VERITIV CORP, 10-K filed on 3/1/2018
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2017
Feb. 23, 2018
Jun. 30, 2017
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
VERITIV CORPORATION 
 
 
Entity Central Index Key
0001599489 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filer
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
15,733,745 
 
Entity Public Float
 
 
$ 511,432,245 
Consolidated Statements of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Net sales (including sales to related party of $32.2, $35.6 and $33.6, respectively)
$ 8,364.7 
$ 8,326.6 
$ 8,717.7 
Cost of products sold (including purchases from related party of $181.6, $224.9 and $264.7, respectively) (exclusive of depreciation and amortization shown separately below)
6,846.6 
6,826.4 
7,160.3 
Distribution expenses
516.9 
505.1 
521.8 
Selling and administrative expenses
872.6 
826.2 
853.9 
Depreciation and amortization
54.2 
54.7 
56.9 
Acquisition and integration expenses
36.5 
25.9 
34.9 
Restructuring charges, net
16.7 
12.4 
11.3 
Operating income
21.2 
75.9 
78.6 
Interest expense, net
31.2 
27.5 
27.0 
Other (income) expense, net
(8.1)
7.6 
6.7 
Income (loss) before income taxes
(1.9)
40.8 
44.9 
Income tax expense
11.4 
19.8 
18.2 
Net income (loss)
$ (13.3)
$ 21.0 
$ 26.7 
Earnings (loss) per share:
 
 
 
Diluted earnings (loss) per share (usd per share)
$ (0.85)
$ 1.30 
$ 1.67 
Basic earnings (loss) per share (usd per share)
$ (0.85)
$ 1.31 
$ 1.67 
Weighted-average shares outstanding
 
 
 
Weighted average shares outstanding - basic (in shares)
15.70 
15.97 
16.00 
Weighted average shares outstanding - diluted (in shares)
15.70 
16.15 
16.00 
Consolidated Statements of Operations (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Related party sales
$ 32.2 
$ 35.6 
$ 33.6 
Related party cost of products sold
$ 181.6 
$ 224.9 
$ 264.7 
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net income (loss)
$ (13.3)
$ 21.0 
$ 26.7 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments, net of $2.0 tax for 2015
5.7 
(2.1)
(12.4)
Change in fair value of cash flow hedge, net of $0.0, $0.1 and $0.3 tax, respectively
(0.2)
(0.5)
Pension liability adjustments, net of ($0.6), ($0.3) and $0.3 tax, respectively
(0.2)
(1.7)
Other comprehensive income (loss)
5.5 
(4.0)
(12.9)
Total comprehensive income (loss)
$ (7.8)
$ 17.0 
$ 13.8 
Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Foreign currency translation adjustment, tax
 
 
$ 2.0 
Change in fair value of cash flow hedge, tax
0.1 
0.3 
Pension liability adjustment, tax
$ (0.6)
$ (0.3)
$ 0.3 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash
$ 80.3 
$ 69.6 
Accounts receivable, less allowances of $44.0 and $34.5, respectively
1,174.3 
1,048.3 
Related party receivable
3.3 
3.9 
Inventories
722.7 
707.9 
Other current assets
133.5 
118.9 
Total current assets
2,114.1 
1,948.6 
Property and equipment (net of depreciation and amortization of $314.6 and $292.8, respectively)
340.2 
371.8 
Goodwill
99.6 
50.2 
Other intangibles, net
64.1 
21.0 
Deferred income tax assets
59.6 
61.8 
Other non-current assets
30.8 
30.3 
Total assets
2,708.4 
2,483.7 
Current liabilities:
 
 
Accounts payable
680.1 
654.1 
Related party payable
8.5 
9.0 
Accrued payroll and benefits
73.5 
84.4 
Other accrued liabilities
134.6 
102.5 
Current maturities of long-term debt
2.9 
2.9 
Financing obligations, current portion (including obligations to related party of $7.1 and $14.9, respectively)
7.8 
14.9 
Total current liabilities
907.4 
867.8 
Long-term debt, net of current maturities
908.3 
749.2 
Financing obligations, less current portion (including obligations to related party of $155.2 and $176.1, respectively)
181.6 
176.1 
Defined benefit pension obligations
24.4 
27.6 
Other non-current liabilities
137.0 
121.2 
Total liabilities
2,158.7 
1,941.9 
Commitments and contingencies (Note 16)
   
   
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, 16.0 million shares issued; shares outstanding - 15.7 million at December 31, 2017 and 2016
0.2 
0.2 
Additional paid-in capital
590.2 
574.5 
Accumulated earnings
6.4 
19.7 
Accumulated other comprehensive loss
(33.5)
(39.0)
Treasury stock at cost - 0.3 million shares at December 31, 2017 and 2016
(13.6)
(13.6)
Total shareholders' equity
549.7 
541.8 
Total liabilities and shareholders' equity
$ 2,708.4 
$ 2,483.7 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Assets
 
 
Allowance for doubtful accounts
$ 44.0 
$ 34.5 
Depreciation and amortization
314.6 
292.8 
Liabilities [Abstract]
 
 
Obligations to related parties current
7.1 
14.9 
Obligations to related parties noncurrent
$ 155.2 
$ 176.1 
Shareholders' equity:
 
 
Preferred stock par value (usd per share)
$ 0.01 
$ 0.01 
Preferred stock, shares authorized (in shares)
10,000,000 
10,000,000 
Preferred stock, shares issued (in shares)
Common stock par value (usd per share)
$ 0.01 
$ 0.01 
Common stock, shares authorized (in shares)
100,000,000 
100,000,000 
Common stock, shares issued (in shares)
16,000,000 
16,000,000 
Common stock shares outstanding (in shares)
15,700,000 
15,700,000 
Treasury stock at cost (in shares)
300,000 
300,000 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Operating activities
 
 
 
Net income (loss)
$ (13.3)
$ 21.0 
$ 26.7 
Depreciation and amortization
54.2 
54.7 
56.9 
Amortization and write-off of deferred financing fees
2.6 
5.6 
4.4 
Net losses (gains) on dispositions of property and equipment
(25.7)
(0.8)
0.5 
Goodwill and long-lived asset impairment charges
8.4 
7.7 
5.9 
Provision for allowance for doubtful accounts
15.9 
2.2 
7.4 
Deferred income tax provision
1.9 
11.1 
14.9 
Stock-based compensation
15.7 
8.3 
3.8 
Other non-cash items, net
(8.8)
3.7 
2.0 
Changes in operating assets and liabilities
 
 
 
Accounts receivable and related party receivable
(101.9)
(14.7)
53.4 
Inventories
30.1 
13.1 
(62.0)
Other current assets
(8.4)
(11.4)
1.0 
Accounts payable and related party payable
48.3 
69.9 
(8.4)
Accrued payroll and benefits
(11.3)
(40.9)
10.5 
Other accrued liabilities
13.6 
(3.6)
(7.1)
Other
15.3 
14.3 
3.1 
Net cash provided by operating activities
36.6 
140.2 
113.0 
Investing activities
 
 
 
Property and equipment additions
(32.5)
(41.0)
(44.4)
Proceeds from asset sales
51.1 
6.6 
0.3 
Cash paid for purchase of business, net of cash acquired
(144.8)
Net cash used for investing activities
(126.2)
(34.4)
(44.1)
Financing activities
 
 
 
Change in book overdrafts
(40.5)
18.9 
(5.8)
Borrowings of long-term debt
4,898.8 
4,555.8 
4,661.9 
Repayments of long-term debt
(4,731.5)
(4,625.9)
(4,708.9)
Payments under equipment capital lease obligations
(2.7)
(3.2)
(3.8)
Payments under financing obligations (including obligations to related party of $15.0, $19.9 and $13.8, respectively)
(16.4)
(19.9)
(13.8)
Deferred financing fees
(2.0)
Purchase of treasury stock
(13.6)
Payments under Tax Receivable Agreement
(8.5)
Net cash provided by (used for) financing activities
99.2 
(89.9)
(70.4)
Effect of exchange rate changes on cash
1.1 
(0.7)
(1.7)
Net change in cash
10.7 
15.2 
(3.2)
Cash at beginning of period
69.6 
54.4 
57.6 
Cash at end of period
80.3 
69.6 
54.4 
Supplemental cash flow information
 
 
 
Cash paid for income taxes, net of refunds
3.7 
11.6 
1.9 
Cash paid for interest
27.6 
20.6 
21.7 
Non-cash investing and financing activities
 
 
 
Non-cash additions to property and equipment
17.8 
20.8 
4.0 
Contingent consideration for purchase of business: Earn-out
$ 22.2 
$ 0 
$ 0 
Consolidated Statements of Cash Flows (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Cash Flows [Abstract]
 
 
 
Repayments of related party obligation
$ 15.0 
$ 19.9 
$ 13.8 
Consolidated Statements of Shareholders' Equity (USD $)
In Millions, unless otherwise specified
Total
Common Stock Issued
Additional Paid-in Capital
Accumulated Earnings (Deficit)
Accumulated Other Comprehensive Loss
Treasury Stock
Beginning of period at Dec. 31, 2014
$ 512.5 
$ 0.2 
$ 562.4 
$ (28.0)
$ (22.1)
$ 0 
Beginning Balance (in shares) at Dec. 31, 2014
 
16.0 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income (loss)
26.7 
 
 
26.7 
 
 
Other comprehensive income (loss)
(12.9)
 
 
 
(12.9)
 
Stock-based compensation
3.8 
 
3.8 
 
 
 
End of period at Dec. 31, 2015
530.1 
0.2 
566.2 
(1.3)
(35.0)
Ending Balance (in shares) at Dec. 31, 2015
 
16.0 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income (loss)
21.0 
 
 
21.0 
 
 
Other comprehensive income (loss)
(4.0)
 
 
 
(4.0)
 
Stock-based compensation
8.3 
 
8.3 
 
 
 
Treasury stock (in shares)
 
 
 
 
 
(0.30)
Treasury stock
(13.6)
 
 
 
 
(13.6)
End of period at Dec. 31, 2016
541.8 
0.2 
574.5 
19.7 
(39.0)
(13.6)
Ending Balance (in shares) at Dec. 31, 2016
 
16.0 
 
 
 
0.3 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income (loss)
(13.3)
 
 
(13.3)
 
 
Other comprehensive income (loss)
5.5 
 
 
 
5.5 
 
Stock-based compensation
15.7 
 
15.7 
 
 
 
End of period at Dec. 31, 2017
$ 549.7 
$ 0.2 
$ 590.2 
$ 6.4 
$ (33.5)
$ (13.6)
Ending Balance (in shares) at Dec. 31, 2017
 
16.0 
 
 
 
0.3 
Business and Summary of Significant Accounting Policies
Business and Summary of Significant Accounting Policies
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 on July 1, 2014 (the "Distribution Date"), following the merger (the "Merger") of International Paper Company’s ("International Paper") xpedx distribution solutions business ("xpedx") and UWW Holdings, Inc. ("UWWH"), the parent company of Unisource Worldwide, Inc. ("Unisource"). On July 2, 2014, Veritiv’s common stock began regular-way trading on the New York Stock Exchange under the ticker symbol VRTV.

International Paper has a potential earn-out payment of up to $100.0 million that would become due in 2020 if Veritiv's aggregate EBITDA for fiscal years 2017, 2018 and 2019 exceeds an agreed-upon target of $759.0 million, subject to certain adjustments. The $100.0 million potential earn-out payment would be reflected by Veritiv as a reduction to equity at the time of payment.

Following the Merger, certain corporate and other related functions continued to be provided by International Paper under a transition services agreement. For the year ended December 31, 2015, the Company recognized $10.0 million in selling and administrative expenses related to this agreement. As of December 31, 2015, all of the functions originally provided by International Paper under this agreement have been fully transitioned to the Company.

Veritiv operates from approximately 170 distribution centers primarily throughout the U.S., Canada and Mexico.
    
Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include all of the Company’s subsidiaries. All significant intercompany transactions between Veritiv's businesses have been eliminated.
    
Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and certain financial statement disclosures. Estimates and assumptions are used for, but not limited to, revenue recognition, accounts receivable valuation, inventory valuation, employee benefit plans, income tax contingency accruals and valuation allowances, recognition of the Tax Cuts and Jobs Act (the "Tax Act"), 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. Estimates are revised as additional information becomes available.

Summary of Significant Accounting Policies

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, collectability is reasonably assured and delivery has occurred. Revenue is recognized when the customer takes title and assumes the risks and rewards of ownership. When management cannot conclude collectability is reasonably assured 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 reasonably assured. Multiple contracts with a single counterparty are accounted for as separate arrangements.

Sales transactions with customers are designated free on board ("f.o.b.") destination and revenue is recorded when the product is delivered to the customer’s delivery site, when title and risk of loss are transferred. Effective January 1, 2016, the Company harmonized its shipping terms to be f.o.b. destination. Prior to that date, revenue was recorded at the time of shipment for certain xpedx customers whose terms were designated f.o.b. shipping point. Management determined that any shipments in transit at December 31, 2015 would honor the f.o.b. destination terms resulting in a reduction of $27.0 million and $1.8 million to net sales and operating income, respectively, for the year ended December 31, 2015.
    
Certain revenues are derived from shipments arranged by the Company made directly from a manufacturer to a customer. The Company is considered to be a principal to these transactions because, among other factors, it controls pricing to the customer, bears the credit risk of the customer defaulting on payment and is the primary obligor. Revenues from these sales are reported on a gross basis in the Consolidated Statements of Operations and amounted to $3.0 billion, $3.0 billion and $3.3 billion for the years ended December 31, 2017, 2016 and 2015, respectively.

Taxes collected from customers relating to product sales and remitted to governmental authorities are accounted for on a net basis. Accordingly, such taxes are excluded from both net sales and expenses.

Purchase Incentives and Customer Rebates

Veritiv enters into agreements with suppliers that entitle Veritiv to receive rebates, allowances and other discounts based on the attainment of specified purchasing levels or sales to certain customers. Purchase incentives are recorded as a reduction to inventory and recognized in cost of products sold when the sale occurs. During the year ended December 31, 2017, approximately 38% of the Company's purchases were made from ten suppliers.

Veritiv also enters into incentive agreements with certain of its customers, which are generally based on sales to these customers. Veritiv records estimated rebates to customers as a reduction to gross sales as customer revenue is recognized.

Distribution Expenses

Distribution expenses consist of storage, handling and delivery costs including freight to the Company's customers’ destinations. Handling and delivery costs were $380.7 million, $371.7 million and $380.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Acquisition and Integration Expenses

Acquisition and integration expenses are expensed as incurred. Acquisition and integration expenses include internally dedicated integration management resources, retention compensation, information technology conversion costs, rebranding, professional services and other costs to integrate its businesses.

Accounts Receivable and Allowances

Accounts receivable are recognized net of allowances. The allowance for doubtful accounts reflects the best estimate of losses inherent in the Company’s accounts receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other available evidence. The other allowances balance is inclusive of returns, discounts and any other items affecting the realization of these assets. Accounts receivable are written off when management determines they are uncollectible.

The components of the accounts receivable allowances were as follows:
 
Year Ended December 31,
(in millions)
2017
 
2016
Allowance for doubtful accounts
$
32.4

 
$
23.7

Other allowances
11.6

 
10.8

Total accounts receivable allowances
$
44.0

 
$
34.5


    
Below is a rollforward of the Company's accounts receivable allowances for the years ended December 31, 2017, 2016 and 2015:            

Year Ended December 31,
(in millions)
2017

2016

2015
Beginning balance, January 1
$
34.5

 
$
33.3

 
$
39.0

Add / (Deduct):
 
 
 
 
 
Provision for bad debt expense
15.9

 
2.2

 
7.4

Net write-offs and recoveries
(7.7
)
 
(6.7
)
 
(13.1
)
Other adjustments(1)
1.3

 
5.7

 

Ending balance, December 31
$
44.0

 
$
34.5

 
$
33.3

(1) Other adjustments represent amounts reserved for returns and discounts, foreign currency translation adjustments and reserves for customer accounts where revenue is not recognized because collectability is not reasonably assured, and may include accounts receivable allowances recorded in connection with acquisitions. 2015 amounts were not material.

Inventories

The Company's inventories are primarily comprised of finished goods and predominantly valued at cost as determined by the last-in first-out ("LIFO") method. Such valuations are not in excess of market. Elements of cost in inventories include the purchase price invoiced by a supplier, plus inbound freight and related costs and reduced by estimated volume-based discounts and early pay discounts available from certain suppliers. Approximately 86% and 87% of inventories were valued using the LIFO method as of December 31, 2017 and 2016, respectively. If the first-in, first-out method had been used, total inventory balances would be increased by approximately $78.7 million and $71.3 million at December 31, 2017 and 2016, respectively.

The Company reduces the value of obsolete inventory based on the difference between the LIFO cost of the inventory and the estimated market value using assumptions of future demand and market conditions. To estimate the net realizable value, the Company considers factors such as age of the inventory, the nature of the products, the quantity of items on-hand relative to sales trends, current market prices and trends in pricing, its ability to use excess supply in another channel, historical write-offs and expected residual values or other recoveries.

Veritiv maintains some of its inventory on a consignment basis in which the inventory is physically located at the customer's premises or a third-party warehouse. Veritiv had $50.9 million and $47.3 million of consigned inventory as of December 31, 2017 and 2016, respectively, valued on a LIFO basis, net of reserves.

Property and Equipment, Net

Property and equipment are stated at cost, less accumulated depreciation and software amortization. Expenditures for replacements and major improvements are capitalized, whereas repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred. The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining software for internal use. Costs related to the development of internal use software, other than those incurred during the application development stage, are expensed as incurred.
            
The components of property and equipment, net were as follows:
(in millions)
December 31,
 
December 31,
2017
 
2016
Land, buildings and improvements
$
106.6

 
$
132.0

Machinery and equipment
145.3

 
131.1

Equipment capital leases and assets related to financing obligations (including financing obligations with related party)
233.3

 
215.5

Internal use software
159.2

 
151.0

Construction-in-progress
10.4

 
35.0

Less: Accumulated depreciation and software amortization
(314.6
)
 
(292.8
)
Property and equipment, net
$
340.2

 
$
371.8



Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Land is not depreciated, and construction-in-progress ("CIP") is not depreciated until ready for service. Leased property and leasehold improvements are amortized on a straight-line basis over the lease term or useful life of the asset, whichever is less.

Depreciation and amortization for property and equipment, other than land and CIP, is based upon the following estimated useful lives:
Buildings
40 years
Leasehold improvements
1 to 20 years
Machinery and equipment
3 to 15 years
Equipment capital leases and assets related to financing obligations (including financing obligations with related party)
3 to 15 years
Internal use software
3 to 5 years


Additional property and equipment information is as follows:
 
Year Ended December 31,
(in millions)
2017
 
2016
 
2015
Depreciation expense (1)
$
33.5

 
$
33.8

 
$
32.6

Amortization expense - internal use software
16.5

 
17.5

 
18.4

Depreciation and amortization expense related to property and equipment
$
50.0

 
$
51.3

 
$
51.0

 
 
 
 
 
 
Accumulated depreciation on equipment capital leases and assets related to financing obligations (including financing obligations with related party)
$
35.6

 
$
29.7

 
 
Unamortized internal use software costs, including amounts recorded in CIP
$
37.6

 
$
43.9

 
 
(1) Includes the depreciation expense for equipment capital leases and assets related to financing obligations (including financing obligations with
related party).

Upon retirement or other disposal of property and equipment, the cost and related amount of accumulated depreciation or accumulated amortization are eliminated from the asset and accumulated depreciation or accumulated amortization accounts, respectively. The difference, if any, between the net asset value and the proceeds is included in net income.

Leases

The Company leases certain property and equipment used for operations. Such lease arrangements are reviewed for capital or operating classification at their inception.

Capital lease obligations consist of delivery equipment, material handling equipment, computer hardware and office equipment which are leased through third parties under non-cancelable leases with terms generally ranging from three to eight years. Many of the delivery equipment leases include annual rate increases based on the Consumer Price Index which are included in the calculation of the initial lease obligation. The carrying value of the related equipment associated with these capital leases is included within property and equipment, net in the Consolidated Balance Sheets and depreciated over the term of the lease. The Company does not record rent expense for capital leases. Rather, rental payments under the lease are recognized as a reduction of the capital lease obligation and interest expense. Depreciation expense for assets under capital leases is included in the total depreciation expense disclosed in the Consolidated Statements of Operations.
  
All other leases are operating leases. Certain lease agreements include renewal options and rent escalation clauses. Assets subject to an operating lease and the related lease payments are not recorded on the Company’s balance sheet. Rent expense is recognized on a straight-line basis over the expected lease term.

The term for all types of leases begins on the date the Company becomes legally obligated for the rent payments or takes possession of the asset, whichever is earlier. See Note 7, Leases, for additional information related to the Company's leases.
    
Goodwill and Other Intangible Assets, Net

Goodwill relating to a single business reporting unit is included as an asset of the applicable segment. Goodwill arising from major acquisitions that involve multiple reportable segments is allocated to the reporting units based on the relative fair value of the reporting unit.

Goodwill is reviewed by Veritiv for impairment on a reporting unit basis annually on October 1st or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The testing of goodwill for possible impairment is performed by completing a Step 0 test or electing to by-pass the Step 0 test and comparing the fair value of a reporting unit with its carrying value, including goodwill. The Step 0 test utilizes qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors include: macroeconomic conditions; industry and market considerations; overall financial performance and cost factors to determine whether a reporting unit is at risk for goodwill impairment.

In the event a reporting unit fails the Step 0 goodwill impairment test, it is necessary to move forward with a comparison of the fair value of the reporting unit with its carrying value, including goodwill. If the fair value exceeds the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, a goodwill impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, any loss recognized will not exceed the total amount of goodwill allocated to the reporting unit. See Note 4, Goodwill and Other Intangible Assets, for additional information related to the Company's goodwill.

Intangible assets acquired in a business combination are recorded at fair value. The Company's intangible assets include customer relationships, trademarks and trade names and non-compete agreements. Intangible assets with finite useful lives are subsequently amortized using the straight-line method over the estimated useful lives of the assets. See the Impairment of Long-Lived Assets section below for the accounting policy related to the periodic review of long-lived intangible assets for impairment. See Note 4, Goodwill and Other Intangible Assets, for additional information related to the Company's intangible assets.

Impairment of Long-Lived Assets

Long-lived assets, including finite lived intangible assets, are tested for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable. The Company assesses the recoverability of long-lived assets based on the undiscounted future cash flow the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When an impairment is identified, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.

For the years ended December 31, 2017 and 2016, impairment charges of $0.7 million and $1.9 million, respectively, were recorded for certain long-lived assets that supported multiple segments. These charges were recorded as selling and administrative expense as they were not related to the Company's restructuring efforts. For the year ended December 31, 2015, impairment charges of $4.0 million were recorded for certain long-lived assets that supported multiple segments, with $0.7 million recorded as selling and administrative expense and $3.3 million recorded as restructuring expense. See Note 3, Acquisition, Integration and Restructuring Charges for additional information related to the Company's restructuring efforts.

Employee Benefit Plans

The Company sponsors and/or contributes to defined contribution plans, defined benefit pension plans and multi-employer pension plans in the United States. In addition, the Company and its subsidiaries have various pension plans and other forms of retirement arrangements outside the United States. See Note 10, Employee Benefit Plans, for additional information related to these plans and arrangements.
      
The determination of defined benefit pension and postretirement plan obligations and their associated costs requires the use of actuarial computations to estimate participant plan benefits to which the employees will be entitled. The Company’s significant assumptions in this regard include discount rates, rate of future compensation increases, expected long-term rates of return on plan assets, mortality rates, and other factors. Each assumption is developed using relevant company experience in conjunction with market-related data in the U.S. and Canada. All actuarial assumptions are reviewed annually with third-party consultants and adjusted, as necessary.

For the recognition of net periodic postretirement cost, the calculation of the expected long-term rate of return on plan assets is derived using the fair value of plan assets at the measurement date. Actual results that differ from the Company's assumptions are accumulated and amortized on a straight-line basis only to the extent they exceed 10% of the higher of the fair value of plan assets or the projected benefit obligation, over the estimated remaining service period of active participants. The fair value of plan assets is determined based on market prices or estimated fair value at the measurement date.

The Company also makes contributions to multi-employer pension plans for its union employees covered by such plans. For these plans, the Company recognizes a liability only for any required contributions to the plans or surcharges imposed by the plans that are accrued and unpaid at the balance sheet date. The Company does not record an asset or liability to recognize the funded status of the plans. The Company records an estimated undiscounted charge when it becomes probable that it has incurred a withdrawal liability, as the final amount and timing is not assured. When a final determination of the withdrawal liability is received from the plan, the estimated charge is adjusted to the final amount determined by the plan.

Stock-Based Compensation

The Company measures and records compensation expense for all stock-based awards based on the grant date fair values over the vesting period of the awards. Forfeitures are recognized when they occur. See Note 15, Equity-Based Incentive Plans, for additional information.

Income Taxes

Veritiv's income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid.  Veritiv records its global tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates.  Where treatment of a position is uncertain, liabilities are recorded based upon an evaluation of the more likely than not outcome considering technical merits of the position.  Changes to recorded liabilities are made only when an identifiable event occurs that alters the likely outcome, such as settlement with the relevant tax authority or the expiration of statutes of limitation for the subject tax year.  Significant judgments and estimates are required in determining the consolidated income tax expense.

The Tax Act was signed into law on December 22, 2017 and makes broad and complex changes to the U.S. tax code. We recognized provisional estimates of the impact of the Tax Act in the year ended December 31, 2017. These provisional amounts may be adjusted during 2018 in accordance with the measurement period guidance outlined in Securities and Exchange Commission's Staff Accounting Bulletin No. 118. See Note 8, Income Taxes of the Notes to Consolidated Financial Statements for additional details regarding the Tax Act.
               
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.  Significant judgment is required in evaluating the need for and amount of valuation allowances against deferred tax assets.  The realization of these assets is dependent on generating sufficient future taxable income.

While Veritiv believes that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimated amounts.
    
Fair Value Measurements

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable.
    
Level 1 –
Quoted market prices in active markets for identical assets or liabilities.
Level 2 –
Observable market-based inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 –
Unobservable inputs for the asset or liability reflecting the reporting entity’s own assumptions or external inputs from inactive markets.

See Note 11, Fair Value Measurements, for further detail.

Foreign Currency

The assets and liabilities of the foreign subsidiaries are translated from their respective local currencies to the U.S. dollars at the appropriate spot rates as of the balance sheet date. Changes in the carrying values of these assets and liabilities attributable to fluctuations in spot rates are recognized in foreign currency translation adjustment, a component of accumulated other comprehensive loss ("AOCL"). See Note 14, Shareholders' Equity, for the impacts of foreign currency translation adjustments on AOCL.

The revenues and expenses of the foreign subsidiaries are translated using the monthly average exchange rates during the year. The gains or losses from foreign currency transactions are included in other (income) expense, net in the Consolidated Statements of Operations.

Treasury Stock
    
Common stock purchased for treasury is recorded at cost. Costs incurred by the Company that are associated with the acquisition of treasury stock are treated in a manner similar to stock issue costs and are added to the cost of the treasury stock.

Recently Issued Accounting Standards
Recently Issued Accounting Standards Not Yet Adopted
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842)
 
The standard requires lessees to put most leases on their balance sheet but recognize expenses in their statement of operations in a manner similar to current accounting guidance. The new standard also eliminates the current guidance related to real estate specific provisions. The guidance requires application on a modified retrospective basis to leases that existed at the beginning of the earliest period presented and those entered into thereafter but prior to the effective date. A proposed ASU has been issued that would add the option for organizations to not provide comparative period financial statements and instead apply the transition requirements as of the effective date. The standard permits entities to elect a package of practical expedients which must be applied consistently to all leases that commenced prior to the effective date. If the package of practical expedients is elected, entities do not need to reassess: (i) whether expired or existing contracts contain leases; (ii) lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The guidance also allows entities to make certain policy elections under the new standard, including: (i) the use of hindsight to determine lease term and when assessing existing right of use assets for impairment; (ii) a policy to not record short-term leases on the balance sheet; and (iii) a policy to not separate lease and non-lease components.
 
January 1, 2019; early adoption is permitted
 
The Company is currently evaluating this standard and anticipates that its adoption will have a material impact on the Consolidated Financial Statements and related disclosures as it will result in recording substantially all operating leases on the balance sheet as a lease obligation and right of use asset. Lease software has been implemented that will better enable the Company to implement the standard. The Company currently anticipates electing to apply the package of practical expedients to all leases that commenced prior to the date of adoption. Based on the analysis performed to date, the Company anticipates making a policy election to not include short-term leases on the Consolidated Balance Sheets and to separate lease and non-lease components. The Company currently does not anticipate making a policy election to use hindsight to determine lease term. The assessment is ongoing and the preliminary conclusions are subject to change. At this time the Company is unable to quantify the impact that the adoption of this standard will have on the Consolidated Financial Statements and related disclosures. The Company currently plans to adopt this ASU on January 1, 2019.
 
 
 
 
 
 
 
Recently Issued Accounting Standards Not Yet Adopted (continued)
 
 
 
 
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)
 
The standard will replace the currently 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 guidance requires application on a modified retrospective basis. Other application requirements exist for specific assets impacted by a more-than-insignificant credit deterioration since origination.
 
January 1, 2020; early adoption is permitted for fiscal years beginning after December 15, 2018
 
The Company is currently evaluating the impact this ASU will have on its Consolidated Financial Statements and related disclosures. The Company currently plans to adopt this ASU on January 1, 2020.
ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220)
 
The standard allows companies to reclassify the effect of the change in tax laws and rates on deferred tax assets and liabilities as part of the Tax Act from accumulated other comprehensive income (loss) to retained earnings. The guidance is to be applied to each period in which the effect of the Tax Act (or portion thereof) is recorded and companies may apply it either (1) retrospectively as of the date of enactment or (2) as of the beginning of the period of adoption.
 
January 1, 2019; early adoption is permitted.
 
The Company is currently evaluating early adoption and the impact this ASU will have on its Consolidated Financial Statements and related disclosures.



Recently Adopted Accounting Standards
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

 
The standard replaces previous revenue recognition standards and significantly expands the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date.

 
January 1, 2018; early adoption date is no earlier than the annual period beginning after December 15, 2016

 
The Company adopted this ASU on January 1, 2018 applying the modified retrospective method. Focus areas were customer rebates, accounting for customer dedicated inventory and principal/agent considerations. The adoption did not materially impact the Company's Financial Statements and is not expected to have a material impact on future financial results as the adoption did not change the recognition pattern for the Company's existing revenue streams. The Company implemented new internal controls related to contract reviews and revenue recognition disclosures. Additional disclosures will be made as needed in future reports as a result of the adoption in 2018.
 
 
 
 
 
 
 
Recently Adopted Accounting Standards (continued)
 
 
 
 
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
ASU 2016-15, Statement of Cash Flows (Topic 230)

 
The standard addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance requires application on a retrospective basis.

 
January 1, 2018; early adoption is permitted (early adoption requires the adoption of all amendments in the same period)

 
The Company adopted this ASU on January 1, 2018. The adoption did not materially impact the Company's historical Consolidated Financial Statements or related disclosures. Impacts to future results and disclosures will be dependent upon the presence of any items noted in the standard.
ASU 2017-01, Business Combinations (Topic 805)
 
The standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires application on a prospective basis.
 
January 1, 2018; early adoption is permitted

 
The Company adopted this ASU on January 1, 2018.
ASU 2017-07, Compensation-Retirement Benefits (Topic 715)
 
The standard requires employers to disaggregate the service cost component from the other components of net benefit cost and disclose the amount of net benefit cost that is included in the income statement or capitalized in assets, by line item. The standard requires employers to report the service cost component in the same line item(s) as other compensation costs and to report other pension-related costs (which include interest costs, amortization of pension-related costs from prior periods, and the gains or losses on plan assets) separately and exclude them from the subtotal of operating income. The standard also allows only the service cost component to be eligible for capitalization when applicable. The guidance requires application on a retrospective basis for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and on a prospective basis for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.
 
January 1, 2018; early adoption is permitted as of the first interim period of an annual period for which interim or annual financial statements have not been issued
 
The Company adopted this ASU on January 1, 2018. The adoption did not materially impact its historical Consolidated Financial Statements or related disclosures.

ASU 2015-11, Inventory - Simplifying the Measurement of Inventory (Topic 330)
 
The standard requires companies to measure inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. This ASU will not apply to inventories measured by either the last-in first-out method or retail inventory method. The guidance requires application on a prospective basis.
 
January 1, 2017
 
The Company adopted this ASU on January 1, 2017. The adoption did not materially impact its Consolidated Financial Statements or related disclosures. For the years ended December 31, 2017 and 2016, approximately 86% and 87% of the inventory balances were measured using LIFO, respectively.
 
 
 
 
 
 
 
Recently Adopted Accounting Standards (continued)
 
 
 
 
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350)
 
The standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The guidance requires application on a prospective basis.
 
January 1, 2020; early adoption is permitted
 
The Company adopted this ASU on January 1, 2017.
ASU 2017-09, Compensation - Stock Compensation (Topic 718)
 
The standard clarifies the changes to the terms and conditions of a share-based payment award that require an entity to apply modification accounting. The guidance requires application on a prospective basis.
 
January 1, 2018; early adoption is permitted
 
The Company adopted this ASU on April 1, 2017. The adoption did not materially impact its Consolidated Financial Statements or related disclosures. Impacts to future results and disclosures will be dependent upon the presence of any items noted in the standard.
2017 Acquisition
2017 Acquisition
2. 2017 ACQUISITION

On August 31, 2017 (the "Acquisition Date"), Veritiv completed its acquisition of 100% of the equity interest in various All American Containers entities (collectively, "AAC"), a family owned and operated distributor of rigid packaging, including plastic, glass and metal containers, caps, closures and plastic pouches. The acquisition of AAC aligns with the Company's strategy of investing in higher growth and higher margin segments of the business. Through the acquisition, Veritiv gains expertise in rigid plastic, glass and metal packaging that complements its portfolio of packaging products and services. This acquisition also provides Veritiv with additional marketing, selling and distribution channels into the growing U.S. rigid packaging market. The rigid packaging market's primary product categories include paperboard, plastics, metals and glass.
    
Acquisition-related costs of approximately $7.3 million were expensed as incurred. These costs were recognized in acquisition and integration expenses on the Consolidated Statements of Operations for the year ended December 31, 2017. These charges are included in the table in Note 3, Acquisition, Integration and Restructuring Charges, and related primarily to legal, consulting and other professional fees, and retention.

The acquisition of AAC was accounted for in the Company's financial statements using the acquisition method of accounting. The total consideration to complete the acquisition was approximately $169.8 million. Due to the limited amount of time since the acquisition of AAC, the valuation of certain assets and liabilities is preliminary and, as management receives additional information during the measurement period, these assets and liabilities may be adjusted. The preliminary purchase price was allocated to tangible and intangible assets and liabilities based upon their respective estimated fair values. The following table summarizes the components of the preliminary estimated purchase price for AAC:

Preliminary estimated purchase price:
 
(in millions)
Cash consideration
$
112.0

Loan pay-off
34.3

Contingent consideration
22.2

Other
1.3

Total preliminary estimated purchase price
$
169.8



The following table summarizes the allocation of the preliminary estimated purchase price to assets acquired and liabilities assumed as of the Acquisition Date based on valuation information, estimates and assumptions available on December 31, 2017. See Note 4, Goodwill and Other Intangible Assets, for additional information related to the goodwill and intangible assets acquired in the AAC acquisition. See Note 11, Fair Value Measurements, for additional information related to the fair value of the contingent consideration related to the earn-out.    
    
Preliminary allocation:
 
(in millions)
Cash
$
1.5

Accounts receivable
30.4

Inventories
38.5

Other current assets
5.7

Property and equipment
3.5

Goodwill
55.5

Other intangible assets
49.0

Other non-current assets
1.4

Accounts payable
(12.4
)
Other current liabilities
(2.7
)
Other non-current liabilities
(0.6
)
Total preliminary estimated purchase price
$
169.8



The amounts shown above may change as the purchase price will be based upon finalization of customary working capital adjustments. The Company is still in the process of verifying data and finalizing information related to the valuation and expects to finalize these matters within the measurement period as final asset and liability valuations are completed.

Actual and Pro Forma Impact (unaudited)

The operating results of AAC are included in the Company's financial statements from September 1, 2017 through December 31, 2017 and are reported as part of the Packaging reportable segment. Net sales and operating loss attributable to AAC during this period and included in the Company's Consolidated Statements of Operations were $71.7 million and ($1.7) million, respectively.

The following unaudited pro forma financial information presents results as if the acquisition of AAC occurred on January 1, 2016. The historical consolidated financial information of the Company and AAC has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the transaction and are factually supportable. The unaudited pro forma results do not reflect events that have occurred or may occur after the transaction, including the impact of any synergies expected to result from the acquisition. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date, nor is it necessarily an indication of future operating results.

(Unaudited)
Year Ended December 31,
(in millions, except share and per share data)
2017
 
2016
Net sales
$
8,527.6

 
$
8,548.2

Net income (loss)
(7.2
)
 
14.1

Earnings (loss) per share:
 
 
 
Basic earnings (loss) per share
$
(0.46
)
 
$
0.88

Diluted earnings (loss) per share
$
(0.46
)
 
$
0.87

Weighted-average shares outstanding
 
 
 
Basic
15.70

 
15.97

Diluted
15.70

 
16.15



The unaudited pro forma information reflects primarily the following pre-tax adjustments for the respective periods:
- Acquisition and integration expenses: Acquisition and integration expenses of $8.9 million incurred during the year ended December 31, 2017 have been eliminated. Pro forma net income for the year ended December 31, 2016 includes acquisition and integration expenses of $8.9 million.
- Incremental amortization expense: Pro forma net income for the year ended December 31, 2017 includes incremental amortization expense of $2.5 million. Pro forma net income for the year ended December 31, 2016 includes incremental amortization expense of $6.3 million.
- Interest expense: Pro forma net income for the year ended December 31, 2017 includes incremental interest expense of $2.0 million. Pro forma net income for the year ended December 31, 2016 includes incremental interest expense of $2.4 million.

A combined U.S. federal statutory and state rate of 39.0% was used to determine the after-tax impact on net income of the pro forma adjustments.
Acquisition, Integration and Restructuring Charges
Acquisition, Integration and Restructuring Charges
3. ACQUISITION, INTEGRATION AND RESTRUCTURING CHARGES

Merger of xpedx and Unisource    

The Company currently expects net costs and charges associated with achieving anticipated cost savings and other synergies from the Merger (excluding charges relating to the complete or partial withdrawal from multi-employer pension plans ("MEPP"), some of which are uncertain at this time, and including cash proceeds from sales of assets related to consolidation), to be approximately $225 million to $250 million, through December 31, 2018. Included in the estimate is approximately $90 million for capital expenditures, primarily consisting of information technology infrastructure, systems integration and planning. Through December 31, 2017, the Company has incurred approximately $221 million in costs and charges, including approximately $82 million for capital expenditures.

Acquisition and Integration Expenses

During the years ended December 31, 2017, 2016 and 2015, Veritiv incurred costs and charges related primarily to: internally dedicated integration management resources, retention compensation, information technology conversion costs, rebranding, professional services and other costs to integrate its businesses. The following table summarizes the components of acquisition and integration expenses:

 
 
Year Ended December 31,
(in millions)
 
2017
 
2016
 
2015
Integration management
 
$
14.5

 
$
8.3

 
$

Retention compensation
 
0.2

 
2.5

 
10.8

Information technology conversion costs
 
8.8

 
6.3

 
7.4

Rebranding
 
0.5

 
2.4

 
6.1

Legal, consulting and other professional fees
 
1.5

 
2.3

 
7.8

Other
 
3.0

 
4.1

 
2.8

AAC acquisition and integration
 
8.0

 

 

     Total acquisition and integration expenses
 
$
36.5

 
$
25.9

 
$
34.9



Veritiv Restructuring Plan

As part of the Merger, the Company is executing on a multi-year restructuring program of its North American operations intended to integrate the legacy xpedx and Unisource operations, generate cost savings and capture synergies across the combined company. The restructuring plan includes initiatives to: (i) consolidate warehouse facilities in overlapping markets, (ii) improve efficiency of the delivery network, (iii) consolidate customer service centers, (iv) reorganize the field sales and operations functions and (v) restructure the corporate general and administrative functions.
As part of its restructuring efforts, the Company continues to evaluate its operations outside of North America to identify additional cost saving opportunities. The Company may elect to restructure its operations in specific countries, which may include staff reductions, lease terminations and facility closures, or a complete exit of a market. The Company may continue to record restructuring charges in the future as restructuring activities progress, which may include gains or losses from the disposition of assets. See Note 17, Segment Information, for the impact these charges had on the Company's reportable segments.

For the years ended December 31, 2017, 2016 and 2015, the Company recognized $24.4 million and $2.1 million in net gains related to the sale or exit of certain facilities and a $4.1 million net non-cash loss from asset impairments, respectively. As of December 31, 2017, the Company held for sale $3.2 million in assets related to these activities, which are included in other current assets on the Consolidated Balance Sheets.
        
Other direct costs reported in the tables below include facility closing costs, actual and estimated multi-employer pension plan withdrawal charges and other incidental costs associated with the development, communication, administration and implementation of these initiatives.

The following table presents a summary of restructuring charges, net, related to active restructuring initiatives that were incurred during the last three fiscal years and the cumulative recorded amounts since the initiative began:
(in millions)
Severance and Related Costs
 
Other Direct Costs
 
Gain on Sale of Assets and Other
 
Total
2017
$
7.5

 
$
33.6

 
$
(24.4
)
 
$
16.7

2016
3.5

 
11.0

 
(2.1
)
 
12.4

2015
4.3

 
2.9

 
4.1

 
11.3

Cumulative
20.0

 
47.9

 
(22.4
)
 
45.5



The following is a summary of the Company's restructuring liability activity for the periods presented:     
(in millions)
Severance and Related Costs
 
Other Direct Costs
 
Total
Balance at December 31, 2015
$
1.7

 
$
0.4

 
$
2.1

Costs incurred
3.5

 
11.0

 
14.5

Payments
(3.4
)
 
(3.4
)
 
(6.8
)
Balance at December 31, 2016
1.8

 
8.0

 
9.8

Costs incurred
7.5

 
33.6

 
41.1

Payments
(4.9
)
 
(16.4
)
 
(21.3
)
Balance at December 31, 2017
$
4.4

 
$
25.2

 
$
29.6



The Company has recorded undiscounted charges related to the complete or partial withdrawal from various multi-employer pension plans. Charges not related to the Company's restructuring efforts are recorded as distribution expenses. Initial amounts are recorded as other non-current liabilities in the Consolidated Balance Sheets. See the table below for a summary of the net withdrawal charges for the respective years ended December 31:
 
Year Ended December 31,
(in millions)
Restructuring charges, net
 
Distribution expenses
 
Total Net Charges
2017
$
17.4

 
$
2.1

 
$
19.5

2016
7.5

 
2.3

 
9.8



Final charges for these MEPP withdrawals will not be known until the plans issue their respective determinations. As a result, these estimates may increase or decrease depending upon the final determinations. Currently, the Company expects payments will occur over an approximate 20 year period. The Company expects to incur similar types of charges in future periods in connection with its ongoing restructuring activities. As of December 31, 2017, the Company has received the determination letters from one of the restructuring related plans. Monthly payments for this plan are expected to occur over an approximate 20 year period.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
4. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

At December 31, 2017, the net goodwill balance was $99.6 million. The following table sets forth the changes in the carrying amount of goodwill during 2017 and 2016:
(in millions)
Packaging
 
Facility Solutions
 
Print
 
Publishing
 
Corporate & Other
 
Total
Balance at December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
   Goodwill
$
44.1

 
$
59.0

 
$
265.4

 
$
50.5

 
$
6.1

 
$
425.1

   Accumulated impairment losses

 
(59.0
)
 
(265.4
)
 
(50.5
)
 

 
(374.9
)
      Net goodwill 2015
44.1

 

 

 

 
6.1

 
50.2

2016 Activity:
 
 
 
 
 
 
 
 
 
 
 
   Goodwill acquired

 

 

 

 

 

   Impairment of goodwill

 

 

 

 

 

Balance at December 31, 2016:
 
 
 
 

 

 

 

   Goodwill
44.1

 
59.0

 
265.4

 
50.5

 
6.1

 
425.1

   Accumulated impairment losses

 
(59.0
)
 
(265.4
)
 
(50.5
)
 

 
(374.9
)
      Net goodwill 2016
44.1

 

 

 

 
6.1

 
50.2

2017 Activity:
 
 
 
 
 
 
 
 
 
 
 
   Goodwill acquired
55.5

 

 

 

 

 
55.5

   Impairment of goodwill

 

 

 

 
(6.1
)
 
(6.1
)
Balance at December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
   Goodwill
99.6

 
59.0

 
265.4

 
50.5

 
6.1

 
480.6

   Accumulated impairment losses

 
(59.0
)
 
(265.4
)
 
(50.5
)
 
(6.1
)
 
(381.0
)
      Net goodwill 2017
$
99.6

 
$

 
$

 
$

 
$

 
$
99.6



Preliminary goodwill of $55.5 million arising from the acquisition of AAC, as described in Note 2, 2017 Acquisition, consists largely of the expected synergies and other benefits from combining operations and is expected to be deductible for tax purposes. The goodwill was allocated 100% to the Company's Packaging reportable segment.

During the third quarter of 2017, as part of the Company's review for possible goodwill impairment indicators, management determined that the goodwill allocated to the logistics solutions business was fully impaired. The impairment was recorded as selling and administrative expense in the Consolidated Statements of Operations. See Note 11, Fair Value Measurements, for additional information related to the impairment. There were no other goodwill impairment charges for the year ended December 31, 2017. No goodwill impairment charges were recorded during the year ended December 31, 2016. During the fourth quarter of 2015, a $1.9 million goodwill impairment was identified and recorded as selling and administrative expense for the Facility Solutions segment.

Other Intangible Assets

The components of the Company's other intangible assets were as follows:
 
December 31, 2017
 
December 31, 2016
(in millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Customer relationships
$
67.7

 
$
6.1

 
$
61.6

 
$
23.6

 
$
4.0

 
$
19.6

Trademarks/Trade names
3.8

 
2.3

 
1.5

 
2.7

 
1.3

 
1.4

Non-compete agreements
1.5

 
0.5

 
1.0

 

 

 

Total
$
73.0

 
$
8.9

 
$
64.1

 
$
26.3

 
$
5.3

 
$
21.0


    
The gross carrying amount of other intangible assets increased by $49.0 million as a result of the acquisition of AAC. The Company is still in the process of verifying data and finalizing information related to the valuation and expects to finalize these matters within the measurement period as final asset and liability valuations are completed. These assets are included in other intangibles, net on the Consolidated Balance Sheets and are being amortized to operating expense on a straight-line basis over their estimated useful lives. Preliminary allocated values from the AAC acquisition are as follows:
 
Gross Value (in millions)
 
Estimated Useful Life (in years)
Customer relationships
$
46.4

 
14.0
Trademarks/Trade names
1.1

 
1.0
Non-compete agreements
1.5

 
1.0
Total identifiable intangible assets acquired
$
49.0

 
 


During the third quarter of 2017, the Company recognized a $1.6 million non-restructuring asset impairment charge related to its logistics solutions business's customer relationship intangible asset, which was recorded in selling and administrative expenses. During the year ended December 31, 2016, the Company recognized $2.8 million and $3.0 million in asset impairment charges related to its Print and Publishing segments' customer relationship intangible assets, respectively, which were recorded in selling and administrative expenses. No intangible asset impairment charges were recorded during the year ended December 31, 2015.
    
See Note 11, Fair Value Measurements, for additional information related to these impairments.

Upon retirement or full impairment of the intangible asset, the cost and related amount of accumulated amortization are eliminated from the asset and accumulated amortization accounts, respectively.

The Company recorded amortization expense of $4.2 million, $3.4 million and $5.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The estimated aggregate amortization expense for each of the five succeeding years is as follows (in millions):
Year
 
Total
2018
 
$
6.7

2019
 
4.8

2020
 
4.8

2021
 
4.8

2022
 
4.8

Debt and Other Obligations
Debt and Other Obligations
5. DEBT AND OTHER OBLIGATIONS

The Company's long-term debt obligations were as follows:
(in millions)
December 31, 2017
 
December 31, 2016
Asset-Based Lending Facility (the "ABL Facility")
$
897.7

 
$
726.9

Equipment capital lease and other obligations
13.5

 
25.2

Total debt
911.2

 
752.1

Less: current maturities of long-term debt
(2.9
)
 
(2.9
)
Long-term debt, net of current maturities
$
908.3

 
$
749.2



The equipment capital lease and other obligations reported in the table above includes $19.1 million related to the accumulated construction costs for the Toronto build-to-suit arrangement as of December 31, 2016. This project was completed during the second quarter of 2017 and is accounted for as a financing obligation. As such, for periods beginning with the second quarter of 2017 the obligation value is shown in the table below as other financing, in addition to the Company's related party financing obligations.         

The Company's long-term financing obligations were as follows:
(in millions)
December 31, 2017
 
December 31, 2016
Obligations to related party
$
162.3

 
$
191.0

Obligations - other financing
27.1

 

Total financing obligations
189.4

 
191.0

Less: current portion of financing obligations
(7.8
)
 
(14.9
)
Financing obligations, less current portion
$
181.6

 
$
176.1



From the Merger through December 31, 2017, the Company has terminated agreements for 11 of the related party financed properties and therefore triggered an early termination of each respective property's financing agreement. One of these terminations also involved the purchase of a facility in Austin, Texas. See Note 7, Leases, for additional information related to that purchase. Upon termination of a property's financing agreement, the Company recognizes the non-cash effects of the derecognition of (i) the property and equipment and (ii) the corresponding financing obligation, as other non-cash items, net, on the Consolidated Statements of Cash Flows. Any gain or loss realized upon derecognition has been included in other (income) expense, net or restructuring charges on the Consolidated Statements of Operations, based upon the rationale for the termination. Unless terminated early, upon the expiration of the term of the remaining related party financing agreements, the net remaining financing obligation of $155.2 million will be settled by the return of the assets to the owner and has been included in other non-current liabilities on the Consolidated Balance Sheets. See the table below for the non-cash effects of the derecognition of (i) the property and equipment and (ii) the corresponding financing obligation:
 
Year Ended December 31,
(in millions, except number of agreements)
2017
 
2016
 
Total
 
 
 
 
 
 
Property and equipment
$
14.6

 
$
3.7

 
$
18.3

Financing obligations
15.2

 
8.4

 
23.6

Number of terminated property agreements
8

 
3

 
11


    
ABL Facility

Veritiv has a $1.4 billion asset-based lending facility. The ABL Facility is comprised of U.S. and Canadian sub-facilities of $1,250.0 million and $150.0 million, respectively. The ABL Facility is available to be drawn in U.S. dollars, in the case of the U.S. sub-facilities, and in U.S. dollars or Canadian dollars, in the case of the Canadian sub-facilities, or in other currencies that are mutually agreeable. The Company's accounts receivable and inventories in the U.S. and Canada are collateral under the ABL Facility.

On August 11, 2016, the Company amended the ABL Facility to, among other things, extend the maturity date to August 11, 2021. All other significant terms remained consistent. The ABL Facility provides for the right of the individual lenders to extend the maturity date of their respective commitments and loans upon the request of Veritiv and without the consent of any other lenders. The ABL Facility may be prepaid at Veritiv's option at any time without premium or penalty and is subject to mandatory prepayment if the amount outstanding under the ABL Facility exceeds either the aggregate commitments with respect thereto or the current borrowing base, in an amount equal to such excess.

The 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 limits outlined under the ABL Facility. At December 31, 2017 the above test was not applicable.

Availability under the ABL Facility is determined based upon a monthly borrowing base calculation which includes eligible customer receivables and inventory, less outstanding borrowings, letters of credit and certain designated reserves. As of December 31, 2017, the available additional borrowing capacity under the ABL Facility was approximately $316.5 million. As of December 31, 2017, the Company held $10.1 million in outstanding letters of credit.

Under the terms of the ABL Facility, interest rates are based upon LIBOR or the prime rate plus a margin rate, or in the case of Canada, a banker’s acceptance rate or base rate plus a margin rate. The weighted-average borrowing interest rate was 3.3% and 2.5% at December 31, 2017 and December 31, 2016, respectively.

Financing and other related costs incurred in connection with the ABL Facility are reflected in other non-current assets in the Consolidated Balance Sheets and are amortized over the ABL Facility term. In conjunction with the ABL Facility amendment noted above, the Company recognized a charge of $1.9 million to interest expense, net, in the Consolidated Statements of Operations, for the write-off of a portion of the previously deferred financing costs associated with lenders in the original ABL Facility that exited the amended ABL Facility. In addition, the Company incurred and deferred $2.0 million of new financing costs associated with this transaction, reflected in other non-current assets in the Consolidated Balance Sheets, which will be amortized to interest expense on a straight-line basis over the amended term of the ABL Facility. For the years ended December 31, 2017, 2016 and 2015, interest expense, net in the Consolidated Statements of Operations included $2.6 million, $5.6 million and $4.4 million, respectively, of amortization and write-off of deferred financing fees.
    
Equipment Capital Lease Obligations
    
See Note 7, Leases, for additional information regarding the Company's equipment capital lease obligations.
Derivative Instrument, Hedging Activities and Risk Management
Derivative Instrument, Hedging Activities and Risk Management
6. DERIVATIVE INSTRUMENT, HEDGING ACTIVITIES AND RISK MANAGEMENT

Financial Risk Management Policy

The Company’s indebtedness under its financing arrangement creates interest rate risk. The Company’s objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in the interest rate. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

This interest rate exposure is actively monitored by management, and in July 2015, the Company entered into an interest rate cap agreement. The interest rate cap effectively limits the floating LIBOR-based portion of the interest rate. The effective date of the interest rate cap agreement was July 31, 2015 with an expiration date of July 1, 2019. The initial notional amount of this agreement covered $392.9 million of the Company’s floating-rate debt at 3.0% plus the applicable credit spread. The Company paid $2.0 million for the interest rate cap agreement. Approximately $0.6 million of the amount paid represented transaction costs and was expensed immediately to earnings. As of December 31, 2017 and December 31, 2016, the interest rate cap agreement had a fair value that was not significant, classified within other non-current assets on the Consolidated Balance Sheets. The fair value is estimated using observable market-based inputs including interest rate curves and implied volatilities (Level 2).

The Company designated the interest rate cap as a cash flow hedge of exposure to changes in cash flows due to changes in the LIBOR-based portion of the interest rate above 3.0% on an equivalent amount of debt. The notional amount of the cap is reduced throughout the term of the agreement to align with the expected repayment of the Company’s outstanding floating-rate debt.

The Company is exposed to counterparty credit risk for nonperformance and, in the event of nonperformance, to market risk for changes in the interest rate. The Company attempts to manage exposure to counterparty credit risk primarily by selecting only those counterparties that meet certain credit and other financial standards. The Company believes there has been no material change in the creditworthiness of its counterparty and believes the risk of nonperformance by such party is minimal.

Accounting for Derivative Instruments

The interest rate cap agreement is subject to Accounting Standards Codification 815, Accounting for Derivative and Hedging Transactions. For those instruments that are designated and qualify as hedging instruments, a company must designate the instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge or a hedge of a net investment in a foreign operation.

A cash flow hedge refers to hedging the exposure to variability in expected future cash flows attributable to a particular risk. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCL until reclassified into earnings in the same period the hedged transaction affects earnings. The gain or loss on the ineffective portion, if any, is immediately recognized in earnings. The ineffective portion was not significant for the years ended December 31, 2017, 2016 and 2015 respectively.

For the years ended December 31, 2017, 2016 and 2015, the Company recognized an after-tax loss of $0.0 million, $0.2 million and $0.5 million, respectively, in other comprehensive income associated with the interest rate cap. For the year ended December 31, 2017, $0.2 million was reclassified from AOCL into earnings. There were no reclassifications from AOCL into earnings for the years ended December 31, 2016 and 2015, respectively. The amount the Company expects to reclassify from AOCL into earnings within the following twelve months is approximately $0.7 million.
Leases
Leases
7. LEASES

Lease Commitments

Future minimum lease payments at December 31, 2017 were as follows:
 
Financing Obligations and Equipment Capital Leases (1)
 
Operating Leases
(in millions)
 
Lease Obligations
 
Sublease Income
 
Total
2018
$
12.8

 
$
94.3

 
$
(0.2
)
 
$
94.1

2019
5.0

 
80.3

 
(0.2
)
 
80.1

2020
4.6

 
70.4

 

 
70.4

2021
4.0

 
57.7

 

 
57.7

2022
3.8

 
45.8

 

 
45.8

Thereafter
22.4

 
135.6

 

 
135.6

 
52.6

 
484.1

 
(0.4
)
 
483.7

Amount representing interest
(12.5
)
 

 

 

Total future minimum lease payments
$
40.1

 
$
484.1

 
$
(0.4
)
 
$
483.7


(1) Amounts shown include the financing obligations to related party.

Financing Obligations to Related Party
In connection with Bain Capital Fund VII, L.P.’s acquisition of its 60% interest in UWWH on November 27, 2002, Unisource transferred 40 of its U.S. warehouse and distribution facilities (the "Properties") to Georgia-Pacific who then sold 38 of the Properties to an unrelated third-party (the "Purchaser/Landlord"). Contemporaneously with the sale, Georgia-Pacific entered into lease agreements with the Purchaser/Landlord with respect to the individual 38 Properties and concurrently entered into sublease agreements with Unisource, which are set to expire in June 2018. As a result of certain forms of continuing involvement, these transactions did not qualify for sale-leaseback accounting. Accordingly, the leases were classified as financing transactions. From the Merger through December 31, 2017, the Company has terminated agreements for 11 of these Properties. At the end of the lease term, the net remaining financing obligation of $155.2 million will be settled by the return of the assets to the Purchaser/Landlord.

The lease and sublease agreements also include rent schedules and escalation clauses throughout the lease and sublease terms. Subject to certain conditions, the Company has the right to sublease any of the Properties. Under the terms of the lease and sublease agreements, Georgia-Pacific and the Company are responsible for all costs and expenses associated with the Properties, including the operation, maintenance and repair, taxes and insurances. In addition to the obligations noted above, the Company currently leases from Georgia-Pacific one remaining Property that is directly owned by Georgia-Pacific and has classified it as an operating lease in accordance with the accounting guidance.

In April 2016, Veritiv assumed ownership of a warehouse and distribution facility located in Austin, Texas that was subleased from Georgia-Pacific. The Company exercised its right of first refusal and matched a $5.4 million offer from an unrelated third-party to purchase the facility directly from the owner. This transaction was accounted for as a settlement of the financing obligation related to the facility. Accordingly, Veritiv recognized a $1.3 million loss on the transaction, which is reflected in other (income) expense, net, on the Consolidated Statements of Operations.

In May 2017, the Company entered into a purchase and sale agreement under which Veritiv agreed to sell the previously acquired Austin, Texas facility to an unrelated third-party. Upon the closing of the sale, Veritiv entered into a lease of the facility for an initial period of ten years with two optional five-year renewal terms. The sale-leaseback transaction does not provide for any continuing involvement by the Company other than a normal lease for use of the property during the lease term. The transaction resulted in net cash proceeds of $9.1 million and a related deferred gain of $5.4 million. The Company expects to recognize the gain over the initial ten-year lease period on a straight-line basis as a reduction to selling and administrative expenses in the Consolidated Statements of Operations. The current portion of the deferred gain is included in other accrued liabilities and the non-current portion of the deferred gain is included in other non-current liabilities on the Consolidated Balance Sheets.

Operating Leases

Certain properties and equipment are leased under cancelable and non-cancelable agreements. The Company recorded rent expense of $106.3 million, $108.1 million and $106.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Income Taxes
Income Taxes
8. INCOME TAXES
    
The Company is subject to federal, state and local income taxes in the United States, as well as income taxes in Canada, Mexico and other foreign jurisdictions. The domestic (United States) and foreign components of the Company's income (loss) before income taxes were as follows:
 
Year Ended December 31,
(in millions)
2017
 
2016
 
2015
Domestic (United States)
$
(18.0
)
 
$
27.6

 
$
46.6

Foreign
16.1

 
13.2

 
(1.7
)
Income (loss) before income taxes
$
(1.9
)
 
$
40.8

 
$
44.9



    
Income tax expense (benefit) in the Consolidated Statements of Operations consisted of the following:
 
Year Ended December 31,
(in millions)
2017
 
2016
 
2015
Current Provision:
 
 
 
 
 
U.S. Federal
$
4.8

 
$
3.6

 
$

U.S. State
1.5

 
1.5

 
1.7

Foreign
3.2

 
3.6

 
1.6

Total current income tax expense
$
9.5

 
$
8.7

 
$
3.3

 
 
 
 
 
 
Deferred, net:
 
 
 
 
 
U.S. Federal
$
16.3

 
$
9.6

 
$
14.8

U.S. State
(2.7
)
 
1.9

 
0.5

Foreign
(11.7
)
 
(0.4
)
 
(0.4
)
Total deferred, net
$
1.9

 
$
11.1

 
$
14.9

Provision for income tax expense (benefit)
$
11.4

 
$
19.8

 
$
18.2



Reconciliation between the federal statutory rate and the effective tax rate is as follows (see Note 9, Related Party Transactions for additional information related to the Tax Receivable Agreement):
 
Year Ended December 31,
(in millions)
2017
 
2016
 
2015
Income (loss) before income taxes
$
(1.9
)
 
$
40.8

 
$
44.9

Statutory U.S. income tax rate
35.0
 %
 
35.0
%
 
35.0
%
Tax expense using statutory U.S. income tax rate
$
(0.7
)
 
$
14.3

 
$
15.7

Foreign income tax rate differential
(1.4
)
 
(1.1
)
 
0.2

State tax (net of federal benefit)
(0.5
)
 
2.8

 
1.6

Non-deductible expenses
2.2

 
2.3

 
1.5

Tax Receivable Agreement (a)
(3.8
)
 
1.6

 
0.7

Tax credits (b)
(4.0
)
 

 

Foreign exchange loss (c)

 

 
(1.2
)
Impact of U.S. Tax Act (Federal and State)
30.2

 

 

Change in valuation allowance - U.S. Federal and State (d)

 

 
(0.8
)
Change in valuation allowance - Foreign
(13.7
)
 
(0.5
)
 
1.7

Goodwill impairment
2.1

 

 
0.7

Foreign taxes
0.7

 
0.5

 
0.1

Other (e)
0.3

 
(0.1
)
 
(2.0
)
Income tax provision (benefit)
$
11.4

 
$
19.8

 
$
18.2

Effective income tax rate
(600.0
)%
 
48.5
%
 
40.5
%

(a) Includes a $4.7 million tax rate benefit for the federal tax rate change as part of the Tax Act and a $0.9 million tax rate increase for other fair value changes in 2017.
(b) Includes a $3.1 million benefit for credits related to foreign taxes and research and experimentation activities recognized in conjunction with the third quarter of 2017 filing of Veritiv’s 2016 U.S. federal tax return and amended 2015 and 2014 U.S. federal tax returns.
(c) Recognition of a 2015 U.S. tax benefit with respect to a foreign exchange loss on the capitalization of an intercompany loan with the Company's Canadian subsidiary.
(d) Increase in Section 382 limitation resulting from recognition of 2015 built-in gains.
(e) In 2015, Other primarily relates to tax benefits related to uncertain tax positions, taxes allocated to comprehensive income, adjustments for prior year tax matters and fuel tax credits.

The Tax Act was signed into law on December 22, 2017. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%, implementation of a territorial tax system and a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. Veritiv recognized the tax effects of the Tax Act in the year ended December 31, 2017 and recorded $30.2 million in provisional tax expense, of which $23.0 million related primarily to the remeasurement of the Company's deferred taxes to the 21% tax rate and $7.2 million related to the one-time transition tax.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company has determined that remeasurement of its deferred tax assets and liabilities, one-time transition tax, impact of the Tax Act on state taxes, and tax liability associated with investments in non-U.S. subsidiaries where book basis exceeds tax basis are provisional amounts and reasonable estimates at December 31, 2017. The impact of the Tax Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued, completion of the Company's 2017 U.S. federal and state tax returns in 2018, completion of earnings and profits and foreign income tax calculations for the Company's non-U.S. subsidiaries, and actions the Company may take as a result of the Tax Act. Additional work is necessary for a more detailed analysis of Veritiv's deferred tax assets and liabilities and its historical foreign earnings as well as potential correlative adjustments. The Company has not accounted for the tax impacts related to the Global Intangible Low Tax Income (GILTI), Base Erosion Anti Abuse Tax or Foreign Derived Intangible Income regimes or any of the other provisions of the Tax Act that are not effective until fiscal year 2018.  Additionally, the Company has not concluded on any applicable accounting policy election associated with  GILTI.  Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter of 2018 when the analysis is complete.

Deferred income tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
(in millions)
U.S.
 
Non-U.S.
 
U.S.
 
Non-U.S.
Deferred income tax assets:
 
 
 
 
 
 
 
Accrued compensation
$
11.6

 
$
0.2

 
$
17.7

 
$
0.1

Financing obligations to related party
47.3

 
0.8

 
77.5

 
0.8

Goodwill and other intangibles, net
1.9

 

 
4.6

 

Long-term compensation
21.3

 
4.1

 
21.2

 
3.8

Net operating losses and credit carryforwards
44.9

 
11.8

 
74.1

 
13.6

Allowance for doubtful accounts
10.0

 
0.1

 
11.9

 

Other
5.6

 
0.6

 
3.5

 
0.8

Gross deferred income tax assets
142.6

 
17.6

 
210.5

 
19.1

Less valuation allowance
(4.7
)
 
(3.6
)
 
(6.5
)
 
(18.1
)
Total deferred tax asset
137.9

 
14.0

 
204.0

 
1.0

Deferred income tax liabilities:
 
 
 
 
 
 
 
Property and equipment, net
(54.2
)
 

 
(86.7
)
 

Inventory reserve
(33.5
)
 

 
(48.2
)
 

Other
(4.6
)
 

 
(8.3
)
 

Total deferred tax liability
(92.3
)
 

 
(143.2
)
 

Net deferred income tax asset
$
45.6

 
$
14.0

 
$
60.8

 
$
1.0



Deferred income tax asset valuation allowance is as follows:
(in millions)
U.S.
 
Non-U.S.
 
Total
Balance at December 31, 2015
$
6.3

 
$
15.5

 
$
21.8

Additions
0.2

 
3.4

 
3.6

Subtractions

 
(0.9
)
 
(0.9
)
Currency translation adjustments

 
0.1

 
0.1

Balance at December 31, 2016
6.5

 
18.1

 
24.6

Additions

 
0.2

 
0.2

Subtractions (a)
(1.8
)
 
(16.0
)
 
(17.8
)
Currency translation adjustments

 
1.3

 
1.3

Balance at December 31, 2017
$
4.7

 
$
3.6

 
$
8.3


(a) Includes a $13.4 million benefit for release of the valuation allowance against net deferred tax assets in Canada reflecting the Company’s cumulative recent income and improved expectation of future taxable income.

The Merger resulted in a significant change in the ownership of the Company, which, pursuant to the Internal Revenue Code Section 382, imposes annual limits on the Company’s ability to utilize its U.S. federal and state net operating loss carryforwards ("NOLs"). The Company’s NOLs will continue to be available to offset taxable income (until such NOLs are either utilized or expire) subject to the Section 382 annual limitation. This limitation is increased for built-in gains recognized within a 60-month period following the ownership change to the extent of total unrealized built-in gains. If the annual limitation amount is not fully utilized in a particular tax year, then the unused portion from that particular tax year will be added to the annual limitation in subsequent years.

In general, it is the practice and intention of Veritiv to reinvest the earnings of its non-U.S. subsidiaries in those operations. As of December 31, 2017, Veritiv’s tax basis exceeded its financial reporting basis in certain investments in non-U.S. subsidiaries. The Company does not believe these temporary differences will reverse in the foreseeable future and, therefore, no deferred tax asset has been recognized with respect to these basis differences. Additionally, no deferred tax liability has been recognized for income and withholding tax liabilities associated with investments in non-U.S. subsidiaries where book basis exceeds tax basis. The provisional estimate of such temporary differences totaled approximately $25.8 million as of December 31, 2017. The provisional estimate of income and withholding tax liability associated with these temporary differences is immaterial. Veritiv will record the tax effects of any change in its prior provisional estimates, with respect to these investments, and disclose any unrecognized deferred tax impact for temporary differences related to its foreign investments, if practicable, in the period that it is first able to determine a change, but no later than December 31, 2018.
    
Veritiv applies a "more likely than not" threshold to the recognition and de-recognition of uncertain tax positions. A change in judgment related to prior years' uncertain tax positions is recognized in the period of such change.

The Company accrues interest on unrecognized tax benefits as a component of interest expense. Penalties, if incurred, are recognized as a component of income tax expense. Total gross unrecognized tax benefits as of December 31, 2017, 2016 and 2015, as well as activity within each of the years, was not material.

In the U.S., Veritiv is generally subject to examination by the Internal Revenue Service ("IRS") for fiscal years 2014 and later and certain states for fiscal years 2013 and later; however, it may be subject to IRS and state tax authority adjustments for years prior to 2014 to the extent of losses or other tax attributes carrying forward from the earlier years. Veritiv Canada remains subject to examination by the Canadian Revenue Agency and certain provinces for fiscal years 2012 and later.

As of December 31, 2017, Veritiv has federal, state and foreign income tax NOLs available to offset future taxable income of $167.1 million, $165.5 million and $49.2 million, respectively, which will expire at various dates from 2018 through 2035, with the exception of certain foreign NOLs that do not expire but have a full valuation allowance.
Related Party Transactions
Related Party Transactions
9. RELATED PARTY TRANSACTIONS

Agreements with the UWWH Stockholder

On the Distribution Date the UWWH Stockholder, the sole shareholder of UWWH, received 7.84 million shares of Veritiv common stock for all outstanding shares of UWWH common stock that it held in a private placement transaction. Additionally, Veritiv and the UWWH Stockholder executed the following agreements:

Registration Rights Agreement: The Registration Rights Agreement provides the UWWH Stockholder with certain demand and piggyback registration rights. Under this Agreement, the UWWH Stockholder is also entitled to transfer its Veritiv common stock to one or more of its affiliates or equity-holders and may exercise registration rights on behalf of such transferees if such transferees become a party to the Registration Rights Agreement. The UWWH Stockholder, on behalf of the holders of shares of Veritiv’s common stock that are party to the Registration Rights Agreement, under certain circumstances and provided certain thresholds described in the Registration Rights Agreement are met, may make a written request to the Company for the registration of the offer and sale of all or part of the shares subject to such registration rights. If the Company registers the offer and sale of its common stock (other than pursuant to a demand registration or in connection with registration on Form S-4 and Form S-8 or any successor or similar forms, or relating solely to the sale of debt or convertible debt instruments) either on its behalf or on the behalf of other security holders, the holders of the registration rights under the Registration Rights Agreement are entitled to include their shares in such registration. The demand rights described commenced 180 days after the Distribution Date. Veritiv is not required to effect more than one demand registration in any 150-day period or more than two demand registrations in any 365-day period. If Veritiv believes that a registration or an offering would materially affect a significant transaction or would require it to disclose confidential information which it in good faith believes would be adverse to its interest, then Veritiv may delay a registration or filing for no more than 120 days in a 360-day period.

Tax Receivable Agreement: The Tax Receivable Agreement sets forth the terms by which Veritiv generally will be obligated to pay the UWWH Stockholder an amount equal to 85% of the U.S. federal, state and Canadian income tax savings that Veritiv actually realizes as a result of the utilization of Unisource's net operating losses attributable to taxable periods prior to the date of the Merger. For purposes of the Tax Receivable Agreement, Veritiv’s income tax savings will generally be computed by comparing Veritiv’s actual aggregate U.S. federal, state and Canadian income tax liability for taxable periods (or portions thereof) beginning after the date of the Merger to the amount of Veritiv’s aggregate U.S. federal, state and Canadian income tax liability for the same periods had Veritiv not been able to utilize Unisource's net operating losses attributable to taxable periods prior to the date of the Merger. Veritiv will pay to the UWWH Stockholder an amount equal to 85% of such tax savings, plus interest at a rate of LIBOR plus 1.00%, computed from the earlier of the date that Veritiv files its U.S. federal income tax return for the applicable taxable year and the date that such tax return is due (without extensions) until payments are made. Under the Tax Receivable Agreement, the UWWH Stockholder will not be required to reimburse Veritiv for any payments previously made if such tax benefits are subsequently disallowed or adjusted (although future payments under the Tax Receivable Agreement would be adjusted to the extent possible to reflect the result of such disallowance or adjustment). The Tax Receivable Agreement will be binding on and adapt to the benefit of any permitted assignees of the UWWH Stockholder and to any successors to any of the parties of the Tax Receivable Agreement to the same extent as if such permitted assignee or successor had been an original party to the Tax Receivable Agreement. In January 2018 and 2017, Veritiv paid $10.1 million and $8.7 million, respectively, in principal and interest, to the UWWH Stockholder for the utilization of pre-merger NOLs in its 2016 and 2015 federal and state tax returns, respectively. As of December 31, 2017, the Tax Receivable Agreement was revalued for the Tax Act change, lowering the U.S. federal corporate tax rate from 35% to 21%. This change reduced the value of the Tax Receivable Agreement liability by $13.5 million.

On November 23, 2016, the UWWH Stockholder sold 1.76 million shares of Veritiv common stock in an underwritten public offering. Concurrently with the closing of the offering, Veritiv repurchased 0.31 million of these offered shares from the underwriters at a price of $42.8625 per share, which is the price at which the underwriters purchased such shares from the selling stockholder, for an aggregate purchase price of approximately $13.4 million. In conjunction with these transactions, Veritiv incurred approximately $0.8 million in transaction-related fees, of which approximately $0.2 million was capitalized as part of the cost to acquire the treasury stock with the remainder included in selling and administrative expense, on the Consolidated Statements of Operations.

On March 22, 2017, the UWWH Stockholder sold 1.80 million shares of Veritiv common stock in a block trade. The Company did not sell any shares and did not receive any of the proceeds. In conjunction with this transaction, Veritiv incurred approximately $0.2 million in transaction-related fees, which were included in selling and administrative expenses on the Consolidated Statements of Operations. The UWWH Stockholder beneficially owned 4,283,840 shares of Veritiv's outstanding common stock as of December 31, 2017.

Transactions with Georgia-Pacific

Veritiv purchases certain inventory items from, and sells certain inventory items to, Georgia-Pacific in the normal course of business. As a result of the Merger and related private placement, Georgia-Pacific, as joint owner of the UWWH Stockholder, is a related party. The following table summarizes the financial impact of these related party transactions with Georgia Pacific:

 
 
Year Ended December 31,
(in millions)
 
2017
 
2016
 
2015
Sales to Georgia-Pacific, reflected in net sales
 
$
32.2

 
$
35.6

 
$
33.6

Purchases of inventory from Georgia-Pacific, recognized in cost of products sold
 
$
181.6

 
$
224.9

 
$
264.7

 
 
 
 
 
 
 
Inventories purchased from Georgia-Pacific that remained on Veritiv's balance sheet
 
$
22.7

 
$
24.8

 
 
Related party payable to Georgia-Pacific
 
$
8.5

 
$
9.0

 
 
Related party receivable from Georgia-Pacific
 
$
3.3

 
$
3.9

 
 


See Note 7, Leases, for information on the Company's financing obligations to Georgia-Pacific.

Separation Agreements with Former Unisource CEO

Effective as of the Distribution Date, Allan R. Dragone, Jr. ceased to be the Chief Executive Officer of Unisource and became a member of Veritiv’s Board of Directors. Under his then existing employment agreement with Unisource, Mr. Dragone was entitled to receive severance benefits, subject to his execution and non-revocation of a general release of claims against Unisource, the Company and International Paper. As part of his employment agreement, Mr. Dragone exercised his right to sell his personal residence to the Company. The Company completed the purchase of the residence for $4.6 million and subsequently sold the residence for $4.6 million during 2015.
Employee Benefit Plans
Employee Benefit Plans
10. EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

Veritiv sponsors qualified defined contribution plans covering its employees in the U.S. and Canada. The defined
contribution plans allow eligible employees to contribute a portion of their eligible compensation (including salary and annual incentive plan bonus) to the plans and Veritiv makes matching contributions to participant accounts on a specified percentage of employee deferrals as determined by the provisions of each plan. During the years ended December 31, 2017, 2016 and 2015 Veritiv's contributions to these plans totaled $19.4 million, $19.6 million and $19.0 million, respectively.

Deferred Compensation Savings Plans

In conjunction with the Merger, Veritiv assumed responsibility for Unisource's legacy deferred compensation plans. In general, the payout terms varied for each employee agreement and are paid in monthly or annual installments ranging up to 15 years from the date of eligibility.

Effective January 1, 2015, the Company adopted the Veritiv Deferred Compensation Savings Plan which provides for the deferral of salaries, commissions or bonuses of eligible non-union employees and the deferral of cash and equity retainers for non-employee members of the Company's Board of Directors. Under this plan, eligible employees may elect to defer up to 85% of their base salary, commissions and annual incentive bonus. The amounts deferred are credited to notional investment accounts selected by participants. At the time a deferral election is made, participants elect to receive payout of the deferred amounts upon termination of employment or termination of Board service in the form of a lump sum or equal annual installments ranging from two to ten years. Currently, Veritiv does not make matching contributions to this plan.

The liabilities associated with these plans are summarized in the table below.
Deferred Compensation Liability
 
 
 
 
 
 
 
 
 
(in millions)
 
December 31, 2017
 
December 31, 2016
Other accrued liabilities
 
$
2.6

 
$
2.7

Other non-current liabilities
 
23.7

 
21.6

Total liabilities
 
$
26.3

 
$
24.3



Defined Benefit Plans

At December 31, 2017 and 2016, Veritiv did not maintain any active defined benefit plans for its non-union employees.

Benefit Obligations and Funded Status

The following table provides information about Veritiv's U.S. and Canadian defined benefit pension and SERP plans:
 
Year Ended December 31,
 
2017

2016
(in millions)
U.S.

Canada

U.S.

Canada
Accumulated benefit obligation, end of year
$
91.0

 
$
83.2

 
$
89.7

 
$
71.9


 
 
 
 
 
 
 
Change in projected benefit obligation:
 
 
 
 
 
 
 
Benefit obligation, beginning of year
$
89.7

 
$
79.0

 
$
89.0

 
$
76.0

Service cost
0.8

 
0.3

 
0.7

 
0.3

Interest cost
2.7

 
2.7

 
3.4

 
3.1

Actuarial (gain) loss