Results of Operations, Including Business Segments
The following discussion compares the consolidated operating results of Veritiv for the
three and six months ended
June 30,
2016
and
2015
:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Increase (Decrease)
|
|
Six Months Ended
June 30,
|
|
Increase (Decrease)
|
|
(in millions)
|
2016
|
|
2015
|
|
$
|
|
%
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
Net sales
|
$
|
2,060.8
|
|
|
$
|
2,159.3
|
|
|
$
|
(98.5
|
)
|
|
(5
|
)%
|
|
$
|
4,080.6
|
|
|
$
|
4,297.2
|
|
|
$
|
(216.6
|
)
|
|
(5
|
)%
|
|
Cost of products sold (exclusive of depreciation and amortization shown separately below)
|
1,687.9
|
|
|
1,768.3
|
|
|
(80.4
|
)
|
|
(5
|
)%
|
|
3,342.4
|
|
|
3,530.2
|
|
|
(187.8
|
)
|
|
(5
|
)%
|
|
Distribution expenses
|
121.7
|
|
|
129.5
|
|
|
(7.8
|
)
|
|
(6
|
)%
|
|
249.2
|
|
|
260.2
|
|
|
(11.0
|
)
|
|
(4
|
)%
|
|
Selling and administrative expenses
|
207.7
|
|
|
218.0
|
|
|
(10.3
|
)
|
|
(5
|
)%
|
|
408.6
|
|
|
428.6
|
|
|
(20.0
|
)
|
|
(5
|
)%
|
|
Depreciation and amortization
|
13.6
|
|
|
15.3
|
|
|
(1.7
|
)
|
|
(11
|
)%
|
|
27.1
|
|
|
28.8
|
|
|
(1.7
|
)
|
|
(6
|
)%
|
|
Integration expenses
|
6.1
|
|
|
10.3
|
|
|
(4.2
|
)
|
|
(41
|
)%
|
|
12.3
|
|
|
20.3
|
|
|
(8.0
|
)
|
|
(39
|
)%
|
|
Restructuring charges (income)
|
(0.3
|
)
|
|
2.2
|
|
|
(2.5
|
)
|
|
(114
|
)%
|
|
1.4
|
|
|
5.6
|
|
|
(4.2
|
)
|
|
(75
|
)%
|
|
Operating income
|
24.1
|
|
|
15.7
|
|
|
8.4
|
|
|
54
|
%
|
|
39.6
|
|
|
23.5
|
|
|
16.1
|
|
|
69
|
%
|
|
Interest expense, net
|
6.4
|
|
|
6.4
|
|
|
—
|
|
|
—
|
%
|
|
12.9
|
|
|
12.8
|
|
|
0.1
|
|
|
1
|
%
|
|
Other expense (income), net
|
3.6
|
|
|
(1.5
|
)
|
|
5.1
|
|
|
*
|
|
|
5.1
|
|
|
2.0
|
|
|
3.1
|
|
|
155
|
%
|
|
Income before income taxes
|
14.1
|
|
|
10.8
|
|
|
3.3
|
|
|
31
|
%
|
|
21.6
|
|
|
8.7
|
|
|
12.9
|
|
|
*
|
|
|
Income tax expense
|
6.2
|
|
|
6.5
|
|
|
(0.3
|
)
|
|
(5
|
)%
|
|
10.4
|
|
|
6.6
|
|
|
3.8
|
|
|
58
|
%
|
|
Net income
|
$
|
7.9
|
|
|
$
|
4.3
|
|
|
$
|
3.6
|
|
|
84
|
%
|
|
$
|
11.2
|
|
|
$
|
2.1
|
|
|
$
|
9.1
|
|
|
*
|
|
* - not meaningful
Net Sales
For the three and six months ended June 30, 2016, net sales declined primarily due to declines in the Print, Publishing and Facility Solutions segments. See the “Segment Results” section for additional discussion.
Cost of Products Sold
For the three and six months ended June 30, 2016, the decrease in cost of products sold was primarily due to declines in sales as previously discussed. See the “Segment Results” section for additional discussion.
Distribution Expenses
For the three months ended June 30, 2016, distribution expenses declined primarily due to (i) a $3.9 million decrease in labor costs, primarily attributable to a decrease in temporary labor due to lower sales volume, (ii) a $3.4 million decrease in transportation expenses, primarily due to lower diesel prices which resulted in reductions in direct fuel spend and third-party freight and (iii) a $1.2 million decrease in facilities expenses due to warehouse consolidations.
For the six months ended June 30, 2016, distribution expenses declined primarily due to decreases of (i) $5.8 million in labor costs, (ii) $3.6 million in facilities expenses and (iii) $3.3 million in transportation expenses.
Selling and Administrative Expenses
For the three months ended June 30, 2016, selling and administrative expenses declined primarily due to (i) a $2.8 million decrease in health and welfare expenses due to lower medical expenses, (ii) a $2.3 million decrease in bad debt expense due to favorable collection experience, (iii) a $1.7 million decrease in travel and entertainment expenses, (iv) a $1.1 million reduction in incentive compensation and (v) a $1.1 million decrease in commissions expense due to lower sales volume.
For the six months ended June 30, 2016, selling and administrative expenses declined primarily due to decreases of (i) $8.4 million in bad debt expense, (ii) $4.0 million in incentive compensation expense, (iii) $3.2 million in health and welfare expense and (iv) $1.9 million in commissions. In addition, expenses were further reduced as the Company recognized a $3.2 million rebate from a pharmaceutical benefits management provider covering the years 2014 and 2015. The rebate had been deferred while a finalized contract was negotiated with the provider.
Depreciation and Amortization Expenses
For the three and six months ended June 30, 2016, depreciation and amortization expense declined when compared to the three and six months ended June 30, 2015, primarily due to $1.1 million and $2.2 million, respectively, of amortization for intangible assets acquired in the Merger that were fully amortized in the prior year.
Integration Expenses
Restructuring Charges (Income)
For the three months ended June 30, 2016, restructuring expenses declined primarily due to (i) a $2.7 million gain on the sale of a closed facility and (ii) a $1.0 million decrease in relocation expenses.
For the six months ended June 30, 2016, restructuring expenses declined primarily due to (i) a $2.7 million gain on the sale of a closed facility and (ii) a $2.2 million decrease in relocation expense.
See
Note 2, Integration and Restructuring Charges,
to the Condensed Consolidated Financial Statements for additional information related to the Company's restructuring efforts. The Company may continue to record restructuring charges in the future as restructuring activities progress.
Interest Expense, Net
For the three months ended June 30, 2016, interest expense was unchanged from the prior year.
For the six months ended June 30, 2016, interest expense rose due to a $0.3 million increase in expense related to the ABL Facility. The increase was due to a $1.5 million increase from higher LIBOR-based borrowing rates that was offset by a $1.2 million decline from a lower average daily loan balance.
Effective Tax Rate
Veritiv's effective tax rate was
44.0%
and
60.2%
for the
three months ended June 30,
2016
and
2015
, respectively. Veritiv's effective tax rate was
48.1%
and
75.9%
for the
six months ended
June 30,
2016
and
2015
, respectively. The difference between the Company’s effective tax rate and the U.S. statutory tax rate of
35.0%
is principally related to the non-recognition of tax benefits on certain losses, non-deductible expenses, and state income taxes (net of federal benefit). The historic volatility of the Company's effective tax rate has been primarily due to both the low level of pre-tax income as well as variations in the Company's income (loss) by jurisdiction. Over time and with higher pre-tax income, the Company estimates its effective tax rate will trend toward approximately 40%. However, the effective tax rate may vary significantly due to potential fluctuations in the amount and source, including both foreign and domestic, of pre-tax income and changes in amounts of non-deductible expenses and other items that could impact the effective tax rate.
Segment Results
Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, restructuring charges (income), stock-based compensation expense, LIFO (income) expense, non-restructuring severance charges, integration expenses, fair value adjustments on the contingent liability associated with the Tax Receivable Agreement ("TRA") and certain other adjustments) is the primary financial performance measure Veritiv uses to manage its segments, monitor its results of operations, measure its compliance with the covenants under the ABL Facility (as defined in the Notes to the Condensed Consolidated Financial Statements) and incentivize its management. This common metric is intended to align shareholders, debt holders and management.
Veritiv uses Adjusted EBITDA because Veritiv believes investors commonly use Adjusted EBITDA as a key financial metric for valuing companies. In addition, the credit agreement governing the ABL Facility permits the Company to exclude these and other charges in calculating Consolidated EBITDA, as defined in the ABL Facility.
Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of Veritiv’s results as reported under U.S. generally accepted accounting principles ("U.S. GAAP"). For example, Adjusted EBITDA:
|
|
|
|
•
|
does not reflect the Company’s income tax expenses or the cash requirements to pay its taxes; and
|
|
|
|
|
•
|
although depreciation and amortization charges are non-cash charges, it does not reflect that the assets being depreciated and amortized will often have to be replaced in the future, and the foregoing metrics do not reflect any cash requirements for such replacements.
|
Other companies in the industry may calculate Adjusted EBITDA differently than Veritiv does, limiting its usefulness as a comparative measure. Veritiv compensates for these limitations by relying both on the Company's U.S. GAAP results and by using Adjusted EBITDA for supplemental purposes. Additionally, Adjusted EBITDA is not an alternative measure of financial performance under U.S. GAAP and therefore should be considered in conjunction with net income and other performance measures such as operating income and not as an alternative to such U.S. GAAP measures.
Due to the shared nature of the distribution network, distribution expenses are not a specific charge to each segment, but are instead allocated to each segment based primarily on operational metrics that correlate with changes in volume. Accordingly, distribution expenses allocated to each segment are highly interdependent on the results of other segments. Lower volume in any segment that is not offset by a reduction in distribution expenses can result in the other segments absorbing a larger share of distribution expenses. Conversely, higher volume in any segment can result in the other segments absorbing a smaller share of distribution expenses. The impact of this at the segment level is that the changes in distribution expense trends may not correspond with volume trends within a particular segment.
The Company sells thousands of products. In the Print, Packaging and Facility Solutions segments, Veritiv is unable to compute the impact of changes in sales volume based on changes in sales of each individual product. Rather, the Company assumes that the margin stays constant and estimates the volume impact based on changes in cost of products sold as a proxy for the change in sales volume. After any other significant sales variances are identified, the remaining sales variance is attributed to price/mix.
The Company approximates foreign currency effects by applying the foreign currency exchange rate for the prior period to the local currency results for the current period.
The Company believes that the decline in demand for paper and related products is due to the widespread use of electronic media and permanent product substitution, more e-commerce, less print advertising, fewer catalogs and a reduced volume of direct mail, among other factors. This trend is expected to continue and will place continued pressure on the Company’s revenues and profit margins and make it more difficult to maintain or grow Adjusted EBITDA within the Print and Publishing segments.
Included in the following table are net sales and Adjusted EBITDA for each of the reportable segments reconciled to the combined totals:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Print
|
|
Publishing
|
|
Packaging
|
|
Facility Solutions
|
|
Corporate & Other
|
|
Total
|
|
Three Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
751.7
|
|
|
$
|
252.5
|
|
|
$
|
704.8
|
|
|
$
|
322.0
|
|
|
$
|
29.8
|
|
|
$
|
2,060.8
|
|
|
Adjusted EBITDA
|
$
|
19.7
|
|
|
$
|
5.9
|
|
|
$
|
59.2
|
|
|
$
|
13.9
|
|
|
$
|
(48.6
|
)
|
|
$
|
50.1
|
|
|
Adjusted EBITDA as a % of net sales
|
2.6
|
%
|
|
2.3
|
%
|
|
8.4
|
%
|
|
4.3
|
%
|
|
*
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
812.5
|
|
|
$
|
294.4
|
|
|
$
|
699.6
|
|
|
$
|
324.5
|
|
|
$
|
28.3
|
|
|
$
|
2,159.3
|
|
|
Adjusted EBITDA
|
$
|
18.4
|
|
|
$
|
7.4
|
|
|
$
|
51.8
|
|
|
$
|
10.6
|
|
|
$
|
(47.5
|
)
|
|
$
|
40.7
|
|
|
Adjusted EBITDA as a % of net sales
|
2.3
|
%
|
|
2.5
|
%
|
|
7.4
|
%
|
|
3.3
|
%
|
|
*
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,510.8
|
|
|
$
|
514.8
|
|
|
$
|
1,376.3
|
|
|
$
|
623.0
|
|
|
$
|
55.7
|
|
|
$
|
4,080.6
|
|
|
Adjusted EBITDA
|
$
|
35.7
|
|
|
$
|
9.9
|
|
|
$
|
105.9
|
|
|
$
|
21.4
|
|
|
$
|
(87.9
|
)
|
|
$
|
85.0
|
|
|
Adjusted EBITDA as a % of net sales
|
2.4
|
%
|
|
1.9
|
%
|
|
7.7
|
%
|
|
3.4
|
%
|
|
*
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,633.2
|
|
|
$
|
603.9
|
|
|
$
|
1,374.8
|
|
|
$
|
633.6
|
|
|
$
|
51.7
|
|
|
$
|
4,297.2
|
|
|
Adjusted EBITDA
|
$
|
33.9
|
|
|
$
|
13.8
|
|
|
$
|
97.5
|
|
|
$
|
17.5
|
|
|
$
|
(93.6
|
)
|
|
$
|
69.1
|
|
|
Adjusted EBITDA as a % of net sales
|
2.1
|
%
|
|
2.3
|
%
|
|
7.1
|
%
|
|
2.8
|
%
|
|
*
|
|
|
1.6
|
%
|
* - not meaningful
The table below provides a reconciliation of Veritiv’s net income determined in accordance with U.S. GAAP to Adjusted EBITDA for the
three and six months ended
June 30,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(in millions)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net income
|
|
$
|
7.9
|
|
|
$
|
4.3
|
|
|
$
|
11.2
|
|
|
$
|
2.1
|
|
|
Interest expense, net
|
|
6.4
|
|
|
6.4
|
|
|
12.9
|
|
|
12.8
|
|
|
Income tax expense
|
|
6.2
|
|
|
6.5
|
|
|
10.4
|
|
|
6.6
|
|
|
Depreciation and amortization
|
|
13.6
|
|
|
15.3
|
|
|
27.1
|
|
|
28.8
|
|
|
EBITDA
|
|
34.1
|
|
|
32.5
|
|
|
61.6
|
|
|
50.3
|
|
|
Restructuring charges (income)
|
|
(0.3
|
)
|
|
2.2
|
|
|
1.4
|
|
|
5.6
|
|
|
Stock-based compensation
|
|
3.1
|
|
|
0.9
|
|
|
5.1
|
|
|
1.9
|
|
|
LIFO (income) expense
|
|
2.2
|
|
|
(4.8
|
)
|
|
(3.1
|
)
|
|
(10.0
|
)
|
|
Non-restructuring severance charges
|
|
1.4
|
|
|
1.0
|
|
|
2.2
|
|
|
1.4
|
|
|
Integration expenses
|
|
6.1
|
|
|
10.3
|
|
|
12.3
|
|
|
20.3
|
|
|
Fair value adjustments on TRA contingent liability
|
|
2.0
|
|
|
(1.7
|
)
|
|
3.8
|
|
|
(0.4
|
)
|
|
Other
|
|
1.5
|
|
|
0.3
|
|
|
1.7
|
|
|
—
|
|
|
Adjusted EBITDA
|
|
$
|
50.1
|
|
|
$
|
40.7
|
|
|
$
|
85.0
|
|
|
$
|
69.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,060.8
|
|
|
$
|
2,159.3
|
|
|
$
|
4,080.6
|
|
|
$
|
4,297.2
|
|
|
Adjusted EBITDA as a % of net sales
|
|
2.4
|
%
|
|
1.9
|
%
|
|
2.1
|
%
|
|
1.6
|
%
|
Print
The table below presents selected data with respect to the Print segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016 vs. 2015
|
|
Six Months Ended June 30,
|
|
2016 vs. 2015
|
|
(in millions)
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
Net sales
|
$
|
751.7
|
|
|
$
|
812.5
|
|
|
(7.5
|
)%
|
|
$
|
1,510.8
|
|
|
$
|
1,633.2
|
|
|
(7.5
|
)%
|
|
Adjusted EBITDA
|
$
|
19.7
|
|
|
$
|
18.4
|
|
|
7.1
|
%
|
|
$
|
35.7
|
|
|
$
|
33.9
|
|
|
5.3
|
%
|
|
Adjusted EBITDA as a % of net sales
|
2.6
|
%
|
|
2.3
|
%
|
|
|
|
2.4
|
%
|
|
2.1
|
%
|
|
|
The table below presents the components of the net sales change compared to the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(in millions)
|
2016 vs. 2015
|
|
2016 vs. 2015
|
|
Volume
|
$
|
(59.7
|
)
|
|
$
|
(119.2
|
)
|
|
Foreign currency
|
(2.9
|
)
|
|
(8.5
|
)
|
|
Price/Mix
|
1.8
|
|
|
5.3
|
|
|
Total change
|
$
|
(60.8
|
)
|
|
$
|
(122.4
|
)
|
Comparison of the Three Months Ended
June 30,
2016
and
June 30,
2015
The net sales decrease was primarily attributable to the continued erosion in sales volume from the secular decline in the paper industry.
The Adjusted EBITDA increase was primarily due to (i) a $4.7 million decrease in labor costs due to a $1.9 million decline in supply chain wage and temporary worker expense reductions because of lower sales volume and a $1.5 million decrease in incentive compensation, (ii) a $1.4 million decrease in bad debt expense due to favorable collections experience, (iii) a $1.0 million increase attributed to cost of products sold decreasing faster than net sales primarily due to improved sourcing, (iv) a $0.7 million decrease in commission expense due to the reduction in sales volume, (v) a $0.6 million decrease in transportation expenses primarily due to lower diesel prices, (vi) a $0.5 million decrease in travel and entertainment expenses and (vii) a $0.3 million decrease in equipment rental expense. These improvements were partially offset by an $8.6 million reduction from the decline in sales volume.
Comparison of the Six Months Ended
June 30,
2016
and
June 30,
2015
The net sales decrease was primarily attributable to the continued erosion in sales volume from the secular decline in the paper industry as well as strategic customer choices made in the prior year.
The Adjusted EBITDA increase was primarily due to (i) a $7.4 million decrease in labor costs that was primarily due to a $3.3 million decline in supply chain wage and temporary worker expense reductions and a $2.1 million reduction in incentive compensation expenses, (ii) a $4.5 million decrease in bad debt expense, (iii) a $3.1 million increase attributed to cost of products sold decreasing faster than net sales primarily due to improved sourcing, (iv) a $1.4 million decrease in commission expense, (v) a $1.3 million decrease in transportation expenses due to a decrease in fuel spend and (vi) a $0.8 million decrease in equipment rental expense. These improvements were partially offset by a $17.1 million reduction from the decline in sales volume.
Publishing
The table below presents selected data with respect to the Publishing segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016 vs. 2015
|
|
Six Months Ended June 30,
|
|
2016 vs. 2015
|
|
(in millions)
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
Net sales
|
$
|
252.5
|
|
|
$
|
294.4
|
|
|
(14.2
|
)%
|
|
$
|
514.8
|
|
|
$
|
603.9
|
|
|
(14.8
|
)%
|
|
Adjusted EBITDA
|
$
|
5.9
|
|
|
$
|
7.4
|
|
|
(20.3
|
)%
|
|
$
|
9.9
|
|
|
$
|
13.8
|
|
|
(28.3
|
)%
|
|
Adjusted EBITDA as a % of net sales
|
2.3
|
%
|
|
2.5
|
%
|
|
|
|
1.9
|
%
|
|
2.3
|
%
|
|
|
The table below presents the components of the net sales change compared to the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(in millions)
|
2016 vs. 2015
|
|
2016 vs. 2015
|
|
Volume
|
$
|
(32.6
|
)
|
|
$
|
(77.5
|
)
|
|
Foreign currency
|
—
|
|
|
(0.1
|
)
|
|
Price/Mix
|
(9.3
|
)
|
|
(11.5
|
)
|
|
Total change
|
$
|
(41.9
|
)
|
|
$
|
(89.1
|
)
|
Comparison of the Three Months Ended
June 30,
2016
and
June 30,
2015
Approximately $21.3 million of the decrease in net sales was attributable to the loss of two customers. The remaining decrease was primarily attributable to the continued erosion in sales volume from the secular decline in the paper industry and unfavorable changes in price/mix.
The Adjusted EBITDA decrease was primarily due to a $2.0 million decrease due to lower sales volume, which was partially offset by a $0.7 million decrease in commission expense attributable to lower sales volumes.
Comparison of the Six Months Ended
June 30,
2016
and
June 30,
2015
Approximately $50.4 million of the decrease in net sales was attributable to the loss of five customers. The remaining decrease was primarily attributable to the continued erosion in sales volume from the secular decline in the paper industry and unfavorable changes in price/mix.
The Adjusted EBITDA decrease was primarily due to (i) a $4.8 million decrease due to lower sales volume and (ii) a $2.3 million decrease attributed to cost of products sold decreasing less than net sales. These declines were partially offset by (i) a $1.7 million decrease in commission expense and (ii) a $1.4 million decrease in bad debt expense due to favorable collections experience.
Packaging
The table below presents selected data with respect to the Packaging segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016 vs. 2015
|
|
Six Months Ended June 30,
|
|
2016 vs. 2015
|
|
(in millions)
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
Net sales
|
$
|
704.8
|
|
|
$
|
699.6
|
|
|
0.7
|
%
|
|
$
|
1,376.3
|
|
|
$
|
1,374.8
|
|
|
0.1
|
%
|
|
Adjusted EBITDA
|
$
|
59.2
|
|
|
$
|
51.8
|
|
|
14.3
|
%
|
|
$
|
105.9
|
|
|
$
|
97.5
|
|
|
8.6
|
%
|
|
Adjusted EBITDA as a % of net sales
|
8.4
|
%
|
|
7.4
|
%
|
|
|
|
7.7
|
%
|
|
7.1
|
%
|
|
|
The table below presents the components of the net sales change compared to the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(in millions)
|
2016 vs. 2015
|
|
2016 vs. 2015
|
|
Volume
|
$
|
11.8
|
|
|
$
|
12.5
|
|
|
Foreign currency
|
(5.8
|
)
|
|
(14.1
|
)
|
|
Price/Mix
|
(0.8
|
)
|
|
3.1
|
|
|
Total change
|
$
|
5.2
|
|
|
$
|
1.5
|
|
Comparison of the Three Months Ended
June 30,
2016
and
June 30,
2015
The net sales increase was primarily attributable to growth in operations in Canada and Mexico.
The Adjusted EBITDA increase was primarily due to (i) a $3.1 million improvement attributed to cost of products sold increasing at a slower rate than net sales due to improved sourcing, (ii) a $2.8 million improvement from increased sales volume and (iii) a $1.3 million decrease in labor costs primarily due to a decrease in incentive compensation costs.
Comparison of the Six Months Ended
June 30,
2016
and
June 30,
2015
The net sales increase was primarily attributable to growth in operations in Canada and Mexico.
The Adjusted EBITDA increase was primarily due to (i) a $7.5 million improvement attributed to cost of products sold increasing at a slower rate than net sales due to improved sourcing and (ii) a $2.9 improvement from increased sales volume.
Facility Solutions
The table below presents selected data with respect to the Facility Solutions segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
2016 vs. 2015
|
|
Six Months Ended June 30,
|
|
2016 vs. 2015
|
|
(in millions)
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
2016
|
|
2015
|
|
Increase (Decrease) %
|
|
Net sales
|
$
|
322.0
|
|
|
$
|
324.5
|
|
|
(0.8
|
)%
|
|
$
|
623.0
|
|
|
$
|
633.6
|
|
|
(1.7
|
)%
|
|
Adjusted EBITDA
|
$
|
13.9
|
|
|
$
|
10.6
|
|
|
31.1
|
%
|
|
$
|
21.4
|
|
|
$
|
17.5
|
|
|
22.3
|
%
|
|
Adjusted EBITDA as a % of net sales
|
4.3
|
%
|
|
3.3
|
%
|
|
|
|
3.4
|
%
|
|
2.8
|
%
|
|
|
The table below presents the components of the net sales change compared to the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
(in millions)
|
2016 vs. 2015
|
|
2016 vs. 2015
|
|
Volume
|
$
|
5.9
|
|
|
$
|
2.7
|
|
|
Foreign currency
|
(3.2
|
)
|
|
(9.1
|
)
|
|
Price/Mix
|
(5.2
|
)
|
|
(4.2
|
)
|
|
Total change
|
$
|
(2.5
|
)
|
|
$
|
(10.6
|
)
|
Comparison of the Three Months Ended
June 30,
2016
and
June 30,
2015
The net sales decrease was primarily attributable to the impact of changes in foreign currency exchange rates, partially offset by growth in the segment’s Canadian operations.
The Adjusted EBITDA improvement was primarily due to (i) $1.7 million decrease in labor costs primarily due to a $0.8 million decrease in incentive compensation and a $0.6 million decrease in supply chain temporary labor expenses, (ii) a $1.3 million increase in sales volume, (iii) a $0.7 million decrease in transportation expenses due to lower diesel prices which resulted in reductions in direct fuel spend and third party freight and (iv) a $0.6 million decrease in bad debt expense due to favorable collections experience. These improvements were partially offset by a $1.5 million decrease from cost of products sold declining at a slower rate than net sales.
Comparison of the Six Months Ended
June 30,
2016
and
June 30,
2015
The net sales decrease was primarily attributable to the impact of changes in foreign currency exchange rates, partially offset by growth in the segment’s Canadian operations.
The Adjusted EBITDA improvement was primarily due to (i) a $1.6 million decrease in labor costs due to a $0.8 million decrease in incentive compensation and a $0.6 million decrease in supply chain temporary labor expenses, (ii) a $1.1 million decrease in bad debt expense due to favorable collections experience and (iii) a $0.6 million decrease in commissions due to lower sales volume.
Corporate & Other
Comparison of the Three Months Ended
June 30,
2016
and
June 30,
2015
Revenue increased $1.5 million, or 5.3%, due to continued growth in freight brokerage services.
The Adjusted EBITDA decline was primarily due to a $2.0 million increase in labor costs due to higher incentive compensation expense and continued investment in personnel to grow the freight brokerage business.
Comparison of the Six Months Ended
June 30,
2016
and
June 30,
2015
Revenue increased $4.0 million, or 7.7%, due to continued growth in freight brokerage services.
The Adjusted EBITDA improvement was primarily due to (i) a $2.8 million decrease in labor costs resulting from the previously mentioned pharmaceutical benefits management provider rebate and (ii) a $2.1 million decrease in foreign exchange losses.
Liquidity and Capital Resources
The cash requirements of the Company are provided by cash flows from operations and borrowings under the ABL Facility. The following table sets forth a summary of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(in millions)
|
2016
|
|
2015
|
|
Net cash provided by (used for):
|
|
|
|
|
Operating activities
|
$
|
122.8
|
|
|
$
|
124.4
|
|
|
Investing activities
|
(12.9
|
)
|
|
(22.4
|
)
|
|
Financing activities
|
(118.4
|
)
|
|
(80.8
|
)
|
Operating Activities
Net cash provided by operating activities
decreased
by
$1.6 million
compared to the prior year. The decrease was due to a $6.3 million decrease in operating assets and liabilities which more than offset the increase in net income adjusted for non-cash items. The changes in operating activities are impacted by the timing of working capital payments.
Investing Activities
Net cash used for investing activities
decreased
by
$9.5 million
compared to the prior year due to lower capital expenditures and increased proceeds from asset sales.
Financing Activities
Net cash used for financing activities
increased
by
$37.6 million
compared to the prior year primarily due to higher net repayments on the ABL Facility. The decline in net cash used for investing activities allowed Veritiv to use more cash to repay the ABL Facility.
Funding and Liquidity Strategy
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
June 30, 2016
, the available additional borrowing capacity under the ABL Facility was approximately
$451.3 million
.
Veritiv's ability to fund its capital needs will depend on its ongoing ability to generate cash from operations, borrowings under the ABL Facility and funds received from capital market offerings. If Veritiv's cash flows from operating activities are lower than expected, the Company may need to borrow under the ABL Facility, incur additional debt or issue additional equity. Although management believes that the arrangements currently in place will permit Veritiv to finance its operations on acceptable terms and conditions, the Company’s access to, and the availability of, financing on acceptable terms and conditions in the future will be impacted by many factors, including (i) the liquidity of the overall capital markets and (ii) the current state of the economy.
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 June 30, 2016, the above test was not applicable and is not expected to be applicable in 2016.
Veritiv's management expects that the Company's primary future cash needs will be for working capital, capital expenditures, contractual commitments and strategic investments. Additionally, management expects that cash provided by operating activities and available capacity under the ABL Facility will provide sufficient funds to operate the business and meet other liquidity needs.
Off-Balance Sheet Arrangements
Veritiv does not have any off-balance sheet arrangements as of
June 30, 2016
, other than operating lease obligations and the letters of credit under the ABL Facility. The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
There have been no material changes to the Company's contractual obligations from those disclosed in Veritiv's Annual Report on Form 10-K for the year ended December 31,
2015
.
Critical Accounting Policies and Estimates
There have been no material changes to the Company's critical accounting policies and estimates from those disclosed in Veritiv's Annual Report on Form 10-K for the year ended December 31,
2015
.
Recently Issued Accounting Standards