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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________
Commission file number 001-36479


VERITIV CORPORATION
(Exact name of registrant as specified in its charter)
Delaware46-3234977
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
1000 Abernathy Road NE
Building 400, Suite 1700
                           Atlanta,Georgia30328
(Address of principal executive offices)(Zip Code)

(770) 391-8200
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.01 par valueVRTVNew York Stock Exchange


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  

The number of shares outstanding of the registrant's common stock as of October 30, 2020 was 15,893,575.




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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

VERITIV CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data, unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net sales (including sales to related party of $4.8, $5.7, $16.5 and $17.3, respectively)
$1,591.2 $1,924.5 $4,703.3 $5,824.2 
Cost of products sold (including purchases from related party of $15.0, $20.0, $47.0 and $66.2, respectively) (exclusive of depreciation and amortization shown separately below)
1,262.4 1,550.8 3,728.8 4,726.5 
Distribution expenses100.6 124.9 323.9 387.3 
Selling and administrative expenses177.4 204.3 545.4 631.6 
Depreciation and amortization15.0 13.3 43.1 39.5 
Integration expenses 4.5  13.3 
Restructuring charges, net7.9 7.6 40.4 16.9 
Operating income (loss)27.9 19.1 21.7 9.1 
Interest expense, net5.5 8.9 19.7 30.5 
Other (income) expense, net1.4 (2.5)0.0 11.3 
Income (loss) before income taxes21.0 12.7 2.0 (32.7)
Income tax expense (benefit)(0.1)7.6 (0.2)0.2 
Net income (loss)$21.1 $5.1 $2.2 $(32.9)
Earnings (loss) per share:
Basic earnings (loss) per share$1.33 $0.32 $0.14 $(2.05)
 Diluted earnings (loss) per share
$1.30 $0.31 $0.14 $(2.05)
Weighted-average shares outstanding:
Basic15.89 16.10 15.99 16.04 
Diluted16.21 16.24 16.18 16.04 

See accompanying Notes to Condensed Consolidated Financial Statements.
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VERITIV CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net income (loss)$21.1 $5.1 $2.2 $(32.9)
Other comprehensive income (loss):
Foreign currency translation adjustments3.8 (2.2)(6.0)1.5 
Change in fair value of cash flow hedge, net of tax (1)
0.0 (0.3)0.0 0.0 
Pension liability adjustments, net of tax (1)
0.1 0.0 0.1 0.1 
Other comprehensive income (loss)3.9 (2.5)(5.9)1.6 
Total comprehensive income (loss)$25.0 $2.6 $(3.7)$(31.3)
(1) Amounts shown are net of tax impacts, which were not significant for the periods presented.

See accompanying Notes to Condensed Consolidated Financial Statements.



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VERITIV CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in millions, except par value, unaudited)

September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$112.5 $38.0 
Accounts receivable, less allowances of $43.7 and $43.8, respectively
840.1 910.8 
Related party receivable2.4 

2.8 
Inventories484.5 

552.9 
Other current assets116.1 

126.1 
Total current assets1,555.6 1,630.6 
Property and equipment (net of accumulated depreciation and amortization of $366.9 and $342.6, respectively)
202.2 

216.9 
Goodwill99.6 

99.6 
Other intangibles, net48.6 

52.2 
Deferred income tax assets57.2 

57.0 
Other non-current assets396.4 

454.8 
Total assets$2,359.6 $2,511.1 
Liabilities and shareholders' equity
Current liabilities:
Accounts payable$496.9 $476.9 
Related party payable4.0 4.3 
Accrued payroll and benefits66.2 53.9 
Other accrued liabilities184.3 

183.8 
Current portion of debt14.9 

12.6 
Total current liabilities766.3 731.5 
Long-term debt, net of current portion591.0 

742.4 
Defined benefit pension obligations14.1 

15.7 
Other non-current liabilities445.4 

485.3 
Total liabilities1,816.8 1,974.9 
Commitments and contingencies (Note 12)

Shareholders' equity:
Preferred stock, $0.01 par value, 10.0 million shares authorized, none issued
 

 
Common stock, $0.01 par value, 100.0 million shares authorized; shares issued - 16.6 million and 16.4 million, respectively; shares outstanding - 15.9 million and 16.1 million, respectively
0.2 

0.2 
Additional paid-in capital632.1 

618.0 
Accumulated (deficit) earnings(33.4)

(35.3)
Accumulated other comprehensive loss(39.0)

(33.1)
Treasury stock at cost - 0.7 million shares in 2020 and 0.3 million shares in 2019
(17.1)(13.6)
Total shareholders' equity542.8 536.2 
Total liabilities and shareholders' equity$2,359.6 $2,511.1 

See accompanying Notes to Condensed Consolidated Financial Statements.
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VERITIV CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
Nine Months Ended September 30,
20202019
Operating activities
Net income (loss)$2.2 $(32.9)
Depreciation and amortization43.1 39.5 
Amortization and write-off of deferred financing fees1.8 1.9 
Net losses (gains) on dispositions of property and equipment(8.1)(0.1)
Provision for expected credit losses and doubtful accounts, respectively11.2 13.8 
Deferred income tax provision (benefit)(0.6)(2.9)
Stock-based compensation14.9 12.4 
Other non-cash items, net8.4 9.9 
Changes in operating assets and liabilities
Accounts receivable and related party receivable58.1 193.1 
Inventories65.3 87.8 
Other current assets0.6 29.7 
Accounts payable and related party payable52.8 (84.8)
Accrued payroll and benefits12.6 (5.9)
Other accrued liabilities1.6 (0.4)
Other16.8 9.4 
Net cash provided by (used for) operating activities280.7 270.5 
Investing activities
Property and equipment additions(19.8)(22.2)
Proceeds from asset sales12.0 0.3 
Net cash provided by (used for) investing activities(7.8)(21.9)
Financing activities
Change in book overdrafts(30.1)31.4 
Borrowings of long-term debt4,100.6 5,038.3 
Repayments of long-term debt(4,252.0)(5,306.1)
Payments under right-of-use finance leases(9.5)(6.8)
Deferred financing fees(3.4) 
Purchase of treasury stock(3.5) 
Payments under Tax Receivable Agreement(0.3)(7.8)
Other(0.3)(2.4)
Net cash provided by (used for) financing activities(198.5)(253.4)
Effect of exchange rate changes on cash0.1 (0.2)
Net change in cash and cash equivalents74.5 (5.0)
Cash and cash equivalents at beginning of period38.0 64.3 
Cash and cash equivalents at end of period$112.5 $59.3 
Supplemental cash flow information
Cash paid for income taxes, net of refunds$2.8 $3.1 
Cash paid for interest17.2 28.1 
Non-cash investing and financing activities
Non-cash additions to property and equipment for right-of-use finance leases$13.4 $9.8 
Non-cash additions to other non-current assets for right-of-use operating leases18.3 107.7 

See accompanying Notes to Condensed Consolidated Financial Statements.
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VERITIV CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions, unaudited)

2020
Common Stock IssuedAdditional Paid-in CapitalAccumulated (Deficit) Earnings
AOCL (1)
Treasury StockTotal
SharesAmountSharesAmount
Balance at December 31, 201916.4 $0.2 $618.0 $(35.3)$(33.1)(0.3)$(13.6)$536.2 
Net income (loss)(0.4)(0.4)
Other comprehensive income (loss)(14.0)(14.0)
Stock-based compensation9.4 9.4 
Issuance of common stock, net of stock received for minimum tax withholdings0.1 0.0 (0.6)(0.6)
Adoption impact - Accounting Standards Update 2016-13(0.3)(0.3)
Treasury stock(0.4)(3.5)(3.5)
Balance at March 31, 202016.5 $0.2 $626.8 $(36.0)$(47.1)(0.7)$(17.1)$526.8 
Net income (loss)(18.5)(18.5)
Other comprehensive income (loss)4.2 4.2 
Stock-based compensation0.7 0.7 
Issuance of common stock, net of stock received for minimum tax withholdings0.1 0.0 (0.2)(0.2)
Balance at June 30, 202016.6 $0.2 $627.3 $(54.5)$(42.9)(0.7)$(17.1)$513.0 
Net income (loss)21.1 21.1 
Other comprehensive income (loss)3.9 3.9 
Stock-based compensation4.8 4.8 
Issuance of common stock, net of stock received for minimum tax withholdings0.0 0.0 0.0 0.0 
Balance at September 30, 202016.6 $0.2 $632.1 $(33.4)$(39.0)(0.7)$(17.1)$542.8 
(1) Accumulated other comprehensive loss.


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2019
Common Stock IssuedAdditional Paid-in CapitalAccumulated (Deficit) Earnings
AOCL (1)
Treasury StockTotal
SharesAmountSharesAmount
Balance at December 31, 201816.2 $0.2 $605.7 $(8.5)$(40.7)(0.3)$(13.6)$543.1 
Net income (loss)(26.7)(26.7)
Other comprehensive income (loss)2.5 2.5 
Stock-based compensation4.7 4.7 
Issuance of common stock, net of stock received for minimum tax withholdings0.2 0.0 (2.7)(2.7)
Adoption impact - Accounting Standards Update 2016-022.7 2.7 
Balance at March 31, 201916.4 $0.2 $607.7 $(32.5)$(38.2)(0.3)$(13.6)$523.6 
Net income (loss)(11.3)(11.3)
Other comprehensive income (loss)1.6 1.6 
Stock-based compensation4.3 4.3 
Issuance of common stock, net of stock received for minimum tax withholdings0.0 0.0 0.5 0.5 
Balance at June 30, 201916.4 $0.2 $612.5 $(43.8)$(36.6)(0.3)$(13.6)$518.7 
Net income (loss)5.1 5.1 
Other comprehensive income (loss)(2.5)(2.5)
Stock-based compensation3.4 3.4 
Issuance of common stock, net of stock received for minimum tax withholdings0.0 0.0 (0.1)(0.1)
Balance at September 30, 201916.4 $0.2 $615.8 $(38.7)$(39.1)(0.3)$(13.6)$524.6 
(1) Accumulated other comprehensive loss.

See accompanying Notes to Condensed Consolidated Financial Statements.

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VERITIV CORPORATION
NOTES TO CONDENSED 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 distributor of packaging, facility solutions, print and publishing products and services. Additionally, Veritiv provides logistics and supply chain management solutions to its customers. Veritiv was established in 2014, following the merger (the "Merger") of International Paper Company's xpedx distribution solutions business ("xpedx") and UWW Holdings, Inc. ("UWWH"), the parent company of Unisource Worldwide, Inc. ("Unisource"). Veritiv operates from approximately 140 distribution centers primarily throughout the United States ("U.S."), Canada and Mexico.

Basis of Presentation and Principles of Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for a complete set of annual audited financial statements. The accompanying unaudited financial information should be read in conjunction with the Consolidated Financial Statements and Notes contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") for the year ended December 31, 2019. In the opinion of management, all adjustments, including normal recurring accruals and other adjustments, considered necessary for a fair presentation of the interim financial information have been included. The operating results for the interim periods are not necessarily indicative of results for the full year, particularly in light of the novel coronavirus ("COVID-19") pandemic and its effects on the domestic and global economies. These financial statements include all of the Company's subsidiaries. All significant intercompany transactions between Veritiv's businesses have been eliminated.

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. As of September 30, 2020, the Company's cash and cash equivalents included a $75.0 million investment in a money market fund that is highly liquid and qualifies as a cash equivalent.

Use of Estimates

The preparation of unaudited 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, income tax contingency accruals and valuation allowances, multi-employer pension plan 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, unfavorable impacts from the COVID-19 pandemic have had a negative impact on the Company's financial results, including decreased net sales across all segments. As a result of the COVID-19 pandemic, the Company could 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, including goodwill, 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 highly uncertain and cannot be predicted, 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 and the remedial actions and stimulus measures adopted by local and federal governments, 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 that has occurred or may occur in the future. Estimates are revised as additional information becomes available.

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Accounting Pronouncements

Recently Adopted Accounting Standards

Effective January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326). The standard replaces the previously required incurred loss impairment methodology with guidance that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to be considered in making credit loss estimates. The standard requires application on a modified retrospective basis; accordingly, prior periods have 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.

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 industries 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 Facility Solutions segment could experience revenue declines and increases in delinquency rates attributable to changes in the travel industry and back-to-school activities. The Packaging segment’s performance could be negatively impacted by 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.

The components of the accounts receivable allowances were as follows:

(in millions)September 30, 2020December 31, 2019
Allowance for credit losses and doubtful accounts, respectively$33.0 $30.4 
Other allowances(1)
10.7 13.4 
Total accounts receivable allowances$43.7 $43.8 
(1) Includes amounts reserved for credit memos, customer discounts, customer short pays and other miscellaneous items.
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Below is a rollforward of the Company’s allowance for credit losses for the nine months ended September 30, 2020:
Packaging and Facility SolutionsPrint - High RiskPrint - Medium/Low Risk
(in millions)U.S.CanadaU.S.CanadaU.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 2016-131.0 (0.3)(0.2)0.0 0.1 (0.1)(0.1) 0.0 0.4 
Provision for expected credit losses2.1 0.0 2.6 0.3 0.3 0.0 1.3 0.2 0.1 6.9 
Write-offs charged against the allowance(1.8)0.0 (2.2)0.0 (0.1)   (0.1)(4.2)
Recoveries of amounts previously written off0.2  0.0 0.0 0.0  0.0  0.0 0.2 
Other adjustments(2)
 0.0 (1.4)0.0 0.8 0.0  (0.1) (0.7)
Balance at September 30, 2020$14.8 $0.7 $10.7 $0.7 $2.0 $0.0 $2.5 $0.7 $0.9 $33.0 
(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.

ASU 2018-13, Fair Value Measurement (Topic 820) - The standard modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted this ASU on January 1, 2020. The adoption did not materially impact its financial statement disclosures.

ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) - The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update also require companies to expense capitalized implementation costs over the term of the hosting arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The amendments also stipulate presentation requirements for the Statement of Operations, Balance Sheet and Statement of Cash Flows. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this ASU on January 1, 2020 on a prospective basis. Capitalized amounts are reported on the Condensed Consolidated Balance Sheet as other non-current assets. The related periodic expense is reported as part of operating expenses on the Condensed Consolidated Statement of Operations and the corresponding cash flow impact is reported as part of operating activities on the Condensed Consolidated Statement of Cash Flows. The Company does not expect the adoption of this standard to have a material impact on its future consolidated financial statements and related disclosures.


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Recently Issued Accounting Standards Not Yet 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 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. 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 ASU is effective January 1, 2021; early adoption is permitted. The Company anticipates adopting this standard effective January 1, 2021, with no material impact to its overall financial statements.

2. REVENUE RECOGNITION

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. The Company has established credit and collection processes whereby collection assessments are performed and expected credit losses are recognized. 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.

Additionally, Veritiv enters into incentive programs with certain of its customers, which are generally based on sales to those same customers. 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. Estimates of the variable consideration are based primarily on contract terms, current customer forecasts as well as historical experience.

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 Condensed Consolidated Balance Sheets.

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 its bill-and-hold arrangements. 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 bill-and-hold arrangements initially cover a 60 - 90 day period, but can be renewed by the customer.

As of September 30, 2020 and December 31, 2019, the Company recognized estimated inventory returns of approximately $1.5 million and $2.0 million, respectively, which are included in inventories on the Condensed Consolidated Balance Sheets. Additionally, the Company recognized customer contract liabilities related to its customer deposits for equipment sales and payments received for bill-and-hold arrangements, which are included in accounts payable on the Condensed Consolidated Balance Sheets.

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See the table below for a summary of the changes to the customer contract liabilities for the nine months ended September 30, 2020 and 2019:

Customer Contract Liabilities
(in millions)20202019
Balance at January 1,$11.7 $17.7 
    Payments received36.5 35.2 
    Revenue recognized from beginning balance(11.4)(17.7)
    Revenue recognized from current year receipts(22.7)(22.4)
Balance at September 30,$14.1 $12.8 

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 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.

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 Condensed Consolidated Statements of Operations and have historically represented approximately 35% of Veritiv's total net sales.

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 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% 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 87%, 10% and 2%, respectively.

The following is a brief description of the Company's four reportable segments, organized by major product category:

Packaging – The Packaging segment provides standard as well as custom and comprehensive packaging solutions for customers based in North America and in key global markets. The business is strategically focused on higher growth industries including light industrial/general manufacturing, food processing, fulfillment and internet retail, as well as niche verticals based on geographical and functional expertise. This segment also provides supply chain solutions, structural and graphic packaging design and engineering, automation, workflow and equipment services and kitting and fulfillment.

Facility Solutions – The Facility Solutions segment sources and sells cleaning, break-room and other supplies such as towels, tissues, wipers and dispensers, can liners, commercial cleaning chemicals, soaps and sanitizers, sanitary maintenance supplies and equipment, safety and hazard supplies, and shampoos and amenities primarily in North America. Additionally, the Company offers total cost of ownership solutions with re-merchandising, budgeting and compliance reporting, and inventory management.

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Print – The Print segment sells and distributes commercial printing, writing, copying, digital, specialty products, graphics consumables and graphics equipment primarily in North America. This segment also includes customized paper conversion services of commercial printing paper for distribution to document centers and form printers. 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.

The Company's consolidated financial results also include a "Corporate & Other" category which includes certain assets and costs not primarily attributable to any of the reportable segments. Corporate & Other also includes the Veritiv logistics solutions business which provides transportation and warehousing solutions.

See Note 13, Segment Information, for the disaggregation of revenue and other information related to the Company's reportable segments and Corporate & Other.

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 September 30, 2020, the Company operated from approximately 140 distribution centers of which approximately 130 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. Real estate leases generally carry lease terms of three years to ten years. Delivery equipment leases generally carry lease terms of three years to eight years and other non-real estate leases generally carry lease terms of three years to five years.

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. The Company does not include short-term leases on the 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.
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The components of lease expense were as follows:
(in millions)Three Months Ended
September 30,
Nine Months Ended
September 30,
Lease ClassificationFinancial Statement Classification2020201920202019
Short-term lease expense(1)
Operating expenses$0.6 $1.7 $1.8 $5.8 
Operating lease expense(2)
Operating expenses$30.6 $29.6 $85.3 $84.3 
Finance lease expense:
Amortization of right-of-use assets
Depreciation and amortization$3.7 $2.7 $10.9 $7.6 
Interest expense
Interest expense, net0.7 0.6 2.2 1.6 
Total finance lease expense
$4.4 $3.3 $13.1 $9.2 
Total Lease Cost
$35.6 $34.6 $100.2 $99.3 
(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 periods presented.

Supplemental balance sheets and other information were as follows:
(in millions, except weighted-average data)September 30, 2020December 31, 2019
Lease ClassificationFinancial Statement Classification
Operating Leases:
Operating lease right-of-use assetsOther non-current assets$371.2 $429.2 
Operating lease obligations - currentOther accrued liabilities$84.3 $90.5 
Operating lease obligations - non-currentOther non-current liabilities324.8 376.6 
Total operating lease obligations
$409.1 $467.1 
Weighted-average remaining lease term in years6.26.6
Weighted-average discount rate4.7 %4.6 %
Finance Leases:
Finance lease right-of-use assetsProperty and equipment$77.8 $76.6 
Finance lease obligations - currentCurrent portion of debt$13.3 $11.5 
Finance lease obligations - non-currentLong-term debt, net of current portion70.0 69.2 
Total finance lease obligations
$83.3 $80.7 
Weighted-average remaining lease term in years7.27.8
Weighted-average discount rate3.6 %3.4 %

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Cash paid for amounts included in the measurement of lease liabilities was as follows:
(in millions)Nine Months Ended September 30,
Lease ClassificationFinancial Statement Classification20202019
Operating Leases:
Operating cash flows from operating leases
Operating activities$83.7 $81.3 
Finance Leases:
Operating cash flows from finance leases
Operating activities$2.2 $1.6 
Financing cash flows from finance leases
Financing activities9.5 6.8 

Lease Commitments

Future minimum lease payments at September 30, 2020 were as follows:
(in millions)Finance Leases
Operating Leases (1)
2020 (excluding the nine months ended September 30, 2020)$4.1 $26.7 
202115.7 98.2 
202215.2 83.0 
202312.9 62.1 
202411.0 52.7 
202510.3 42.2 
Thereafter26.4 110.6 
Total future minimum lease payments95.6 475.5 
    Amount representing interest(12.3)(66.4)
Total future minimum lease payments, net of interest$83.3 $409.1 
(1) Future sublease income is not included in the above table as the amount is not significant.

Total future minimum lease payments at September 30, 2020 for finance and operating leases, including the amount representing interest, are comprised of $