2. REVENUE RECOGNITION AND CREDIT LOSSES
Veritiv applies the five-step model to assess its contracts with customers. The Company's revenue is reported as net sales and is measured as the determinable transaction price, net of any variable consideration (e.g., sales incentives and rights to return product) and any taxes collected from customers and remitted to governmental authorities. Certain revenues are derived from shipments which are made directly from a manufacturer to a Veritiv customer. The Company is considered to be a principal to these transactions. 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. As a normal business practice, Veritiv does not enter into contracts that require more than one year to complete or that contain significant financing components. The Company considers handling and delivery as activities to fulfill its performance obligations. Billings for third-party freight are accounted for as net sales and handling and delivery costs are accounted for as distribution expenses. The Company has established credit and collection processes whereby collection assessments are performed and expected credit losses are recognized. 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. As of June 30, 2021 and December 31, 2020, estimated inventory returns were not significant.
A customer contract liability will arise when Veritiv has received payment for goods and services, but has not yet transferred the items to a customer and satisfied its performance obligations. Veritiv records a customer contract liability for performance obligations outstanding related to payments received in advance for customer deposits on equipment sales and other sale arrangements requiring prepayment, which are included in accounts payable on the Condensed Consolidated Balance Sheets. Veritiv expects to satisfy these remaining performance obligations and recognize the related revenues upon delivery of the goods and services to the customer's designated location within 12 months following receipt of the payment. Most equipment sales
deposits are held for approximately 90 days and other sale arrangements requiring prepayment initially cover a 60 - 90 day period, but can be renewed by the customer.
See the table below for a year-to-date summary of the changes to the customer contract liabilities balance:
|Customer Contract Liabilities|
|Balance at January 1,||$||12.2 ||$||11.7 |
| Payments received||25.5 ||23.3 |
| Revenue recognized from beginning balance||(10.6)||(10.8)|
| Revenue recognized from current year receipts||(14.4)||(11.5)|
|Balance at June 30,||$||12.7 ||$||12.7 |
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. Veritiv evaluated the nature of the products and services provided to its customers as well as the nature of the customer and the geographical distribution of its customer base and determined that the best representative level of disaggregated revenue is the product category basis. The following is a brief description of the Company's four reportable segments, organized by major product category. This segment structure is consistent with the way the Chief Operating Decision Maker, who is Veritiv's Chief Executive Officer, makes operating decisions and manages the growth and profitability of the Company's business. The Company also has a Corporate & Other category, which includes certain assets and costs not primarily attributable to any of the reportable segments, as well as the Veritiv logistics solutions business which provides transportation and warehousing solutions.
•Packaging – The Packaging segment provides custom and standard packaging solutions for customers based in North America and in key global markets. This segment services customers with a full spectrum of packaging product materials within flexible, corrugated and fiber, ancillary packaging, rigid and equipment categories. The business is strategically focused on higher growth industry sectors including manufacturing, food and beverage, wholesale and retail, healthcare and transportation, as well as specialty sectors based on industry and product expertise. This segment also provides supply chain solutions, structural and graphic packaging design and engineering, automation, workflow and equipment services and kitting.
•Facility Solutions – The Facility Solutions segment sources and sells cleaning, break-room and other supplies in product categories that include towels and tissues, food service, personal protective equipment, cleaning chemicals and skincare, primarily in North America. Additionally, the Company offers total cost of ownership solutions with re-merchandising, budgeting and compliance reporting, and inventory management.
•Print – The Print segment sells and distributes commercial printing, writing, copying, digital, specialty products and graphics consumables primarily in North America. Veritiv's broad geographic platform of operations coupled with the breadth of paper and graphics products, including exclusive private brand offerings, provides a foundation to service national, regional and local customers across North America.
•Publishing – The Publishing segment sells and distributes coated and uncoated commercial printing papers to publishers, retailers, converters, printers and specialty businesses for use in magazines, catalogs, books, directories, gaming, couponing, retail inserts and direct mail primarily in the U.S. This segment also provides print management, procurement and supply chain management solutions to simplify paper and print procurement processes for its customers.
Allowance for Credit Losses
The components of the accounts receivable allowances were as follows:
|(in millions)||June 30, 2021||December 31, 2020|
|Allowance for credit losses||$||25.3 ||$||31.4 |
|10.5 ||10.2 |
|Total accounts receivable allowances||$||35.8 ||$||41.6 |
(1) Includes amounts reserved for credit memos, customer discounts, customer short pays and other miscellaneous items.
Below is a year-to-date rollforward of the Company’s allowance for credit losses. During the second quarter of 2021, the Company reassessed its reserve position for customers who had previously been considered high risk due to the pandemic, resulting in reductions to the allowance for certain customers. Additionally, the Company experienced no material customer bankruptcies during the first half of 2021. The impact of these positive experiences resulted in a favorable reduction of expected credit losses as shown in the table below.
|Packaging and Facility Solutions||Print - High Risk||Print - Medium/Low Risk|
|Rest of world|
Corporate & Other(1)
|Balance at December 31, 2020||$||14.4 ||$||0.5 ||$||10.2 ||$||0.7 ||$||2.2 ||$||0.0 ||$||1.6 ||$||1.0 ||$||0.8 ||$||31.4 |
|Add / (Deduct):|
|Provision for expected credit losses||1.2 ||0.2 ||(1.5)||0.0 ||0.3 ||0.0 ||(0.9)||(0.1)||0.2 ||(0.6)|
|Write-offs charged against the allowance||(2.4)||0.0 ||(1.3)||0.0 ||0.0 ||— ||(0.1)||0.0 ||(0.2)||(4.0)|
|Recoveries of amounts previously written off||0.0 ||— ||0.0 ||— ||0.0 ||— ||— ||— ||— ||0.0 |
|— ||0.0 ||(0.2)||0.0 ||(1.3)||0.0 ||— ||0.0 ||— ||(1.5)|
|Balance at June 30, 2021||$||13.2 ||$||0.7 ||$||7.2 ||$||0.7 ||$||1.2 ||$||0.0 ||$||0.6 ||$||0.9 ||$||0.8 ||$||25.3 |
(1) Publishing and Corporate & Other have only U.S. operations.
(2) Other adjustments represent amounts reserved for foreign currency translation adjustments and reserves for certain customer accounts where revenue is not recognized because collectability is not probable, and may include accounts receivable allowances recorded in connection with acquisitions.The Company, under certain circumstances, enters into note receivable agreements with customers. Expected credit losses are recognized when collectability is uncertain; these losses are included in selling and administrative expenses on the Condensed Consolidated Statements of Operations. For the six months ended June 30, 2021 and 2020, the Company recognized $0.3 million and $4.3 million, respectively, in the provision for expected credit losses related to these notes receivable. At June 30, 2021 and December 31, 2020, the Company held $1.5 million and $2.2 million, respectively, in notes receivable, the majority of which is reflected within other current assets on the Condensed Consolidated Balance Sheets.