NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business —
We operate in the following
two
market segments: paper and pulp. However, we determined that the operating income (loss) of the pulp segment is immaterial for disclosure purposes. Our core business platform is as a producer of coated freesheet, specialty and coated groundwood papers. Our products are used primarily in media and marketing applications, including catalogs, magazines, commercial printing applications, such as high-end advertising brochures, annual reports and direct-mail advertising, and specialty applications, such as flexible packaging and label and converting. Our market kraft pulp is used to manufacture printing, writing and specialty paper grades and tissue products. Our assets are utilized across segments in our integrated mill system and are not identified by segment or reviewed by management on a segment basis. We operate primarily in
one
geographic location, North America.
Basis of Presentation —
This report contains the Unaudited Condensed Consolidated Financial Statements of Verso as of December 31, 2017 and
March 31, 2018
and for the
three months
ended
March 31, 2017
and
March 31, 2018
. The
December 31, 2017
, Unaudited Condensed Consolidated Balance Sheet data was derived from audited financial statements, but it does not include all disclosures required annually by accounting principles generally accepted in the United States of America, or “GAAP.” In the opinion of Management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Verso’s respective financial conditions, results of operations and cash flows for the interim periods presented. Except as disclosed in the notes to the Unaudited Condensed Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Variable interest entities for which Verso is the primary beneficiary are consolidated. Intercompany balances and transactions are eliminated in consolidation. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. It is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Verso contained in its Annual Report on Form 10-K for the year ended
December 31, 2017
.
Going Concern —
The Unaudited Condensed Consolidated Financial Statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2018
ASC Topic 220, Income Statement - Reporting Comprehensive Income.
In February 2018, the Financial Accounting Standards Board, or “FASB,” issued Accounting Standards Update, or “ASU,” 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220)
. This guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. We early adopted this guidance in the first quarter of 2018 and recorded an adjustment from Accumulated other comprehensive income to Retained deficit of
$7 million
associated with pension obligations. Our accounting to reflect the provisions of the Tax Cuts and Jobs Act is complete after recording this adjustment.
ASC Topic 715, Compensation - Retirement Benefits
. In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715)
, which amends the existing guidance relating to the presentation of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. On January 1, 2018, we retrospectively adopted the presentation of service cost separate from the other components of net benefit cost. The interest costs, expected long-term return on plan assets, amortization of prior service costs and other costs have been reclassified from Cost of products sold and Selling, general and administrative expenses to Other (income) expense. We elected to apply the practical expedient, which allows us to reclassify amounts disclosed previously in the retirement benefits note as the basis for applying retrospective presentation for comparative periods. On a prospective basis, only service costs will be capitalized in inventory or property, plant & equipment.
The effect of the retrospective presentation change related to the net periodic pension and other postretirement benefits plans on our Unaudited Condensed Consolidated Statement of Operations for the period ended March 31, 2017, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2017
|
Effect of change
|
(Dollars in millions)
|
Previously reported
|
As revised
|
Higher/(Lower)
|
Cost of products sold (exclusive of Depreciation, amortization and depletion)
|
$
|
560
|
|
$
|
562
|
|
$
|
2
|
|
Selling, general and administrative expense
|
33
|
|
33
|
|
—
|
|
Other (income) expense
|
—
|
|
(2
|
)
|
(2
|
)
|
In connection with the adoption of ASU 2017-07, we adopted an accounting policy effective January 1, 2018, on a prospective basis, to classify plan maintenance fees as a reduction of the expected return on plan assets, previously reported as a component of service cost.
ASC Topic 230, Statement of Cash Flows.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force)
. This ASU requires that restricted cash be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The guidance was adopted on January 1, 2018 on a retrospective basis. We do not expect this guidance to have a material impact on an ongoing basis on our Unaudited Condensed Consolidated Financial Statements.
ASC Topic 606, Revenue from Contracts with Customers
. On January 1, 2018, we adopted Accounting Standards Codification, or “ASC,” 606,
Revenue from Contracts with Customers
and all amendments (“new revenue standard”) to all contracts that were not complete using the modified retrospective method. The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Under the new standard, a sales contract is established with our customer upon receipt and acknowledgment of a customer purchase order. After evaluating open contracts at January 1, 2018, we determined that there was no cumulative effect on our Unaudited Condensed Consolidated Financial Statements as a result of adoption of the new revenue standard. The comparative financial results from 2017 have not been restated and continue to be reported under the accounting standards in effect for that period. We do not expect this standard will have a material impact on our sales or operations on an ongoing basis. See Note 3 for additional related revenue disclosures.
We also adopted the following standards in 2018, neither of which had a material impact to our financial statements or financial statement disclosures:
|
|
|
|
Standard
|
|
Effective Date
|
2017-09
|
Stock Compensation - Scope of Modification Accounting
|
January 1, 2018
|
2016-15
|
Classification of Certain Cash Receipts and Cash Payments
|
January 1, 2018
|
Accounting Guidance Not Yet Adopted
ASC Topic 842, Leases
. In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 supersedes existing lease guidance, including ASC Topic 840,
Leases,
and requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance also requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leases that will be effective for interim and annual periods beginning after December 15, 2018. We plan to adopt this guidance on January 1, 2019. The guidance requires the use of a modified retrospective approach. On March 7, 2018 the FASB board approved a practical expedient to adopt the standard with a cumulative effect at the adoption date without restating prior periods. The Company expects to adopt this guidance, when issued, for leases existing at the date of adoption. We expect to recognize a liability and corresponding asset associated with in-scope leases, but we are still in the process of determining those amounts and the processes required to account for leasing activity on an ongoing basis.
3.
REVENUE RECOGNITION
Revenue is recognized when obligations under the contract with the customer are satisfied which primarily occurs at the time of shipment from our mills or warehouses. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods reflecting any variable consideration, the most significant of which is our volume rebate program. Sales
taxes collected concurrent with revenue are excluded from revenues. Incidental items immaterial to the context of the contract are expensed as incurred. We do not have any material significant payment terms as payment is received shortly after the point of sale.
With respect to variable consideration, the amount of consideration received and revenue recognized is adjusted for the most likely amount of credits based on historical experience. Revenues are adjusted at the earlier date of when the most likely amount expected to be received changes or the consideration becomes fixed. We have elected to recognize the cost of freight and shipping when control has transferred to the customer as fulfillment activities in Cost of products sold.
The following table presents our revenues disaggregated by product included in our Unaudited Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
|
(Dollars in millions)
|
|
March 31, 2018
|
Printing paper
|
|
$
|
356
|
|
Coated groundwood
|
|
56
|
|
Specialty paper
|
|
155
|
|
Pulp
|
|
29
|
|
Supercalendared paper
|
|
43
|
|
Total Net sales
|
|
$
|
639
|
|
The following table presents our revenue disaggregated by sales channel included in our Unaudited Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
|
(Dollars in millions)
|
|
March 31, 2018
|
Direct sales
|
|
$
|
357
|
|
Merchant sales
|
|
241
|
|
Broker sales
|
|
41
|
|
Total Net sales
|
|
$
|
639
|
|
4.
SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Restricted Cash —
As of December 31, 2017 and March 31, 2018,
$2 million
of restricted cash was included in Intangibles and other assets, net in the Unaudited Condensed Consolidated Balance Sheets mainly related to asset retirement obligations in the state of Michigan. These cash deposits are required by the state and may only be used for the future closure of a landfill. For the three months ended March 31, 2017 and March 31, 2018, Cash and cash equivalents in the Unaudited Condensed Consolidated Statements of Cash Flows include restricted cash of
$3 million
and
$2 million
, respectively.
Inventories —
The following table summarizes inventories by major category:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
March 31,
|
(Dollars in millions)
|
2017
|
|
2018
|
Raw materials
|
$
|
75
|
|
|
$
|
99
|
|
Work-in-process
|
54
|
|
|
63
|
|
Finished goods
|
228
|
|
|
209
|
|
Replacement parts and other supplies
|
28
|
|
|
27
|
|
Inventories
|
$
|
385
|
|
|
$
|
398
|
|
Property, plant and equipment —
Depreciation expense for the
three months
ended
March 31, 2017
and
March 31, 2018
was
$31 million
and
$26 million
, respectively. Interest costs capitalized for the
three months
ended
March 31, 2017
and
March 31, 2018
were not material. Capital expenditures unpaid as of
March 31, 2017
and
March 31, 2018
were
$3 million
and
$5 million
, respectively.
Transactions with Affiliates
—
For the
three months
ended
March 31, 2017
and
March 31, 2018
, we did not transact any material business with affiliates.
5.
DEBT
The following table summarizes debt:
|
|
|
|
|
|
|
|
|
|
|
Original
|
December 31,
|
|
March 31,
|
(Dollars in millions)
|
Maturity
|
2017
|
|
2018
|
ABL Facility
|
7/14/2021
|
$
|
65
|
|
|
$
|
118
|
|
Term Loan Facility
|
10/14/2021
|
146
|
|
|
100
|
|
Unamortized (discount) and debt issuance costs, net
|
|
(21
|
)
|
|
(15
|
)
|
Less: Current portion
|
|
(60
|
)
|
|
(18
|
)
|
Total long-term debt
|
|
$
|
130
|
|
|
$
|
185
|
|
As of
March 31, 2018
, the fair value of Verso’s total debt outstanding was
$220 million
.
During the three months ended
March 31, 2018
, we made a scheduled principal payment of
$4 million
on the Term Loan Facility (as defined below) and we elected to make an additional
$21 million
voluntary principal prepayment on the Term Loan Facility, from available liquidity including amounts under our ABL Facility (as defined below), and applied that payment against the final maturity amount due in October 2021. As a result of the excess cash flow requirement, under our Term Loan Facility, we were obligated to fund an additional principal payment of
$7 million
and
$21 million
during the three months ended March 31, 2017 and March 31, 2018, respectively.
Amounts included in interest expense (inclusive of amounts capitalized) and amounts of cash interest payments related to long-term debt for the periods presented, are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
March 31, 2017
|
|
March 31, 2018
|
Interest expense
|
$
|
8
|
|
|
$
|
6
|
|
Cash interest paid
|
8
|
|
|
5
|
|
Debt issuance cost and discount amortization
(1)
|
2
|
|
|
6
|
|
(1) Amortization of debt issuance cost and original issue discount are included in interest expense on the Unaudited Condensed Consolidated Statements of Operations.
Credit Facilities
On July 15, 2016, VPH entered into a
$375 million
asset-based revolving credit facility, or the “ABL Facility,” and a
$220 million
senior secured term loan (with loan proceeds of
$198 million
after the deduction of the original issue discount of
$22 million
), or the “Term Loan Facility,” and collectively termed the “Credit Facilities.” After the Internal Reorganization, Verso Paper became the borrower under the Credit Facilities. The amount of borrowings and letters of credit available to Verso pursuant to the ABL Facility is limited to the lesser of
$375 million
or an amount determined pursuant to a borrowing base (
$344 million
as of March 31, 2018). As of
March 31, 2018
, the outstanding balance of the ABL Facility was
$118 million
, with $
40 million
issued in letters of credit and
$186 million
available for future borrowings, and the weighted-average interest rate on outstanding borrowings was
3.42%
. As of
March 31, 2018
, the Term Loan’s interest rate was
12.77%
per annum.
6.
EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Ended
|
|
Ended
|
|
March 31, 2017
|
|
March 31, 2018
|
Net income (loss) available to common shareholders (in millions)
|
$
|
(21
|
)
|
|
$
|
(2
|
)
|
Weighted average common shares outstanding (in thousands)
|
34,391
|
|
|
34,465
|
|
Weighted average restricted shares (in thousands)
|
—
|
|
|
—
|
|
Weighted average common shares outstanding - basic (in thousands)
|
34,391
|
|
|
34,465
|
|
Dilutive shares from stock awards (in thousands)
|
—
|
|
|
—
|
|
Weighted average common shares outstanding - diluted (in thousands)
|
34,391
|
|
|
34,465
|
|
Basic income (loss) per share
|
$
|
(0.61
|
)
|
|
$
|
(0.06
|
)
|
Diluted income (loss) per share
|
$
|
(0.61
|
)
|
|
$
|
(0.06
|
)
|
As a result of the net loss from continuing operations,
0.3 million
and
1.4 million
restricted stock units as of March 31, 2017 and March 31, 2018, respectively, and
1.8 million
warrants as of March 31, 2017 and March 31, 2018 have been excluded from the calculations of diluted earnings per share as their inclusion would be anti-dilutive. No dividends were declared or paid in the periods presented.
7.
RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
The following table summarizes the components of net periodic pension cost of our pension plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
March 31, 2017
|
|
March 31, 2018
|
Service cost
|
$
|
4
|
|
|
$
|
1
|
|
Interest cost
|
16
|
|
|
15
|
|
Expected return on plan assets
|
(18
|
)
|
|
(18
|
)
|
Net periodic pension cost (income)
|
$
|
2
|
|
|
$
|
(2
|
)
|
We make contributions that are sufficient to fund our actuarially-determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act. We made contributions to the pension plans of
$6 million
in each of the
three months
ended
March 31, 2017
and
March 31, 2018
. We expect to make additional cash contributions of
$37 million
to the pension plans in the remainder of
2018
.
8.
EQUITY
Equity Awards
On February 22, 2018, Verso granted
0.2 million
service based restricted stock units to its executives and certain senior managers based on the closing market price of our Class A Common Stock on the date of grant. In addition, the compensation committee established performance criteria associated with
0.4 million
restricted stock units that were awarded in 2017 for which the performance criteria had not been established at the award date. The compensation committee also granted
0.2 million
additional performance restricted stock units on February 22, 2018. The performance awards vest at December 31, 2019 and 2020 based on a comparison of the compound annual growth rate (“CAGR”) of Verso’s stock price over a
3
year period to the CAGR of peer group companies. 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 provided that the employee is employed continuously to the vesting date. The number of shares which will ultimately vest at the vesting date ranges from
50%
to
150%
based on Verso stock performance relative to the peer group. The grant date for all performance awards was February 22, 2018, and the compensation expense associated with these awards was determined using the Monte Carlo valuation methodology. As of March 31, 2018, there was approximately
$19 million
of unrecognized compensation cost related to the
1.4 million
restricted stock units, which is expected to be recognized over the weighted average period of
2.4
years.
Time-based Restricted Stock Units
Changes to non-vested time-based restricted stock units for the three months ended March 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Weighted Average
|
|
Units
|
|
Grant Date
|
Shares (in thousands)
|
Outstanding
|
|
Fair Value
|
Non-vested at December 31, 2017
|
583
|
|
|
$
|
6.89
|
|
Granted
|
190
|
|
|
16.87
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(2
|
)
|
|
11.50
|
|
Non-vested at March 31, 2018
|
771
|
|
|
9.35
|
|
Performance-based Restricted Stock Units
Changes to non-vested performance-based restricted stock units for the three months ended March 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Weighted Average
|
|
Units
|
|
Grant Date
|
Shares (in thousands)
|
Outstanding
|
|
Fair Value
|
Non-vested at December 31, 2017
|
—
|
|
|
$
|
—
|
|
Granted
|
640
|
|
|
22.25
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Non-vested at March 31, 2018
|
640
|
|
|
22.25
|
|
Warrants
On July 15, 2016, warrants to purchase up to an aggregate of
1.8 million
shares of Class A Common Stock were issued to holders of first-lien secured debt at an initial exercise price of
$27.86
per share. As of March 31, 2018,
no
warrants have been exercised.
9.
RESTRUCTURING CHARGES
Corporate Restructuring —
In November 2016, Verso announced the closure of its Memphis office headquarters and relocation of its Corporate headquarters to Miamisburg, Ohio. The following table details the charges incurred related to the Memphis office closure as included in Restructuring charges on our Unaudited Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
|
|
Ended
|
|
Ended
|
|
Cumulative
|
(Dollars in millions)
|
March 31, 2017
|
|
March 31, 2018
|
|
Incurred
|
Severance and benefit costs
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Write-off of purchase obligations
|
—
|
|
|
—
|
|
|
2
|
|
Other costs
|
—
|
|
|
—
|
|
|
1
|
|
Total restructuring costs
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
6
|
|
The following table details the changes in our restructuring reserve liabilities related to the Memphis office headquarters closure which are included in Accrued liabilities on our Unaudited Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
March 31, 2017
|
|
March 31, 2018
|
Beginning balance of reserve
|
$
|
3
|
|
|
$
|
2
|
|
Severance and benefit costs
|
1
|
|
|
—
|
|
Severance and benefit payments
|
(2
|
)
|
|
—
|
|
Ending balance of reserve
|
$
|
2
|
|
|
$
|
2
|
|
Androscoggin/Wickliffe Capacity Reductions —
During 2015, Verso announced production capacity reductions at our Androscoggin Mill in Jay, Maine, and our Wickliffe Mill in Wickliffe, Kentucky. Together, these actions reduced our production capacity by approximately
430,000
tons of coated paper and approximately
130,000
tons of dried market pulp.
The following table details the charges incurred related primarily to the Androscoggin/Wickliffe capacity reductions as included in Restructuring charges on our Unaudited Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
|
|
Ended
|
|
Ended
|
|
Cumulative
|
(Dollars in millions)
|
March 31, 2017
|
|
March 31, 2018
|
|
Incurred
|
Severance and benefit costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Write-off of purchase obligations and commitments
|
—
|
|
|
—
|
|
|
3
|
|
Other costs
|
1
|
|
|
1
|
|
|
7
|
|
Total restructuring costs
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
15
|
|
The following table details the changes in our restructuring reserve liabilities related to the Androscoggin/Wickliffe capacity reductions which are included in Accrued liabilities on our Unaudited Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
March 31, 2017
|
|
March 31, 2018
|
Beginning balance of reserve
|
$
|
6
|
|
|
$
|
1
|
|
Other costs
|
1
|
|
|
1
|
|
Payments on other costs
|
(1
|
)
|
|
(1
|
)
|
Ending balance of reserve
|
$
|
6
|
|
|
$
|
1
|
|
In connection with the temporary idling of the No. 3 paper machine at our Androscoggin mill in the fourth quarter of 2016, we recognized
$6 million
of accelerated depreciation during the three months ended March 31, 2017, which is included in Depreciation, amortization and depletion in our Unaudited Condensed Consolidated Statement of Operations.
10.
COMMITMENTS AND CONTINGENCIES
Represented Employees —
Approximately
70%
of our hourly workforce is represented by unions. All represented employees were covered by the Master Labor Agreement 2012–2016, dated as of December 21, 2012, covering wages and benefits; certain represented mills also had local agreements covering general work rules, until the expiration of the Master Labor Agreement in December 2016. The parties are engaged in collective bargaining at the Luke Mill, Escanaba Mill, Wisconsin Rapids Mill and Stevens Point Mill and continue to work under the terms and conditions of their expired agreements.
General Litigation
—
We are involved from time to time in legal proceedings incidental to the conduct of our business. We do not believe that any liability that may result from these proceedings will have a material, adverse effect on our Unaudited Condensed Consolidated Financial Statements.
Settlement Agreement
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On March 20, 2018, we entered into a settlement agreement with Canadian producers of supercalendered paper, Port Hawkesbury Paper Limited Partnership and certain related entities, collectively, “Port Hawkesbury” and Irving Paper Limited, or “Irving”. In accordance with the terms of the settlement agreement, Verso filed with the U.S. Department of Commerce, or “Commerce,” a written request for a “no interest” changed circumstances review by
Commerce of the final countervailing duty order, or the “CVD Order,” issued by Commerce on December 10, 2015, imposing tariffs on supercalendered paper imported into the United States from Canada since August 3, 2015, such request, the “Changed Circumstances Request”. Verso included in its Changed Circumstances Request, among other things, a request that Commerce revoke the CVD Order retroactively to August 3, 2015, which, if granted, would result in refunds to Canadian producers of supercalendered paper of all countervailing duties collected on supercalendered paper imported into the United States from such producers under the CVD Order. If the Changed Circumstances Request is granted by Commerce, Port Hawkesbury and Irving have agreed in the settlement agreement to pay Verso a percentage of the duties refunded to Port Hawkesbury and Irving over time, with the total amount payable to Verso capped at
$42 million
. There can be no assurance that Commerce will grant the Changed Circumstances Request and revoke the CVD Order retroactively, or at all, and therefore no assurance that Verso will receive any or all of the settlement amount.