. The principal assumptions utilized, all of which are considered Level 3 inputs under the fair value hierarchy, are subject to various risks and uncertainties. As a result of the respective quantitative goodwill impairment tests, no goodwill impairment was indicated or recorded. The continuing impact of the COVID-19 pandemic on estimated future cash flows is uncertain and will largely depend on the outcome of future events. The Company will perform additional goodwill impairment testing when indicators are present or changes in circumstances suggest the carrying amount of the asset may not be recoverable and a triggering event has occurred.
Other Assets
At December 31, 2021 and 2020, the Company had assets-held-for-sale of $1.2 million and $0.4 million, respectively. These assets are included, at the lower of their carrying value or fair value, in other current assets on the Consolidated Balance Sheets. During the second and third quarters of 2021, the Company sold two properties and recognized gains totaling approximately $4.6 million related to the exit and sale of those facilities, of which approximately $1.7 million is included in selling and administrative expenses and approximately $2.9 million is included in restructuring charges, net on the Consolidated Statements of Operations. During the third and fourth quarters of 2020, the Company sold two properties and recognized gains totaling approximately $8.3 million related to the exit and sale of those facilities, which are included in selling and administrative expenses on the Consolidated Statements of Operations.
The Company has on occasion recognized minor impairments when warranted as part of its normal review of long-lived assets. Based on the underlying nature of each item, these impairment charges may be reported as restructuring charges, net or selling and administrative expenses on the Consolidated Statements of Operations. Total long-lived asset impairments for the years ended December 31, 2021, 2020 and 2019 were $0.5 million, $0.5 million and none, respectively.
At December 31, 2021 and 2020, the pension plan assets were primarily comprised of mutual funds and pooled funds. The underlying investments of these funds were valued using either quoted prices in active markets or valued as of the most recent trade date. See Note 9, Employee Benefits Plans, for additional information regarding the Company's pension plans.
TRA Contingent Liability
At the time of the Merger, the Company recorded a $59.4 million contingent liability associated with the TRA at fair value using a discounted cash flow model that reflected management's expectations about probability of payment. The contingent liability was remeasured at fair value at each reporting period-end with the change in fair value recognized in other (income) expense, net on the Consolidated Statements of Operations. In December 2020, the Company and the UWWH Stockholder agreed to settle the TRA. The Company paid the UWWH Stockholder a total of $12.0 million in settlement of all past and future liabilities that would have been owed under the TRA and the parties agreed to a mutual release of claims under the TRA. As a result of the settlement, the Company recognized a favorable fair value adjustment of $20.1 million in other (income) expense, net in the fourth quarter of 2020. See Note 8, Related Party Transactions, for additional information regarding the TRA.
The following table provides a summary of the TRA contingent liability activity:
| | | | | | | | |
(in millions) | | TRA Contingent Liability |
| | |
| | |
| | |
Balance at December 31, 2019 | | $ | 31.4 | |
Change in fair value adjustment recorded in other (income) expense, net | | (19.1) | |
Principal payment | | (12.3) | |
Balance at December 31, 2020 | | $ | — | |
AAC Contingent Consideration
On August 31, 2017 (the "Acquisition Date"), Veritiv completed its acquisition of 100% of the equity interests in various AAC entities. The purchase price allocation for the acquisition of AAC included $22.2 million for the estimated fair value of contingent consideration. The maximum amount payable for the contingent consideration was $50.0 million, with up to $25.0 million payable at each of the first and second anniversaries of the Acquisition Date. The Company paid $20.0 million on December 11, 2019 for contingent consideration earned as of the second anniversary of the Acquisition Date. During the first quarter of 2020, the Company recognized an additional charge of $1.0 million and on March 19, 2020, the Company paid $3.5 million to the sellers of AAC in full satisfaction of the contingent liability.
11. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Other Current Assets
The components of other current assets as of December 31 were as follows: | | | | | | | | | | | |
| | | |
| | | |
(in millions) | 2021 | | 2020 |
Rebates receivable | $ | 59.3 | | | $ | 44.5 | |
Prepaid expenses | 44.2 | | | 46.9 | |
Value Added Tax receivable | 11.9 | | | 11.1 | |
Vendor Deposits | 8.2 | | | 5.3 | |
Other | 9.1 | | | 11.7 | |
Other current assets | $ | 132.7 | | | $ | 119.5 | |
Other Non-Current Assets
The components of other non-current assets as of December 31 were as follows: | | | | | | | | | | | |
| | | |
| | | |
(in millions) | 2021 | | 2020 |
Operating lease right-of-use assets | $ | 375.6 | | | $ | 351.7 | |
Investments in real estate joint ventures | 7.7 | | | 7.3 | |
Deferred financing costs | 7.3 | | | 5.4 | |
| | | |
Other | 17.8 | | | 13.9 | |
Other non-current assets | $ | 408.4 | | | $ | 378.3 | |
Accrued Payroll and Benefits
The components of accrued payroll and benefits as of December 31 were as follows: | | | | | | | | | | | |
| | | |
| | | |
(in millions) | 2021 | | 2020 |
Accrued incentive plans | $ | 60.1 | | | $ | 43.9 | |
Accrued payroll and related taxes | 28.7 | | | 16.6 | |
Accrued commissions | 17.9 | | | 17.1 | |
Other | 3.3 | | | 3.0 | |
Accrued payroll and benefits | $ | 110.0 | | | $ | 80.6 | |
Other Accrued Liabilities
The components of other accrued liabilities as of December 31 were as follows: | | | | | | | | | | | |
| | | |
| | | |
(in millions) | 2021 | | 2020 |
Operating lease obligations - current | $ | 80.2 | | | $ | 81.9 | |
Accrued customer incentives | 23.5 | | | 20.0 | |
Accrued taxes | 17.8 | | | 18.8 | |
Accrued freight | 12.3 | | | 7.8 | |
| | | |
| | | |
| | | |
Accrued professional fees | 5.4 | | | 1.6 | |
Other | 46.5 | | | 52.1 | |
Other accrued liabilities | $ | 185.7 | | | $ | 182.2 | |
Other Non-Current Liabilities
The components of other non-current liabilities as of December 31 were as follows: | | | | | | | | | | | |
| | | |
| | | |
(in millions) | 2021 | | 2020 |
Operating lease obligations - non-current | $ | 329.3 | | | $ | 307.4 | |
MEPP withdrawals | 41.4 | | | 42.7 | |
| | | |
Deferred compensation | 19.3 | | | 19.7 | |
| | | |
| | | |
Other | 32.1 | | | 25.4 | |
Other non-current liabilities | $ | 422.1 | | | $ | 395.2 | |
12. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share for Veritiv common stock is calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the respective periods. Diluted earnings per share is similarly calculated, except that the denominator is increased to include the number of additional common shares that would
have been outstanding during those periods if the dilutive potential common shares had been issued, using the treasury stock method, except where the inclusion of such common shares would have an antidilutive impact. See Note 14, Long-Term Incentive Compensation Plans, for additional information regarding shares issued under incentive plans.
A summary of the numerators and denominators used in the basic and diluted earnings (loss) per share calculations is as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions, except per share data) | 2021 | | 2020 | | 2019 |
| | | | | |
Numerator: | | | | | |
| | | | | |
| | | | | |
Net income (loss) | $ | 144.6 | | | $ | 34.2 | | | $ | (29.5) | |
| | | | | |
Denominator: | | | | | |
Weighted-average shares outstanding – basic | 15.22 | | | 15.96 | | | 16.06 | |
Weighted-average shares outstanding – diluted | 16.05 | | | 16.48 | | | 16.06 | |
| | | | | |
Earnings (loss) per share: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Basic | $ | 9.50 | | | $ | 2.14 | | | $ | (1.84) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted | $ | 9.01 | | | $ | 2.08 | | | $ | (1.84) | |
| | | | | |
Antidilutive stock-based awards excluded from computation of diluted earnings per share | 0.00 | | | 0.28 | | | 1.17 | |
Performance stock-based awards excluded from computation of diluted earnings per share because performance conditions had not been met | 0.00 | | | 0.08 | | | 0.33 | |
In accordance with the Company's 2014 Omnibus Incentive Plan, as amended and restated as of March 8, 2017, shares of the Company's common stock were issued to plan participants whose Restricted Stock Units ("RSUs"), Performance Share Units ("PSUs"), Market Condition Performance Share Units ("MCPSUs") and/or non-employee director grants (grants not deferred) vested during those periods. The net share issuance is included on the Consolidated Statements of Shareholders' Equity for the years ended December 31, 2021, 2020 and 2019. The related cash flow impacts are included in financing activities on the Consolidated Statements of Cash Flows.
See the table below for information related to these transactions:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Shares issued | 0.6 | | | 0.3 | | | 0.3 | |
Shares recovered for minimum tax withholding | (0.2) | | | (0.1) | | | (0.1) | |
Net shares issued | 0.4 | | | 0.2 | | | 0.2 | |
13. SHAREHOLDERS' EQUITY
Common Stock
Shares Authorized and Outstanding: At December 31, 2021 and 2020, the Company had authorized 100.0 million shares of common stock with a par value of $0.01.
Dividends: Each holder of common stock shall be entitled to participate equally in all dividends payable with respect to the common stock.
Voting Rights: The holders of the Company's common stock are entitled to vote only in the circumstances set forth in Veritiv's Amended and Restated Certificate of Incorporation. Each holder of common stock shall be entitled to one vote
for each share of common stock held of record by such holder upon all matters to be voted on by the holders of the common stock.
Other Rights: Each holder of common stock shall be entitled to share equally, subject to any rights and preferences of the preferred stock (as fixed by resolutions, if any, of Veritiv's Board of Directors), in the assets of the Company available for distribution, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of Veritiv, or upon any distribution of the assets of the Company.
Preferred Stock
Subject to the provisions of the Amended and Restated Certificate of Incorporation, the Board of Directors of Veritiv is authorized to provide for the issuance of up to 10.0 million shares of preferred stock in one or more series. The Board of Directors may fix the number of shares constituting any series and determine the designation of the series, the dividend rates, rights of priority of dividend payment, the voting powers (if any) of the shares of the series, and the preferences and relative participating, optional and other rights, if any, and any qualifications, limitations or restrictions, applicable to the shares of such series. No preferred stock was issued and outstanding as of December 31, 2021 and 2020.
Treasury Stock
On March 3, 2021, Veritiv announced that its Board of Directors authorized a $50 million share repurchase program, the 2021 Share Repurchase Program, which was increased to $100 million in May 2021. The 2021 Share Repurchase Program replaced the $25 million share repurchase authorization previously approved by the Board of Directors in March 2020 (the "2020 Share Repurchase Program") and may be suspended, terminated, increased or decreased by the Board at any time. Under the repurchase authorization, the Company may, from time to time, purchase shares of its common stock through open market purchases, privately negotiated transactions, accelerated repurchase programs, tender offers or otherwise, in accordance with all applicable securities laws and regulations.
During the year ended December 31, 2021, the Company repurchased 1,734,810 shares of its common stock at a cost of $100 million under its 2021 Share Repurchase Program. During the first quarter of 2020, the Company repurchased 383,972 shares of its common stock at a cost of $3.5 million under its 2020 Share Repurchase Program, prior to its suspension as of March 27, 2020.
Accumulated Other Comprehensive Loss (AOCL)
Comprehensive income (loss) is reported on the Consolidated Statements of Comprehensive Income (Loss) and consists of net income (loss) and other gains and losses affecting shareholders' equity that, under U.S. GAAP, are excluded from net income (loss).
The following table provides the components of AOCL (amounts are shown net of their related income tax effect, if any):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign currency translation adjustments | | Retirement liabilities | | Interest rate cap | | AOCL |
Balance at December 31, 2019 | | $ | (26.6) | | | $ | (6.2) | | | $ | (0.3) | | | $ | (33.1) | |
| | | | | | | | |
Unrealized net gains (losses) arising during the period | | 2.1 | | | (3.9) | | | (0.1) | | | (1.9) | |
Amounts reclassified from AOCL | | 0.3 | | | 1.0 | | | 0.2 | | | 1.5 | |
Net current period other comprehensive income (loss) | | 2.4 | | | (2.9) | | | 0.1 | | | (0.4) | |
Balance at December 31, 2020 | | (24.2) | | | (9.1) | | | (0.2) | | | (33.5) | |
| | | | | | | | |
Unrealized net gains (losses) arising during the period | | (1.2) | | | 10.1 | | | 0.0 | | | 8.9 | |
Amounts reclassified from AOCL | | 0.2 | | | 0.0 | | | 0.1 | | | 0.3 | |
Net current period other comprehensive income (loss) | | (1.0) | | | 10.1 | | | 0.1 | | | 9.2 | |
Balance at December 31, 2021 | | $ | (25.2) | | | $ | 1.0 | | | $ | (0.1) | | | $ | (24.3) | |
14. LONG-TERM INCENTIVE COMPENSATION PLANS
Veritiv Omnibus Incentive Plan
The 2014 Plan provides for the grant of stock, Deferred Share Units ("DSUs"), RSUs, PSUs, Market Condition Performance Share Units and cash-based Performance-Based Units ("PBUs"), among other awards. A total of 3.1 million shares of Veritiv common stock may be issued under the 2014 Plan subject to certain adjustment provisions. As of December 31, 2021, there were approximately 1.0 million shares available to be granted to any employee, director or consultant of Veritiv or a subsidiary of Veritiv. Grants are made at the discretion of the Compensation and Leadership Development Committee of the Company's Board of Directors. For awards granted in 2021 and 2020, the Compensation and Leadership Development Committee approved cash-based grants in lieu of equity-based PSU and MCPSU grants.
Stock
The Company made grants of common stock in 2021, 2020 and 2019 to its non-employee directors. The stock grants were fully vested and non-forfeitable as of the grant dates. The non-employee directors were eligible to defer receipt of the awards under the Veritiv Deferred Compensation Savings Plan, a nonqualified plan. The Company recognized $1.1 million, $1.0 million and $1.0 million in expense related to these grants for the years ended December 31, 2021, 2020 and 2019 respectively.
Deferred Share Units
The Company granted DSUs in 2016, 2015 and 2014 to its non-employee directors. Each DSU is the economical equivalent of one share of Veritiv's common stock. The DSUs were fully vested and non-forfeitable as of the grant date and are payable following the individual's separation of service as a Veritiv director. The DSUs granted in 2015 and 2014 are payable in cash and the DSUs granted in 2016 are settled in stock. The cash-settled DSUs are classified as a non-current liability and are remeasured at each reporting date, with a corresponding adjustment to compensation expense. At December 31, 2021 there were approximately 34,600 DSUs outstanding with a fair value of $3.2 million. At December 31, 2020, there were approximately 34,600 DSUs outstanding with a fair value of $1.0 million. The Company recognized impacts of $2.1 million, $0.0 million and $(0.2) million in selling and administrative expenses related to these grants for the year ended December 31, 2021, 2020 and 2019, respectively.
Restricted Stock Units
RSUs are awarded to key employees annually. RSUs granted prior to 2020 typically cliff vest at the end of three years, subject to continued service. RSUs granted in 2021 and 2020 typically vest over four years, with 25% vesting on each of the first, second, third and fourth anniversaries of the grant date, subject to continued service. The fair value of the RSU awards is based typically on either the closing price of Veritiv common stock on the grant date or the closing price on the trading date immediately prior to the grant date if the grant date is not a trading date. Compensation expense for RSUs granted prior to 2020 is recognized ratably from the grant date to the vesting date. Compensation expense for RSUs granted in 2021 and 2020 is recognized ratably over the requisite service period for the entire award, which is four years. The total fair value of RSUs that vested during 2021, 2020 and 2019 was $7.2 million, $4.3 million and $3.8 million, respectively.
A summary of activity related to non-vested RSUs is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(units in thousands) | Number of RSUs | Weighted-Average Grant Date Fair Value Per Share | | Number of RSUs | Weighted-Average Grant Date Fair Value Per Share | | Number of RSUs | Weighted-Average Grant Date Fair Value Per Share |
Non-vested at beginning of year | 556 | | $ | 22.59 | | | 369 | | $ | 32.00 | | | 398 | | $ | 35.88 | |
Granted | 243 | | $ | 19.79 | | | 352 | | $ | 18.59 | | | 160 | | $ | 24.70 | |
Vested | (288) | | $ | 24.93 | | | (99) | | $ | 43.48 | | | (102) | | $ | 37.53 | |
Forfeited | (55) | | $ | 20.24 | | | (66) | | $ | 22.69 | | | (87) | | $ | 29.96 | |
Non-vested at end of year | 456 | | $ | 19.91 | | | 556 | | $ | 22.59 | | | 369 | | $ | 32.00 | |
Performance Share Units
PSUs granted prior to 2020 were awarded to key employees annually and cliff vest at the end of three years, subject to continued service and the attainment of performance conditions. The PSU award represents the contingent right to receive a number of shares equal to a portion, all or a multiple (not to exceed 200%) of the target number of PSUs. The PSUs are divided into three tranches, and each tranche is earned based on the achievement of an annual Adjusted EBITDA target which is set at the beginning of each of the three years in the vesting period. The Company defines Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring charges, net, integration and acquisition expenses and other similar charges including any severance costs, costs associated with warehouse and office openings or closings, consolidation, and relocation and other business optimization expenses, stock-based compensation expense, changes in the LIFO reserve, non-restructuring asset impairment charges, non-restructuring severance charges, non-restructuring pension charges, net, fair value adjustments related to contingent liabilities assumed in mergers and acquisitions and certain other adjustments. Compensation expense for each tranche is recognized ratably from the date the fair value is measured to the vesting date for the number of awards expected to vest. The total fair value of PSUs that vested during 2021, 2020 and 2019 was $5.9 million, $3.6 million and $6.7 million, respectively. Cash-based PBUs were granted in 2021 and 2020 in lieu of equity-based PSUs.
A summary of activity related to non-vested PSUs is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(units in thousands) | Number of PSUs | Weighted-Average Grant Date Fair Value Per Share | | Number of PSUs | Weighted-Average Grant Date Fair Value Per Share | | Number of PSUs | Weighted-Average Grant Date Fair Value Per Share |
Non-vested at beginning of year | 587 | | $ | 23.06 | | | 645 | | $ | 25.10 | | | 627 | | $ | 32.59 | |
Granted (1) | — | | $ | — | | | — | | $ | — | | | 392 | | $ | 21.76 | |
Shares gained (lost) based on actual performance (2) (3) | (31) | | $ | 23.60 | | | 183 | | $ | 19.67 | | | (112) | | $ | 21.76 | |
Vested | (249) | | $ | 23.60 | | | (102) | | $ | 35.70 | | | (174) | | $ | 38.36 | |
Forfeited | (27) | | $ | 21.95 | | | (139) | | $ | 28.26 | | | (88) | | $ | 25.30 | |
Non-vested at end of year | 280 | | $ | 21.79 | | | 587 | | $ | 23.06 | | | 645 | | $ | 25.10 | |
(1) The per share value for the 2019 grants represents the weighted-average grant date fair value for the 2019, 2020 and 2021 tranches.
(2) Shares gained (lost) based on actual performance are reflected in the year of vesting. The current year amount may include adjustments for prior
years' activity.
(3) The per share value for shares gained (lost) based on actual performance in 2021 represents the weighted-average grant date fair value for the shares vesting in that year.
Market Condition Performance Share Units
MCPSUs granted prior to 2020 were awarded to key employees annually and cliff vest at the end of three years, subject to continued service and the attainment of performance conditions. The MCPSU award represents the contingent right to receive a number of shares equal to a portion, all or a multiple (not to exceed 200%) of the target number of MCPSUs. The MCPSUs are divided into three tranches and each tranche is earned based on the achievement of a total shareholder return ("TSR") target relative to the TSR of an applicable peer group over the one-, two- and three-year cumulative periods in the vesting period. The weighted-average grant date fair value of the MCPSUs is determined using a Monte Carlo simulation model. Assumptions used in the 2019 model included an expected volatility rate of 53.6% and a risk-free interest rate of 2.5%; no MCPSUs were granted in 2021 and 2020. The expected volatility rate is based on the historical volatility over the most recent period equal to the vesting period. The risk-free interest rate is based on the yield on U.S. Treasury securities matching the vesting period. Compensation expense is recognized ratably from the grant date to the vesting date. The total fair value of MCPSUs that vested during 2021, 2020 and 2019 was $3.3 million, $0.0 million and $2.7 million, respectively. None of the 2017 MCPSUs vested in 2020, due to the cumulative TSR performance resulting in a 0% of target final payout. Cash-based PBUs were granted in 2021 and 2020 in lieu of equity-based MCPSUs.
A summary of activity related to non-vested MCPSUs is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(units in thousands) | Number of MCPSUs | Weighted-Average Grant Date Fair Value Per Share | | Number of MCPSUs | Weighted-Average Grant Date Fair Value Per Share | | Number of MCPSUs | Weighted-Average Grant Date Fair Value Per Share |
Non-vested at beginning of year | 20 | | $ | 34.35 | | | 274 | | $ | 40.81 | | | 308 | | $ | 46.74 | |
Granted | — | | $ | — | | | — | | $ | — | | | 235 | | $ | 31.41 | |
Shares gained (lost) based on actual performance (1)(2) | 250 | | $ | 37.79 | | | (110) | | $ | 34.35 | | | (153) | | $ | 31.41 | |
Vested | (86) | | $ | 37.79 | | | — | | $ | — | | | (64) | | $ | 42.12 | |
Forfeited/cancelled | (16) | | $ | 31.95 | | | (144) | | $ | 58.89 | | | (52) | | $ | 40.93 | |
Non-vested at end of year | 168 | | $ | 31.51 | | | 20 | | $ | 34.35 | | | 274 | | $ | 40.81 | |
(1) Shares gained (lost) based on actual performance are reflected in the year of vesting. The current year amount may include adjustments for prior years'
activity.
(2) The per share value for shares gained (lost) based on actual performance in 2021 represents the weighted-average grant date fair value for the shares
vesting in that year.
Performance-Based Units (cash-based)
In 2021 and 2020, PBUs valued at $1.00 per unit and payable in cash, were awarded to key employees and cliff vest at the end of three years, subject to continued service and the attainment of performance conditions. The PBUs represent the contingent right to receive a cash payment of performance units equal to a portion, all or a multiple (not to exceed 200%) of the target value. Fifty percent of the PBUs vest based on the achievement of Packaging Gross Profit Dollar Growth targets, which were set at the beginning of 2021 and 2020. Packaging Gross Profit Dollar Growth is defined as: net sales for the Packaging reportable segment less the cost of product sold, excluding the impact of LIFO inventory accounting and certain other adjustments. The remaining 50% of the PBUs vest based on the achievement of Return on Invested Capital targets, which were set at the beginning of 2021 and 2020. Return on Invested Capital is defined as: (Net Operating Profit) divided by (the sum of net working capital and property and equipment). Net Operating Profit is defined as: (Adjusted EBITDA less depreciation and amortization) times (1 minus the standard tax rate). The standard tax rate used in 2021 and 2020 was 26%. The maximum PBU payout based on the achievement of Packaging Gross Profit Dollar Growth and Return on Invested Capital targets is 180% of the target values. The PBUs are then subject to an adjustment of 20 percentage points (increase or decrease) based on the Company’s TSR relative to the TSR of an applicable peer group. The maximum total payout that can be earned, including the 20% relative TSR modifier, is 200% of the target value. The PBUs are classified as a non-current liability and are remeasured at each reporting date. Compensation expense is recognized ratably from the grant date to the vesting date for the number of awards expected to vest.
A summary of activity related to non-vested PBUs is presented below:
| | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | |
(units in thousands) | Number of PBUs | Grant Date Fair Value Per Share | | Number of PBUs | Grant Date Fair Value Per Share | | | |
Non-vested at beginning of year | 11,613 | | $ | 1.00 | | | — | | $ | — | | | | |
Granted | 9,408 | | $ | 1.00 | | | 11,863 | | $ | 1.00 | | | | |
PBUs gained (lost) based on actual performance (1) | (1,057) | | $ | 1.00 | | | 1,056 | | $ | 1.00 | | | | |
Vested | (20) | | $ | 1.00 | | | — | | $ | — | | | | |
Forfeited/cancelled | (1,960) | | $ | 1.00 | | | (1,306) | | $ | 1.00 | | | | |
Non-vested at end of year | 17,984 | | $ | 1.00 | | | 11,613 | | $ | 1.00 | | | | |
(1) Shares gained (lost) based on actual performance are reflected in the year of vesting. The current year amount may include adjustments for prior years'
activity.
For the years ended December 31, 2021, 2020 and 2019, the Company recognized $7.4 million, $17.7 million and $14.6 million, respectively, in expense related to the aforementioned stock-based long-term incentive awards. For the years ended December 31, 2021 and 2020, the Company recognized $10.8 million and $6.5 million, respectively, in expense related to the aforementioned cash-based long-term incentive awards. The income tax benefit recognized in 2021, 2020 and 2019 related to the stock-based long-term incentive compensation expense was $1.9 million, $4.6 million and $3.8 million, respectively. The income tax benefit recognized in 2021 and 2020 related to the cash-based long-term incentive compensation expense was $2.8 million and $1.7 million, respectively. As of December 31, 2021, total unrecognized long-term incentive compensation expense was $21.0 million and is expected to be recognized over a weighted-average period of approximately 2.1 years. Dividends are not paid or accrued on unvested stock units. The grant date fair values are not reduced for dividends as none are expected to be paid during the vesting period.
15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company is involved in various lawsuits, claims and regulatory and administrative proceedings arising out of its business relating to general commercial and contractual matters, governmental regulations, intellectual property rights, labor and employment matters, tax and other actions.
Although the ultimate outcome of any legal proceeding or investigation cannot be predicted with certainty, based on present information, including the Company's assessment of the merits of the particular claim, the Company does not expect that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on its results of operations, financial condition or cash flows.
MEPPs
The Company records an estimated undiscounted charge when it becomes probable that it has incurred a withdrawal liability when exiting a MEPP. Final charges for MEPP withdrawals are not known until the plans issue their respective determinations. As a result, these estimates may increase or decrease depending upon the final determinations.
Western Pennsylvania Teamsters and Employers Pension Fund
During the first quarter of 2020, Veritiv negotiated the complete withdrawal from the Western Pennsylvania Teamsters and Employers Pension Fund (the "Western Pennsylvania Fund"), a MEPP related to its Warrendale, Pennsylvania location, related to the second bargaining unit at its Warrendale, Pennsylvania location and recognized an estimated complete withdrawal liability of $7.1 million, which was unchanged as of December 31, 2021. The withdrawal charge was recorded in distribution expenses as it was not related to a restructuring activity.
During the second quarter of 2019, in the course of negotiations for a collective bargaining agreement, Veritiv negotiated a partial withdrawal from the Western Pennsylvania Fund and recognized an estimated partial withdrawal liability of $6.5 million, which was unchanged as of December 31, 2021. The withdrawal charge was recorded in distribution expenses as it was not related to a restructuring activity.
As of December 31, 2021, the Company has not yet received the determination letters for the partial and subsequent full withdrawal from the Western Pennsylvania Fund. The Company expects that payments will occur over an approximate 20-year period, which could run consecutively.
Minneapolis Food Distributors Ind Pension Plan
During the fourth quarter of 2021, in the course of negotiations for a collective bargaining agreement, Veritiv negotiated a complete withdrawal from the Minneapolis Food Distributors Ind Pension Plan to take effect on July 31, 2022, and recognized an estimated complete withdrawal liability of $0.5 million as of December 31, 2021. The withdrawal charge was recorded in distribution expenses as it was not related to a restructuring activity. As of December 31, 2021, the Company has not yet received the determination letter for the complete withdrawal from the Minneapolis Food Distributors Ind Pension Plan. The Company expects that payments will occur over an approximate 3-year period.
16. SEGMENT AND OTHER INFORMATION
Veritiv's business is organized under four reportable segments: Packaging, Facility Solutions, Print, and Publishing and Print Management ("Publishing"). See Note 2, Revenue Recognition and Credit Losses, for descriptions of the Company's reportable segments and Corporate & Other.
The following table presents net sales, Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, restructuring charges, net, integration and acquisition expenses and other similar charges including any severance costs, costs associated with warehouse and office openings or closings, consolidation, and relocation and other business optimization expenses, stock-based compensation expense, changes in the LIFO reserve, non-restructuring asset impairment charges, non-restructuring severance charges, non-restructuring pension charges, net, fair value adjustments related to contingent liabilities assumed in mergers and acquisitions and certain other adjustments), which is the metric management uses to assess operating performance of the segments, and certain other measures for each of the reportable segments and Corporate & Other for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Packaging | | Facility Solutions | | Print | | Publishing | | Total Reportable Segments | | Corporate & Other | | Total |
Year Ended December 31, 2021 | | | | | | | | | | | | | |
Net sales | $ | 3,760.4 | | | $ | 894.0 | | | $ | 1,484.2 | | | $ | 596.6 | | | $ | 6,735.2 | | | $ | 115.3 | | | $ | 6,850.5 | |
Adjusted EBITDA | 393.5 | | | 52.7 | | | 96.0 | | | 18.7 | | | 560.9 | | | (218.3) | | | |
Depreciation and amortization | 24.5 | | | 7.5 | | | 6.2 | | | 0.1 | | | 38.3 | | | 16.9 | | | 55.2 | |
Restructuring charges, net | 8.8 | | | 1.7 | | | 3.3 | | | 0.0 | | | 13.8 | | | 1.6 | | | 15.4 | |
Total assets, end of period | 1,482.6 | | 280.6 | | 420.2 | | 126.5 | | 2,309.9 | | | 128.5 | | 2,438.4 | |
Year Ended December 31, 2020 | | | | | | | | | | | | | |
Net sales | $ | 3,316.7 | | | $ | 922.3 | | | $ | 1,458.2 | | | $ | 543.5 | | | $ | 6,240.7 | | | $ | 104.9 | | | $ | 6,345.6 | |
Adjusted EBITDA | 300.0 | | | 41.6 | | | 33.7 | | | 12.8 | | | 388.1 | | | (200.5) | | | |
Depreciation and amortization | 22.5 | | | 7.9 | | | 7.6 | | | 0.2 | | | 38.2 | | | 19.5 | | | 57.7 | |
Restructuring charges, net | 16.0 | | | 5.1 | | | 23.8 | | | 0.0 | | | 44.9 | | | 7.3 | | | 52.2 | |
Total assets, end of period | 1,332.9 | | 314.7 | | 424.2 | | 104.7 | | 2,176.5 | | | 158.5 | | 2,335.0 | |
Year Ended December 31, 2019 | | | | | | | | | | | | | |
Net sales | $ | 3,446.3 | | | $ | 1,181.8 | | | $ | 2,104.6 | | | $ | 798.0 | | | $ | 7,530.7 | | | $ | 128.7 | | | $ | 7,659.4 | |
Adjusted EBITDA | 243.5 | | | 33.1 | | | 43.1 | | | 21.4 | | | 341.1 | | | (185.2) | | | |
Depreciation and amortization | 18.9 | | | 7.0 | | | 8.4 | | | 0.5 | | | 34.8 | | | 18.7 | | | 53.5 | |
Restructuring charges, net | 10.3 | | | 14.7 | | | 7.2 | | | (9.1) | | | 23.1 | | | 5.7 | | | 28.8 | |
Total assets, end of period | 1,290.2 | | 324.4 | | 610.3 | | 123.9 | | 2,348.8 | | | 162.3 | | 2,511.1 | |
The table below presents a reconciliation of net income (loss) as reflected on the Consolidated Statements of Operations to Adjusted EBITDA for the reportable segments: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Net income (loss) | $ | 144.6 | | | $ | 34.2 | | | $ | (29.5) | |
Interest expense, net | 17.2 | | | 25.1 | | | 38.1 | |
Income tax expense (benefit) | 52.9 | | | 8.8 | | | 0.7 | |
Depreciation and amortization | 55.2 | | | 57.7 | | | 53.5 | |
Restructuring charges, net | 15.4 | | | 52.2 | | | 28.8 | |
Facility closure charges, including (gain) loss from asset disposition | 0.1 | | | (3.7) | | | — | |
Stock-based compensation | 7.4 | | | 17.7 | | | 14.6 | |
LIFO reserve (decrease) increase | 43.6 | | | (1.5) | | | (3.7) | |
| | | | | |
Non-restructuring severance charges | 7.8 | | | 4.1 | | | 8.4 | |
Non-restructuring pension charges, net | 0.5 | | | 7.2 | | | 6.6 | |
Integration expenses | — | | | — | | | 17.5 | |
Fair value adjustment on TRA contingent liability | — | | | (19.1) | | | 0.3 | |
Fair value adjustment on contingent consideration liability | — | | | 1.0 | | | 13.1 | |
Escheat audit contingent liability | — | | | (0.2) | | | 3.7 | |
Other | (2.1) | | | 4.1 | | | 3.8 | |
Adjustment for Corporate & Other | 218.3 | | | 200.5 | | | 185.2 | |
Adjusted EBITDA for reportable segments | $ | 560.9 | | | $ | 388.1 | | | $ | 341.1 | |
The following table presents net sales as well as property and equipment and operating lease ROU assets, which are shown net of accumulated depreciation and or accumulated amortization, by geographic area: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Property and Equipment | | Operating Lease ROU Assets |
| Year Ended December 31, | | As of December 31, | | As of December 31, |
(in millions) | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
U.S. | $ | 5,919.2 | | | $ | 5,521.8 | | | $ | 6,779.6 | | | $ | 120.1 | | | $ | 149.4 | | | $ | 321.7 | | | $ | 311.8 | |
Canada | 722.3 | | | 650.9 | | | 699.4 | | | 38.7 | | | 42.3 | | | 43.5 | | | 30.6 | |
Rest of world | 209.0 | | | 172.9 | | | 180.4 | | | 4.1 | | | 3.0 | | | 10.4 | | | 9.3 | |
Total | $ | 6,850.5 | | | $ | 6,345.6 | | | $ | 7,659.4 | | | $ | 162.9 | | | $ | 194.7 | | | $ | 375.6 | | | $ | 351.7 | |
No single customer accounted for more than 5% of net sales for the years ended December 31, 2021, 2020 and 2019. During the year ended December 31, 2021, approximately 28% of our purchases were made from ten suppliers.
On March 31, 2021, the Company sold its Print segment's Rollsource business, which provides specialized converting of commercial printing paper for distribution to the business-forms, direct-mail and digital-printing industries. The Company received total cash proceeds of approximately $8.2 million, which was immediately used to pay outstanding revolving loan borrowings under the ABL Facility. The cash proceeds are reported as proceeds from asset sales and sale of a business in the investing activities section of the Consolidated Statements of Cash Flows. The Company recognized a total gain of approximately $3.1 million on the sale, which is included in selling and administrative expenses on the Consolidated Statements of Operations. The transaction and post-close adjustments are now complete. The divestiture is not considered a strategic shift that will have a major effect on the Company's operations or financial results; therefore it is not reported as discontinued operations.
17. SUBSEQUENT EVENT
On March 1, 2022, Veritiv announced that its Board of Directors authorized a $200 million share repurchase program (the "2022 Share Repurchase Program"). The 2022 Share Repurchase Program authorizes the Company, from time
to time, to purchase shares of its common stock through open market transactions, privately negotiated transactions, forward, derivative, or accelerated repurchase transactions, tender offers or otherwise, including Rule 10b5-1 trading plans, in accordance with all applicable securities laws and regulations. The timing and method of any repurchases, which will depend on a variety of market factors, including market conditions, are subject to results of operations, financial conditions, cash requirements and other factors. This authorization may be suspended, terminated, increased or decreased by the Board of Directors at any time.