Veritiv(VRTV) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents Veritiv Corporation's unaudited condensed consolidated financial statements and related notes for Q1 2023 and 2022 Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net sales | $1,510.2 | $1,858.1 | | Cost of products sold | $1,144.1 | $1,455.4 | | Distribution expenses | $89.7 | $112.2 | | Selling and administrative expenses | $171.4 | $187.9 | | Operating income | $94.9 | $87.2 | | Net income | $68.7 | $78.5 | | Basic EPS | $5.08 | $5.31 | | Diluted EPS | $5.00 | $5.12 | - Net sales decreased by 18.7% YoY, from $1,858.1 million in Q1 2022 to $1,510.2 million in Q1 2023[9] - Operating income increased by 8.8% YoY, from $87.2 million in Q1 2022 to $94.9 million in Q1 2023[9] - Net income decreased by 12.5% YoY, from $78.5 million in Q1 2022 to $68.7 million in Q1 2023[9] Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income | $68.7 | $78.5 | | Other comprehensive income (loss) | $2.8 | $2.6 | | Total comprehensive income (loss) | $71.5 | $81.1 | - Total comprehensive income decreased by 11.8% YoY, from $81.1 million in Q1 2022 to $71.5 million in Q1 2023[12] Condensed Consolidated Balance Sheets | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :----------------------------------- | :----------------------------- | :------------------------------ | | Total current assets | $1,394.9 | $1,457.8 | | Total assets | $2,026.9 | $2,089.6 | | Total current liabilities | $646.5 | $726.6 | | Total liabilities | $1,209.6 | $1,333.5 | | Total shareholders' equity | $817.3 | $756.1 | - Total assets decreased by 3.0% from December 31, 2022, to March 31, 2023[15] - Total liabilities decreased by 9.3% over the same period[15] - Total shareholders' equity increased by 8.1%[15] Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Net cash provided by operating activities | $70.9 | $(5.9) | | Net cash used for investing activities | $(2.7) | $(7.1) | | Net cash used for financing activities | $(76.5) | $7.4 | | Net change in cash and cash equivalents | $(7.6) | $(15.5) | | Cash and cash equivalents at end of period | $33.0 | $33.8 | - Net cash provided by operating activities significantly improved, moving from a use of $5.9 million in Q1 2022 to a provision of $70.9 million in Q1 2023[17] - Net cash used for financing activities increased from a provision of $7.4 million in Q1 2022 to a use of $76.5 million in Q1 2023, primarily due to increased debt repayments and dividend payments[17] Condensed Consolidated Statements of Shareholders' Equity | Metric | Balance at Dec 31, 2022 (in millions) | Balance at Mar 31, 2023 (in millions) | | :-------------------------------- | :------------------------------------ | :------------------------------------ | | Common Stock Amount | $0.2 | $0.2 | | Additional Paid-in Capital | $613.1 | $611.3 | | Accumulated Earnings | $472.6 | $532.8 | | Accumulated Other Comprehensive Loss | $(12.7) | $(9.9) | | Treasury Stock Amount | $(317.1) | $(317.1) | | Total Shareholders' Equity | $756.1 | $817.3 | - Total shareholders' equity increased from $756.1 million at December 31, 2022, to $817.3 million at March 31, 2023, driven by net income and other comprehensive income, partially offset by dividends[19] Notes to Condensed Consolidated Financial Statements 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Veritiv Corporation is a North American business-to-business full-service provider of value-added packaging products and services, facility solutions, and print-based products and services, operating primarily in the U.S. and Mexico[21] - The company sold its Veritiv Canada, Inc. business on May 2, 2022, and its logistics solutions business on September 1, 2022, neither of which were classified as discontinued operations[22] - Effective January 1, 2023, the Company adopted ASU 2022-04 (Supplier Finance Programs), and effective March 17, 2023, ASU 2020-04 (Reference Rate Reform), neither of which had a material impact on financial statements[27][28] 2. REVENUE RECOGNITION AND CREDIT LOSSES - Approximately 35% of Veritiv's total net sales are derived from direct shipments from manufacturers to customers, reported on a gross basis[29] - The company's principal markets are concentrated in North America, with approximately 97% of Q1 2023 net sales generated in the U.S.[33] Customer Contract Liabilities (in millions) | (in millions) | 2023 | 2022 | | :-------------- | :--- | :--- | | Balance at January 1, | $16.1 | $21.8 | | Payments received | $11.2 | $15.3 | | Revenue recognized from beginning of year balance | $(5.2) | $(11.4) | | Revenue recognized from current year receipts | $(7.0) | $(5.1) | | Balance at March 31, | $15.1 | $19.5 | Accounts Receivable Allowances (in millions) | (in millions) | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Allowance for credit losses | $14.7 | $17.7 | | Other allowances | $9.6 | $9.0 | | Total accounts receivable allowances | $24.3 | $26.7 | 3. LEASES - Veritiv leases approximately 90 of its 95 distribution centers across the U.S. and Mexico, along with various office spaces[37] Total Lease Cost (in millions) | Lease Classification | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | | Short-term lease expense | $1.4 | $0.8 | | Operating lease expense | $21.1 | $25.1 | | Total finance lease expense | $3.0 | $4.4 | | Total Lease Cost | $25.5 | $30.3 | Future Minimum Lease Payments at March 31, 2023 (in millions) | (in millions) | Finance Leases | Operating Leases | | :-------------- | :------------- | :--------------- | | Total future minimum lease payments | $36.7 | $377.3 | | Amount representing interest | $(3.7) | $(46.3) | | Total future minimum lease payments, net of interest | $33.0 | $331.0 | 4. RESTRUCTURING CHARGES - The 2020 Restructuring Plan, initiated to respond to COVID-19 impacts, secular changes in print/publishing, and cost alignment, was completed as of December 31, 2022[42] 2020 Restructuring Plan Liability Activity (in millions) | (in millions) | Balance at Dec 31, 2022 | Payments | Other non-cash items | Balance at Mar 31, 2023 | | :-------------------- | :---------------------- | :------- | :------------------- | :---------------------- | | Severance and Related Costs | $0.9 | $(0.4) | $(0.1) | $0.4 | | Other Direct Costs | $2.3 | $(0.3) | $0.0 | $2.0 | | Total | $3.2 | $(0.7) | $(0.1) | $2.4 | - The remaining liability primarily consists of obligations for future lease payments through the end of 2024 for exited properties, with most severance obligations expected to be paid by the end of 2023[45] 5. DEBT Debt Obligations (in millions) | (in millions) | March 31, 2023 | December 31, 2022 | | :------------------------------------ | :------------- | :---------------- | | Asset-Based Lending Facility (ABL) | $199.9 | $229.2 | | Commercial card program | $1.4 | $1.6 | | Vendor-based financing arrangements | $11.2 | $14.5 | | Finance leases | $33.0 | $32.9 | | Total debt | $245.5 | $278.2 | | Less: current portion of debt | $(13.6) | $(13.4) | | Long-term debt, net of current portion | $231.9 | $264.8 | - On March 17, 2023, the ABL Facility was amended to replace LIBOR provisions with SOFR, with full transition expected in Q2 2023[48] - The ABL Facility has aggregate commitments of $1.1 billion and a maturity date of May 20, 2026[48] - As of March 31, 2023, the available additional borrowing capacity under the ABL Facility was approximately $681.8 million[48] 6. INCOME TAXES Income Tax Expense and Effective Tax Rates (in millions) | (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Income before income taxes | $89.2 | $84.3 | | Income tax expense | $20.5 | $5.8 | | Effective tax rate | 23.0% | 6.9% | - The effective tax rate increased significantly from 6.9% in Q1 2022 to 23.0% in Q1 2023, primarily due to state income taxes, stock compensation vesting, non-deductible expenses, and the recognition of a deferred tax asset on a foreign subsidiary investment in Q1 2022[55] 7. DEFINED BENEFIT PLANS - Veritiv maintains defined benefit pension plans in the U.S. for certain collectively bargained employees and frozen cash balance accounts for former Unisource employees[56] - The company intends to terminate and settle the U.S. Veritiv Pension Plan by the end of 2023, while the Veritiv Hourly Pension Plan will remain open[57] Net Periodic Benefit Cost (Credit) (in millions) | (in millions) | Three Months Ended March 31, 2023 (U.S.) | Three Months Ended March 31, 2022 (U.S.) | Three Months Ended March 31, 2022 (Canada) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Service cost | $0.4 | $0.8 | $0.1 | | Interest cost | $0.6 | $0.3 | $0.6 | | Expected return on plan assets | $(0.6) | $(0.5) | $(1.1) | | Total other components | $0.0 | $(0.2) | $(0.5) | | Net periodic benefit cost (credit) | $0.4 | $0.6 | $(0.4) | 8. FAIR VALUE MEASUREMENTS - The carrying amounts of cash, receivables, payables, and short-term debt approximate their fair values due to their short maturities[59] - Borrowings under the ABL Facility are at variable market interest rates, and their carrying amount approximates fair value (Level 2 measurement)[60] 9. EARNINGS PER SHARE Earnings Per Share Calculation (in millions, except per share data) | (in millions, except per share data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net income | $68.7 | $78.5 | | Weighted-average shares outstanding – basic | 13.53 | 14.77 | | Dilutive effect of stock-based awards | 0.21 | 0.55 | | Weighted-average shares outstanding – diluted | 13.74 | 15.32 | | Basic EPS | $5.08 | $5.31 | | Diluted EPS | $5.00 | $5.12 | - Diluted EPS decreased from $5.12 in Q1 2022 to $5.00 in Q1 2023, despite a lower diluted share count, reflecting the decrease in net income[63] 10. SHAREHOLDERS' EQUITY Dividend Declarations and Payments (in millions) | Declaration Date | Record Date | Payable Date | Dividend Per Share | Payment (in millions) | | :---------------- | :---------- | :----------- | :----------------- | :-------------------- | | February 27, 2023 | March 9, 2023 | March 31, 2023 | $0.63 | $8.5 | | May 8, 2023 | May 18, 2023 | June 5, 2023 | $0.63 | N/A | - The company declared and paid a quarterly cash dividend of $0.63 per share in Q1 2023, totaling $8.5 million, with no comparable transactions in the prior year period[64][65] - The 2022 Share Repurchase Program, authorizing $200 million, was completed by December 31, 2022, with 1,564,420 shares repurchased[66] - In Q1 2022, 78,025 shares were repurchased for $10.4 million[66] Accumulated Other Comprehensive Loss (AOCL) (in millions) | (in millions) | Balance at Dec 31, 2022 | Unrealized net gains (losses) | Net current period OCI (loss) | Balance at Mar 31, 2023 | | :-------------------------- | :---------------------- | :---------------------------- | :-------------------------- | :---------------------- | | Foreign currency translation adjustments | $(16.6) | $2.9 | $2.9 | $(13.7) | | Retirement liabilities | $3.9 | $(0.1) | $(0.1) | $3.8 | | AOCL | $(12.7) | $2.8 | $2.8 | $(9.9) | 11. COMMITMENTS AND CONTINGENCIES - The Company is involved in various legal proceedings but does not expect any to have a material adverse effect on its financial condition or results of operations[73] - Veritiv recognized an estimated complete withdrawal liability of $4.9 million from the Teamsters Pension Trust Fund of Philadelphia and Vicinity as of December 31, 2022, unchanged as of March 31, 2023, with payments expected over 19 years[75] - A final withdrawal liability of $0.6 million was recognized for the Minneapolis Food Distributors Ind Pension Plan in Q1 2023, with payments expected over four years[76] 12. SEGMENT AND OTHER INFORMATION - Veritiv operates through three reportable segments: Packaging, Facility Solutions, and Print Solutions, along with a Corporate & Other category[78] Net Sales and Adjusted EBITDA by Segment (in millions) | (in millions) | Packaging (2023) | Packaging (2022) | Facility Solutions (2023) | Facility Solutions (2022) | Print Solutions (2023) | Print Solutions (2022) | Corporate & Other (2023) | Corporate & Other (2022) | Total (2023) | Total (2022) | | :-------------- | :--------------- | :--------------- | :------------------------ | :------------------------ | :--------------------- | :--------------------- | :----------------------- | :----------------------- | :----------- | :----------- | | Net sales | $895.4 | $1,003.1 | $180.2 | $229.4 | $434.6 | $596.6 | $0 | $29.0 | $1,510.2 | $1,858.1 | | Adjusted EBITDA | $96.4 | $97.4 | $15.4 | $13.4 | $37.2 | $54.6 | $(45.2) | $(45.9) | N/A | N/A | - Adjusted EBITDA for reportable segments decreased from $165.4 million in Q1 2022 to $149.0 million in Q1 2023[80] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses Veritiv's financial condition and operating results for Q1 2023, including segment performance and liquidity Executive Overview - Veritiv continues to execute its long-term strategy to be a leading provider of business-to-business packaging products and services, as well as paper and facility solutions, with ongoing investments in organic packaging growth and evaluation of inorganic opportunities[87] - The company sold its Canadian business (May 2, 2022) and logistics solutions business (September 1, 2022) to focus its portfolio on core packaging and higher-growth, higher-margin businesses[89] - Veritiv's operating results are subject to seasonal influences, with higher consolidated net sales historically occurring in the third and fourth quarters, and lowest in the first quarter[93] Results of Operations, Including Business Segments Consolidated Operating Results (in millions) | (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Increase (Decrease) ($) | Increase (Decrease) (%) | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | :---------------------- | :---------------------- | | Net sales | $1,510.2 | $1,858.1 | $(347.9) | (18.7)% | | Cost of products sold | $1,144.1 | $1,455.4 | $(311.3) | (21.4)% | | Distribution expenses | $89.7 | $112.2 | $(22.5) | (20.1)% | | Selling and administrative expenses | $171.4 | $187.9 | $(16.5) | (8.8)% | | Operating income | $94.9 | $87.2 | $7.7 | 8.8% | | Net income | $68.7 | $78.5 | $(9.8) | (12.5)% | - Net sales decreased by 18.7% YoY, with organic sales decreasing by 7.8%, primarily due to lower volumes and customer inventory destocking, especially in the Print Solutions segment[96] - Divestitures of Canadian and logistics solutions businesses accounted for $191.6 million and $29.0 million of the net sales decrease, respectively[96] - Operating income increased by 8.8% YoY, despite lower net sales, due to cost of products sold decreasing at a faster rate than net sales, and reductions in distribution and selling and administrative expenses, partly offset by higher interest expense and other net expenses[94][97][98][99][102][103] Segment Results - Adjusted EBITDA is the primary financial performance measure used by management to assess business performance and incentivize management[105] Segment Net Sales and Adjusted EBITDA (in millions) | Segment | Net Sales (Q1 2023) | Net Sales (Q1 2022) | Adjusted EBITDA (Q1 2023) | Adjusted EBITDA (Q1 2022) | | :---------------- | :------------------ | :------------------ | :------------------------ | :------------------------ | | Packaging | $895.4 | $1,003.1 | $96.4 | $97.4 | | Facility Solutions | $180.2 | $229.4 | $15.4 | $13.4 | | Print Solutions | $434.6 | $596.6 | $37.2 | $54.6 | | Corporate & Other | $0 | $29.0 | $(45.2) | $(45.9) | Packaging - Net sales decreased by 10.7% YoY to $895.4 million, with organic sales down 3.6%, primarily due to lower sales volume and the Canadian business divestiture ($74.2 million impact), partially offset by higher market prices[113][115] - Adjusted EBITDA decreased by 1.0% YoY to $96.4 million, primarily due to lower net sales, but partially offset by decreased distribution and selling and administrative expenses, and cost of products sold decreasing faster than net sales[113][116] - Management expects market demand challenges to continue into Q2 2023, but believes the majority of customer inventory destocking effects were over by the end of Q1 2023[115] Facility Solutions - Net sales decreased by 21.4% YoY to $180.2 million, primarily due to the Canadian business divestiture ($64.5 million impact) and decreased sales volume[117][118] - Organic sales, however, increased by 9.3%[118] - Adjusted EBITDA increased by 14.9% YoY to $15.4 million, driven by organic sales growth and cost of products sold increasing at a slower rate than net sales, despite the overall net sales decrease from divestiture[117][119] - Demand improved in entertainment, hospitality, and office-like sectors due to a consumer shift from goods to services and increased physical office returns, partially offset by lower demand for personal protective equipment[118] Print Solutions - Net sales decreased by 27.2% YoY to $434.6 million, with organic sales down 20.1%, primarily due to decreased sales volume, customer inventory destocking, and the Canadian business divestiture ($52.9 million impact)[120][121] - Adjusted EBITDA decreased by 31.9% YoY to $37.2 million, mainly attributable to lower net sales, partially offset by cost of products sold decreasing faster than net sales and reduced selling and administrative and distribution expenses[120][122] - Management expects customer inventory destocking to continue into Q3 2023 and anticipates pricing challenges in H2 2023 if demand remains depressed[121] Corporate & Other - Net sales decreased by 100.0% YoY to $0, driven by the divestiture of the logistics solutions business in 2022[124][125] - Adjusted EBITDA increased by 1.5% YoY to $(45.2) million, primarily due to a $5.0 million decrease in selling and administrative expenses, partially offset by the net sales decrease from the logistics solutions divestiture[124][126] Liquidity and Capital Resources Summary of Cash Flows (in millions) | (in millions) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used for) Operating activities | $70.9 | $(5.9) | | Net cash provided by (used for) Investing activities | $(2.7) | $(7.1) | | Net cash provided by (used for) Financing activities | $(76.5) | $7.4 | - Net cash from operating activities increased by $76.8 million YoY, primarily due to a decrease in accounts receivable driven by lower net sales and improved collection efforts[129] - Net cash used for financing activities increased by $83.9 million YoY, mainly due to increased net repayments under the ABL Facility, unfavorable change in book overdrafts, and dividend payments, partially offset by lower tax withholdings and common stock repurchases[131][132] - As of March 31, 2023, the available additional borrowing capacity under the ABL Facility was approximately $681.8 million[134] - The company expects to spend approximately $30 million on capital expenditures in 2023 and declared a quarterly cash dividend of $0.63 per share payable in June 2023[137] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes in market risk were reported compared to the prior year's Annual Report on Form 10-K - No material changes in market risk were reported compared to the previous Annual Report on Form 10-K[142] ITEM 4. CONTROLS AND PROCEDURES Management concluded the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023[143] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[144] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Legal proceedings information is referenced to Note 11 of the financial statements, with no new material updates - Legal proceedings information is referenced to Note 11 of the financial statements[146] ITEM 1A. RISK FACTORS No material changes to risk factors were reported compared to the prior year's Annual Report on Form 10-K - No material changes to risk factors were reported compared to the previous Annual Report on Form 10-K[147] ITEM 6. EXHIBITS This section lists exhibits filed with the Form 10-Q, including the ABL Credit Agreement amendment and CEO/CFO certifications - Key exhibits include the Third Amendment to the ABL Credit Agreement dated March 17, 2023, and Rule 13a-14(a) and Section 1350 Certifications from the Chief Executive Officer and Chief Financial Officer[148] SIGNATURES - The report was signed on May 9, 2023, by Eric J. Guerin, Senior Vice President and Chief Financial Officer, and Lance D. Gebert, Corporate Controller[153]