Verso Quinnesec Earnings 2020-09-30
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
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Assets, Equity
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Rev, G Profit, Net Income
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Ops, Inv, Fin
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended September 30, 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from __________ to __________ | |||||
(Commission File Number)
(Exact name of registrant as specified in its charter)
| (State of Incorporation or Organization) | (IRS Employer Identification Number) | |||||||||||||
(Address, including zip code, of principal executive offices)
(877 ) 855-7243
(Registrant’s telephone number, including area code)
_____________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
☑ | Accelerated filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☑ Yes ☐ No
As of October 30, 2020, Verso Corporation had 33,723,138 shares of Class A common stock, par value $0.01 per share, outstanding.
Entity Names and Organization
In this report, the term “Verso,” “the Company,” “we,” “us,” and “our” refer to Verso Corporation, which is the ultimate parent entity and the issuer of Class A common stock listed on the New York Stock Exchange, and its consolidated subsidiaries. Verso is the sole member of Verso Holding LLC, which is the sole member of Verso Paper Holding LLC. As used in this report, the term “Verso Holding” refers to Verso Holding LLC, and the term “Verso Paper” refers to Verso Paper Holding LLC.
Forward-Looking Statements
In this quarterly report, all statements that are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act.” Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “intend” and other similar expressions. They include, for example, statements relating to our business and operating outlook, including our plans with respect to our Duluth Mill and Wisconsin Rapids Mill; the potential impact of the COVID-19 pandemic; assessment of market conditions; and the growth potential of the industry in which we operate. Forward-looking statements are based on currently available business, economic, financial and other information and reflect management’s current beliefs, expectations and views with respect to future developments and their potential effects on us. Actual results could vary materially depending on risks and uncertainties that may affect us and our business. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: uncertainties regarding the impact, duration and severity of the COVID-19 pandemic and measures intended to reduce its spread; the long-term structural decline and general softening of demand facing the paper industry; adverse developments in general business and economic conditions; developments in alternative media, which are expected to adversely affect the demand for some of our key products, and the effectiveness of our responses to these developments; intense competition in the paper manufacturing industry; our ability to compete with respect to certain specialty paper products for a period of two years after the closing of the Pixelle Sale (as defined in Note 1 to our Unaudited Condensed Consolidated Financial Statements); our business being less diversified following the sale of two mills in the Pixelle Sale and the idling of two other mills while exploring alternatives for those mills; our dependence on a small number of customers for a significant portion of our business; our limited ability to control the pricing of our products or pass through increases in our costs to our customers; changes in the costs of raw materials and purchased energy; negative publicity, even if unjustified; any failure to comply with environmental or other laws or regulations, even if inadvertent; legal proceedings or disputes; any labor disputes; and the potential risks and uncertainties described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent annual reports on Form 10-K and quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statement made in this Quarterly Report to reflect subsequent events or circumstances or actual outcomes.
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TABLE OF CONTENTS
| Page | ||||||||
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| VERSO CORPORATION | |||||||||||
| UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||
| December 31, | September 30, | ||||||||||
| (Dollars in millions, except per share amounts) | 2019 | 2020 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Assets held for sale | |||||||||||
| Prepaid expenses and other assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Deferred tax assets | |||||||||||
| Intangibles and other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued and other liabilities | |||||||||||
| Current maturities of long-term debt and finance leases | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt and finance leases | |||||||||||
| Pension benefit obligation | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 11) | |||||||||||
| Equity: | |||||||||||
Preferred stock -- par value $ | |||||||||||
Common stock -- par value $ | |||||||||||
Treasury stock -- at cost ( September 30, 2020) | ( | ( | |||||||||
| Paid-in-capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
4
| VERSO CORPORATION | |||||||||||||||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
Cost of products sold (exclusive of depreciation and amortization) | |||||||||||||||||||||||
Depreciation and amortization | |||||||||||||||||||||||
Selling, general and administrative expenses | |||||||||||||||||||||||
| Restructuring charges | ( | ||||||||||||||||||||||
| Other operating (income) expense | ( | ||||||||||||||||||||||
| Operating income (loss) | ( | ( | ( | ||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Other (income) expense | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Income (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Diluted | ( | ( | ( | ||||||||||||||||||||
Weighted average common shares outstanding (in thousands) | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
| VERSO CORPORATION | |||||||||||||||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| (Dollars in millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Defined benefit pension plan: | |||||||||||||||||||||||
| Pension liability adjustment, net | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
5
| VERSO CORPORATION | ||||||||||||||||||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||
| Class A | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||
(Dollars in millions, shares in thousands) | Common Shares | Common Stock | Treasury Shares | Treasury Stock | Paid-in-Capital | |||||||||||||||||||||
| Balance - June 30, 2019 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | ||||||||||||||||||||
| Treasury shares | — | — | — | — | — | — | ||||||||||||||||||||
Common stock issued for restricted stock | — | — | — | — | — | — | — | |||||||||||||||||||
| Equity award expense | — | — | — | — | — | — | ||||||||||||||||||||
| Balance - September 30, 2019 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Balance - June 30, 2020 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | — | ( | ||||||||||||||||||
| Treasury shares | — | — | — | — | — | — | ||||||||||||||||||||
Other comprehensive income (loss), net | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
Common stock issued for restricted stock | — | — | — | — | — | — | — | |||||||||||||||||||
Dividends and dividend equivalents declared | — | — | — | — | ( | — | ( | |||||||||||||||||||
| Equity award expense | — | — | — | — | — | — | ||||||||||||||||||||
| Balance - September 30, 2020 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Balance - December 31, 2018 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | — | ( | ||||||||||||||||||
| Treasury shares | — | — | ( | — | — | — | ( | |||||||||||||||||||
Common stock issued for restricted stock | — | — | — | — | — | — | — | |||||||||||||||||||
| Equity award expense | — | — | — | — | — | — | ||||||||||||||||||||
| Balance - September 30, 2019 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Balance - December 31, 2019 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | — | ( | ||||||||||||||||||
Other comprehensive income (loss), net | — | — | — | — | — | — | ( | ( | ||||||||||||||||||
| Treasury shares | — | — | ( | — | — | — | ( | |||||||||||||||||||
Common stock issued for restricted stock | — | — | — | — | — | — | — | |||||||||||||||||||
Dividends and dividend equivalents declared | — | — | — | — | ( | — | ( | |||||||||||||||||||
| Equity award expense | — | — | — | — | — | — | ||||||||||||||||||||
| Balance - September 30, 2020 | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
6
| VERSO CORPORATION | |||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| (Dollars in millions) | 2019 | 2020 | |||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net income (loss) | $ | ( | $ | ( | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Noncash restructuring charges | |||||||||||
| Net periodic pension cost (income) | ( | ( | |||||||||
| Pension plan contributions | ( | ( | |||||||||
| Amortization of debt issuance cost and discount | |||||||||||
| Equity award expense | |||||||||||
| Gain on Sale of Androscoggin/Stevens Point Mills | ( | ||||||||||
| (Gain) loss on sale or disposal of assets | |||||||||||
| Deferred taxes | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued and other liabilities | ( | ( | |||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
Cash Flows From Investing Activities: | |||||||||||
| Proceeds from sale of assets | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Net proceeds from Sale of the Androscoggin/Stevens Point Mills | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
Cash Flows From Financing Activities: | |||||||||||
| Borrowings on ABL Facility | |||||||||||
| Payments on ABL Facility | ( | ( | |||||||||
Principal payment on financing lease obligation | ( | ( | |||||||||
Acquisition of treasury stock | ( | ( | |||||||||
Dividends paid to stockholders | ( | ||||||||||
| Debt issuance costs | ( | ||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Change in Cash and cash equivalents and restricted cash | ( | ||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | |||||||||
Supplemental cash flow disclosures: | |||||||||||
| Total interest paid | $ | $ | |||||||||
Total income taxes paid | |||||||||||
Noncash investing and financing activities: | |||||||||||
Right-of-use assets recorded upon adoption of ASC 842 | $ | $ | |||||||||
Right-of-use assets obtained in exchange for new finance lease liabilities | |||||||||||
Right-of-use assets obtained in exchange for new capitalized operating lease liabilities | |||||||||||
See notes to Unaudited Condensed Consolidated Financial Statements.
7
VERSO CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND BASIS OF PRESENTATION
Sale of Androscoggin Mill and Stevens Point Mill — On November 11, 2019, Verso and Verso Paper entered into a membership interest purchase agreement, or the “Purchase Agreement,” with Pixelle Specialty Solutions LLC, or “Pixelle,” whereby Verso and Verso Paper agreed to sell to Pixelle, or the “Pixelle Sale,” or the “Sale of the Androscoggin/Stevens Point Mills,” all of the outstanding membership interests in Verso Androscoggin, LLC, an indirect wholly owned subsidiary of Verso and the entity that, as of the closing date of the Pixelle Sale, held all the assets primarily related to Verso’s Androscoggin Mill located in Jay, Maine, and Verso’s Stevens Point Mill located in Stevens Point, Wisconsin. As a result of the Pixelle Sale, which was completed on February 10, 2020, the assets and liabilities associated with the sale are not included in Verso’s Unaudited Condensed Consolidated Balance Sheet as of September 30, 2020 or Verso’s Unaudited Condensed Consolidated Statement of Operations for the three months ended September 30, 2020, and Verso’s Unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020 only includes the results of operations associated with the Androscoggin and Stevens Point mills through February 9, 2020 (see Note 5).
Idle of Duluth Mill and Wisconsin Rapids Mill — On June 9, 2020, Verso announced plans to indefinitely idle its mills in Duluth, Minnesota and Wisconsin Rapids, Wisconsin, while exploring viable and sustainable alternatives for both mills. Those alternatives could include restarting if market conditions improve, marketing for sale or closing permanently one or both mills. Verso’s decision to reduce its production capacity was driven by the accelerated decline in graphic paper demand resulting from the COVID-19 pandemic (see below). The “stay-at-home” and other orders related to the COVID-19 pandemic have significantly reduced the use of print advertising in various industries, including retail, sports, entertainment and tourism. The production capacity of the Duluth Mill is approximately 270,000 tons of supercalendered/packaging papers and the production capacity of the Wisconsin Rapids Mill is approximately 540,000 tons of coated and packaging papers. Paper and pulp production ceased at the Duluth Mill on July 1, 2020 and at the Wisconsin Rapids Mill on July 27, 2020. In September 2020, Verso recognized $3 million in severance and benefit costs, included in Costs of products sold, associated with the Duluth Mill. See Note 12 for further information.
COVID-19 Pandemic — The outbreak of coronavirus disease, or “COVID-19”, which was declared by the World Health Organization to be a global pandemic, is impacting worldwide economic activity. In an effort to contain and combat the spread of COVID-19, government and health authorities around the world have taken extraordinary and wide-ranging actions, including orders to close all businesses not deemed “essential,” quarantines and “stay-at-home” orders. Although some of these governmental restrictions have since been lifted or scaled back, recent surges of COVID-19 have resulted in the re-imposition of certain restrictions and may lead to other restrictions being re-implemented in an effort to reduce the spread of COVID-19. Verso serves as an essential manufacturing business and, as a result, Verso’s mills have continued to be operational during this time in order to meet the ongoing needs of its customers, including those in other essential business sectors, which provide food, medical and hygiene products needed in a global health crisis. The guidelines and orders enacted by federal, state and local governments continue to affect retailers, political campaigns, and sports and entertainment events, driving reduced purchases of printed materials and substantially impacting Verso’s graphic papers business.
Verso’s COVID-19 preparedness and response team has been monitoring the pandemic and related events daily and preparing and implementing responses in accordance with Centers for Disease Control and Prevention, or the “CDC,” and Occupational Safety and Health Administration, or “OSHA,” recommendations as well as federal, state and local guidelines.
While Verso cannot reasonably estimate the full impact of COVID-19 on the business, financial position, results of operations and cash flows, the pandemic will continue to have a negative impact on business and financial results. The full extent to which
8
COVID-19 impacts Verso’s operations will depend on future developments, which are highly uncertain, including, among others, the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions taken, especially those by governmental authorities, to contain its spread or treat its impact.
Correction of previously reported amounts — Subsequent to the original issuance of the Company’s 2019 Consolidated Financial Statements, Verso identified two adjustments necessary to correct deferred tax assets associated with property, plant and equipment and pension obligation, on the Consolidated Balance Sheet as of December 31, 2019. These errors occurred due to the incorrect measurement of the state deferred tax assets relating to bonus depreciation and the incorrect application of the tax accounting for the minimum pension liability in Accumulated other comprehensive income (loss). Management believes that the impact of these adjustments is immaterial to the previously issued Consolidated Financial Statements, based on an evaluation of both quantitative and qualitative factors. As a result, Verso corrected Deferred tax assets and Retained earnings on the Unaudited Condensed Consolidated Balance Sheet as of December 31, 2019 included in this Form 10-Q, reducing each by $26
There was no impact to the Unaudited Condensed Consolidated Statements of Operations, the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), or the Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2019 and 2020, as a result of this matter.
The following table presents the as corrected line items in the Consolidated Balance Sheet as of December 31, 2019:
| December 31, 2019 | |||||||||||
| (Dollars in millions) | As Reported | As Corrected | |||||||||
| Deferred tax assets | $ | $ | |||||||||
| Total assets | $ | $ | |||||||||
| Retained earnings | $ | $ | |||||||||
| Total equity | $ | $ | |||||||||
| Total liabilities and equity | $ | $ | |||||||||
As a result of this matter, Verso will correct its Consolidated Financial Statements and related footnotes for the year ended December 31, 2019, when those statements are reproduced on a comparative basis in its Annual Report on Form 10-K for the year ending December 31, 2020. In addition to presenting the correct amounts on the Consolidated Balance Sheet as of December 31, 2019 as noted above, Verso will present corrected amounts of Net income and Income tax benefit on the Consolidated Statement of Operations for the year ended December 31, 2019, reducing each by $26 26
2. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2020
ASC Topic 350, Intangible Assets - Goodwill & Other. In August 2018, the Financial Accounting Standards Board, or “FASB,” issued Accounting Standards Update, or “ASU,” 2018-15, Customer’s Accounting for Implementation Costs in a Cloud Computing Arrangement that is a Service Contract (Topic 350), which aligns the accounting for such costs with guidance on capitalizing costs associated with developing or obtaining internal use software. Verso adopted this guidance on
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January 1, 2020 on a prospective basis and the effect on the Unaudited Condensed Consolidated Financial Statements was not material.
ASC Topic 326, Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance replaces the current incurred loss impairment method with a method that reflects expected credit losses. Adoption of this standard is through a cumulative-effect adjustment to retained earnings as of the effective date. Verso adopted this guidance on January 1, 2020 and the effect on the Unaudited Condensed Consolidated Financial Statements was not material.
ASC Topic 820, Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies disclosure requirements related to fair value measurement. Verso adopted this guidance on January 1, 2020 and the effect on the Unaudited Condensed Consolidated Financial Statements was not material.
Accounting Guidance Not Yet Adopted
ASC Topic 740, Income Taxes. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. This guidance removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce the complexity in accounting for income taxes. It is effective for annual periods, and interim periods within those years, beginning after December 15, 2020 and is not expected to have a material effect on the Unaudited Condensed Consolidated Financial Statements.
3. REVENUE RECOGNITION
The following table presents the revenues disaggregated by product included on the Unaudited Condensed Consolidated Statements of Operations:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| (Dollars in millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| Paper | $ | $ | $ | $ | |||||||||||||||||||
| Packaging | |||||||||||||||||||||||
| Pulp | |||||||||||||||||||||||
| Total Net sales | $ | $ | $ | $ | |||||||||||||||||||
The following table presents the revenue disaggregated by sales channel included on the Unaudited Condensed Consolidated Statements of Operations:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| (Dollars in millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
| End-users and Converters | $ | $ | $ | $ | |||||||||||||||||||
| Brokers and Merchants | |||||||||||||||||||||||
| Printers | |||||||||||||||||||||||
| Total Net sales | $ | $ | $ | $ | |||||||||||||||||||
4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
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Inventories — The following table summarizes inventories by major category:
| December 31, | September 30, | ||||||||||
| (Dollars in millions) | 2019 | 2020 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Replacement parts and other supplies | |||||||||||
| Inventories | $ | $ | |||||||||
Property, plant and equipment — Depreciation expense for the three and nine months ended September 30, 2019 was $24 million and $153 million, respectively. Depreciation expense for the three and nine months ended September 30, 2020 was $20 million and $62 million, respectively. Depreciation expense for the nine months ended September 30, 2019 includes $76 million in accelerated depreciation associated with the closure of the Luke Mill in June 2019 (see Note 10).
Interest costs capitalized for the three and nine months ended September 30, 2019 were zero and $1 million, respectively. Interest costs capitalized for the three and nine months ended September 30, 2020 were zero and $1 million, respectively. Property, plant and equipment as of September 30, 2019 and 2020 include $13 million and $2 million, respectively, of capital expenditures that were unpaid and included on Accounts payable and Accrued and other liabilities on the Unaudited Condensed Consolidated Balance Sheets.
Income Taxes — Income tax benefit for the three and nine months ended September 30, 2019 was $1 million and zero , respectively. Income tax benefit for the three months ended September 30, 2020 was $9 million and income tax expense for the nine months ended September 30, 2020 was $14 million. During the three and nine months ended September 30, 2020, Verso recognized $1 million and $8 million, respectively, of additional valuation allowance against state tax credits. The nine months ended September 30, 2020 also includes $7 million of income tax expense related to the year ended December 31, 2019. This resulted from recording the federal tax effect on deferred tax assets for state net operating losses and state tax credits in the three months ended June 30, 2020, which was not recorded in the prior year. This adjustment was not material to the current periods’ Unaudited Condensed Consolidated Financial Statements or any prior periods.
5. DISPOSITIONS
Sale of Androscoggin Mill and Stevens Point Mill
On February 10, 2020, Verso completed the Pixelle Sale, selling all of the outstanding membership interests in Verso Androscoggin, LLC, an indirect wholly owned subsidiary of Verso and the entity that, as of the closing date of the Pixelle Sale, held all the assets primarily related to Verso’s Androscoggin Mill located in Jay, Maine and Verso’s Stevens Point Mill, located in Stevens Point, Wisconsin. The Pixelle Sale did not qualify as a discontinued operation. As consideration for the Pixelle Sale, Verso received $344 million in cash, which reflects certain adjustments in respect of Verso’s estimates of cash, indebtedness and working capital of Verso Androscoggin, LLC as of the closing date, and Pixelle assumed $37 million of Verso’s unfunded pension liabilities, which reflects certain adjustments in connection with the completed transfer of the unfunded pension liabilities during the three months ended September 30, 2020. The sale resulted in a gain of $88 million included in Other operating (income) expense on the Unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020 and is subject to final post-closing adjustments. In connection with the Pixelle Sale, Verso provided certain transition services to Pixelle and recognized $2 million and $5 million for these services on the Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2020, respectively. During the three months ended September 30, 2020, $1 million of these transition services were recognized as a reduction of Cost of products sold and $1 million as a reduction of Selling, general and administrative expenses. During the nine months ended September 30, 2020, $2 million of these transition services were recognized as a reduction of Cost of products sold and $3 million as a reduction of Selling, general and administrative expenses. These transition services were completed in October 2020.
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The following table summarizes the components of the gain on sale:
| (Dollars in millions) | |||||
| Cash proceeds | $ | ||||
| Less: costs to sell | ( | ||||
| Net cash proceeds | |||||
| Less: assets and liabilities associated with the sale | |||||
| Accounts receivable, net | |||||
| Inventories | |||||
| Property, plant and equipment, net | |||||
| Write-off of intangible assets | |||||
| Other assets | |||||
| Accounts payable | ( | ||||
| Pension benefit obligation | ( | ||||
| Other liabilities | ( | ||||
| Gain on sale | $ | ||||
Luke Mill Equipment Sale
On August 1, 2020, Verso entered into an equipment purchase agreement with Halkali Kagit Karton Sanayi ve Tic. A.S., or the “Purchaser,” a company organized under the laws of Turkey, whereby Verso agreed to sell, and the Purchaser agreed to purchase, certain equipment at Verso’s Luke Mill, primarily including two paper machines. The purchase price is $11 million in cash, with $2 million due upon execution of the agreement and the remaining $9 million due at various milestones through closing. Verso received $4 million in non-refundable deposits associated with this sale during the three months ended September 30, 2020 and an additional $3 million in non-refundable deposits subsequent to September 30, 2020. The closing of the equipment purchase, including the transfer of title and ownership of the equipment to the Purchaser, will occur upon completion to Verso’s satisfaction of the disassembly and removal of the equipment and the receipt by Verso of all payments due from the Purchaser.
Luke Land - Assets Held for Sale
As of September 30, 2020, Verso had land associated with Verso’s Luke Mill classified as held for sale on the Unaudited Condensed Consolidated Balance Sheet of $4 million, which approximates the fair value of the land. On October 30, 2020, Verso received the $4 million of cash proceeds for the sale of the land.
6. DEBT
As of December 31, 2019 and September 30, 2020, Verso Paper had no
ABL Facility
On July 15, 2016, Verso Paper Holdings LLC entered into a $375 million asset-based revolving credit facility, or the “ABL Facility.” After the Company completed an internal reorganization in December 2016, Verso Paper Holdings LLC ceased to exist and Verso Paper became the borrower under the ABL Facility.
On February 6, 2019, Verso Paper entered into a second amendment to the ABL Facility, or the “ABL Amendment.” As a result of the ABL Amendment, the ABL Facility provides for revolving commitments of $350 million, subject to a borrowing base limit, with a $100 million sublimit for letters of credit and a $35 million sublimit for swingline loans. Verso Paper may request one or more incremental revolving commitments in an aggregate principal amount up to the greater of (i) $75 million or (ii) the excess of the borrowing base over the revolving facility commitments of $350 million; however, the lenders are not obligated to increase the revolving commitments upon any such request. Availability under the ABL Facility is subject to customary borrowing conditions. The ABL Facility will mature on February 6, 2024.
Outstanding borrowings under the ABL Facility bear interest at an annual rate equal to, at the option of Verso Paper, either (i) a customary London interbank offered rate plus an applicable margin ranging from 1.25 % to 1.75 % or (ii) a customary base rate
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plus an applicable margin ranging from 0.25 % to 0.75 %, determined based upon the average excess availability under the ABL Facility. Verso Paper also is required to pay a commitment fee for the unused portion of the ABL Facility of 0.25 % per year, based upon the average revolver usage under the ABL Facility.
The amount of borrowings and letters of credit available to Verso Paper pursuant to the ABL Facility is limited to the lesser of $350 million or an amount determined pursuant to a borrowing base ($244 million as of September 30, 2020). As of September 30, 2020, there were no borrowings outstanding under the ABL Facility, with $24 million issued in letters of credit and $220 million available for future borrowings.
All obligations under the ABL Facility are unconditionally guaranteed by Verso Holding and certain of the subsidiaries of Verso Paper. The security interest with respect to the ABL Facility consists of a first-priority lien on certain assets of Verso Paper, Verso Holding and the other guarantor subsidiaries, including accounts receivable, inventory, certain deposit accounts, securities accounts and commodities accounts, if applicable.
The ABL Facility contains financial covenants requiring Verso, among other things, to maintain a minimum fixed charge coverage ratio if availability were to drop below prescribed thresholds. The ABL Facility also requires that certain payment conditions, as defined therein, are met in order for Verso to incur debt or liens, pay cash dividends, repurchase equity interest, prepay indebtedness, sell or dispose of assets and make investments in or merge with another company.
7. EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted income (loss) per common share:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2019 | 2020 | 2019 | 2020 | ||||||||||||||||||||
Net income (loss) available to common stockholders (in millions) | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Weighted average common shares outstanding - basic (in thousands) | |||||||||||||||||||||||
Dilutive shares from stock awards (in thousands) | |||||||||||||||||||||||
Weighted average common shares outstanding - diluted (in thousands) | |||||||||||||||||||||||
Basic income (loss) per share | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
Diluted income (loss) per share | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||
As a result of the net loss from continuing operations for the nine months ended September 30, 2019 and the three and nine months ended September 30, 2020, 1.2 million restricted stock units as of September 30, 2019 and 0.9 1.8 million warrants outstanding at an exercise price of $21.67 (see Note 9). As a result of the exercise price of the warrants exceeding the average market price of Verso’s common stock during the three and nine months ended September 30, 2019 and 2020, 1.8
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8. RETIREMENT BENEFITS
In connection with the completed transfer of the unfunded pension liabilities assumed by Pixelle, as part of the Pixelle Sale (See Note 5), Verso remeasured its pension plan assets and liabilities as of September 30, 2020. For the remeasurement, the discount rate was updated to 2.71 % from 3.11 % at December 31, 2019. The remeasurement resulted in a $162 119 1
The following table summarizes the components of net periodic pension cost (income) for the periods presented:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
(Dollars in millions) | 2019 | 2020 | 2019 | 2020 | |||||||||||||||||||
Service cost | $ | $ | $ | $ | |||||||||||||||||||
Interest cost | |||||||||||||||||||||||
Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Settlement | |||||||||||||||||||||||
Net periodic pension cost (income) | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Verso makes contributions that are sufficient to fund actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act. Verso made contributions to the pension plan of $18 million and $34 million during the three and nine months ended September 30, 2019, respectively, and $29 million and $47 million during the three and nine months ended September 30, 2020, respectively. Verso expects to make the required cash contribution of $2 million to the pension plan in the remainder of 2020.
9. EQUITY
Equity Awards
During the nine months ended September 30, 2020, Verso granted 0.2 million time-based restricted stock units and 0.2 million performance-based restricted stock units to its executives and certain senior managers. The performance awards granted vest at December 31, 2022, subject to a comparison of annualized total stockholder return, or “TSR,” of Verso to a select group of peer companies over a 3-year period. The vesting criteria of the performance awards meet the definition of a market condition for accounting purposes. The full grant date value of the performance awards will be recognized over the remaining vesting period assuming that the employee is employed continuously to the vesting date. The number of shares which will ultimately vest at the vesting date ranges from 0 % to 150 % based on Verso’s TSR relative to the peer group during the performance period. The compensation expense associated with these performance awards was determined using the Monte Carlo valuation methodology.
On May 11, 2020, the threshold requirement for vesting of achieving a 5 % annualized TSR was eliminated for performance units granted in 2019 and 2020. This change was considered a modification of each award and requires Verso to incur additional compensation cost for the incremental difference in the fair value between the modified award (post-modification) and original award (pre-modification) over the remaining vesting period. The incremental difference was $1.60 and $3.75 per unit for the 2019 and 2020 performance grants, respectively.
Verso recognized equity award expense of $2 million and $10 million for the three and nine months ended September 30, 2019, respectively, and $1 million and $5 million for the three and nine months ended September 30, 2020, respectively. Equity award expense for the nine months ended September 30, 2020 includes $0.3 million related to the accelerated vesting of 138 thousand performance-based restricted stock units and 130 thousand time-based restricted stock units. Amounts are net of the cancellation of 90 thousand time-based and 93 thousand performance-based restricted stock units and dividend equivalent units, pursuant to separation agreements with key members of management. As of September 30, 2020, there was approximately $5 million of unrecognized compensation cost related to the 0.9 million non-vested restricted stock units, which is expected to be recognized over the weighted average period of 1.9 years.
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Time-based Restricted Stock Units
Changes to non-vested time-based restricted stock units for the nine months ended September 30, 2020 were as follows:
| Restricted Stock | Weighted Average | ||||||||||
| Units | Grant Date | ||||||||||
| Shares (in thousands) | Outstanding | Fair Value | |||||||||
| Non-vested at December 31, 2019 | $ | ||||||||||
Granted (1) | |||||||||||
| Vested | ( | ||||||||||