ITEM 1. FINANCIAL STATEMENTS
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|
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VERSO CORPORATION
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
December 31,
|
|
September 30,
|
(Dollars in millions)
|
2017
|
|
2018
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
7
|
|
|
$
|
7
|
|
Accounts receivable, net
|
208
|
|
|
255
|
|
Inventories
|
385
|
|
|
377
|
|
Prepaid expenses and other assets
|
14
|
|
|
11
|
|
Total current assets
|
614
|
|
|
650
|
|
Property, plant and equipment, net
|
1,062
|
|
|
1,026
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|
Intangibles and other assets, net
|
56
|
|
|
53
|
|
Total assets
|
$
|
1,732
|
|
|
$
|
1,729
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LIABILITIES AND EQUITY
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|
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Current liabilities:
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|
|
|
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Accounts payable
|
$
|
176
|
|
|
$
|
210
|
|
Accrued liabilities
|
129
|
|
|
122
|
|
Current maturities of long-term debt
|
60
|
|
|
—
|
|
Total current liabilities
|
365
|
|
|
332
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|
Long-term debt
|
130
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|
|
108
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|
Pension benefit obligation
|
457
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|
|
417
|
|
Other liabilities
|
34
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|
|
34
|
|
Total liabilities
|
986
|
|
|
891
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|
Commitments and contingencies (Note 11)
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Equity:
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|
|
|
|
Preferred stock -- par value $0.01 (50,000,000 shares authorized, no shares issued)
|
—
|
|
|
—
|
|
Common stock -- par value $0.01 (210,000,000 Class A shares authorized with 34,173,571 shares issued and 34,164,434 outstanding on December 31, 2017 and 34,569,917 shares issued and 34,553,376 outstanding on September 30, 2018; 40,000,000 Class B shares authorized with 291,039 shares issued and outstanding on December 31, 2017 and no shares issued and outstanding on September 30, 2018)
|
—
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|
|
—
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|
Treasury stock -- at cost (9,137 shares on December 31, 2017 and 16,541 shares on September 30, 2018)
|
—
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|
|
—
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|
Paid-in-capital (including Warrants of $10 million)
|
676
|
|
|
682
|
|
Retained earnings (deficit)
|
(62
|
)
|
|
16
|
|
Accumulated other comprehensive income
|
132
|
|
|
140
|
|
Total equity
|
746
|
|
|
838
|
|
Total liabilities and equity
|
$
|
1,732
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|
|
$
|
1,729
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|
See notes to Unaudited Condensed Consolidated Financial Statements.
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VERSO CORPORATION
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months
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|
Three Months
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|
Nine Months
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|
Nine Months
|
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Ended
|
|
Ended
|
|
Ended
|
|
Ended
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(Dollars in millions, except per share amounts)
|
September 30, 2017
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|
September 30, 2018
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|
September 30, 2017
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|
September 30, 2018
|
Net sales
|
$
|
621
|
|
|
$
|
704
|
|
|
$
|
1,822
|
|
|
$
|
1,987
|
|
Costs and expenses:
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|
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|
|
|
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|
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Cost of products sold (exclusive of depreciation and amortization)
|
554
|
|
|
580
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|
|
1,690
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|
|
1,742
|
|
Depreciation and amortization
|
27
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|
|
28
|
|
|
87
|
|
|
83
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|
Selling, general and administrative expenses
|
24
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|
|
25
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|
|
81
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|
|
78
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|
Restructuring charges
|
4
|
|
|
—
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|
|
8
|
|
|
2
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|
Other operating (income) expense
|
—
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|
|
(9
|
)
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|
—
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|
|
(7
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)
|
Operating income (loss)
|
12
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|
|
80
|
|
|
(44
|
)
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|
89
|
|
Interest expense
|
10
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|
|
15
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|
|
29
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|
|
32
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|
Other (income) expense
|
(2
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)
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|
(21
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)
|
|
(7
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)
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|
(28
|
)
|
Income (loss) before income taxes
|
4
|
|
|
86
|
|
|
(66
|
)
|
|
85
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
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Net income (loss)
|
$
|
4
|
|
|
$
|
86
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|
|
$
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(66
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)
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|
$
|
85
|
|
Income (loss) per common share:
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|
|
|
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Basic
|
$
|
0.12
|
|
|
$
|
2.49
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|
|
$
|
(1.92
|
)
|
|
$
|
2.46
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|
Diluted
|
0.12
|
|
|
2.45
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|
|
(1.92
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)
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|
2.44
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Weighted average common shares outstanding (in thousands)
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Basic
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34,456
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34,562
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|
|
34,421
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|
34,511
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Diluted
|
34,460
|
|
|
35,051
|
|
|
34,421
|
|
|
34,868
|
|
See notes to Unaudited Condensed Consolidated Financial Statements.
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VERSO CORPORATION
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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|
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|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
Net income (loss)
|
$
|
4
|
|
|
$
|
86
|
|
|
$
|
(66
|
)
|
|
$
|
85
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
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|
Defined benefit pension/other postretirement plans:
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|
|
|
|
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Pension/other postretirement liability adjustment, net
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Comprehensive income (loss)
|
$
|
4
|
|
|
$
|
86
|
|
|
$
|
(66
|
)
|
|
$
|
86
|
|
See notes to Unaudited Condensed Consolidated Financial Statements.
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|
|
|
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|
|
|
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|
|
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|
VERSO CORPORATION
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
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|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
Class B
|
|
|
|
Retained Earnings (Deficit)
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
Stockholders’
Equity (Deficit)
|
(Dollars in millions, shares in thousands)
|
Common Shares
|
Common Stock
|
Common Shares
|
Common Stock
|
Treasury Shares
|
Treasury Stock
|
Paid-in-Capital
|
Balance - December 31, 2016
|
33,367
|
|
$
|
—
|
|
1,024
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
675
|
|
$
|
(32
|
)
|
$
|
127
|
|
$
|
770
|
|
Net income (loss)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(66
|
)
|
—
|
|
(66
|
)
|
Treasury shares acquired
|
—
|
|
—
|
|
—
|
|
—
|
|
(9
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Common stock issued for restricted stock, net
|
73
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Class B stock converted to Class A stock
|
655
|
|
—
|
|
(655
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Equity award expense
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
—
|
|
—
|
|
1
|
|
Balance - September 30, 2017
|
34,095
|
|
$
|
—
|
|
369
|
|
$
|
—
|
|
(9
|
)
|
$
|
—
|
|
$
|
676
|
|
$
|
(98
|
)
|
$
|
127
|
|
$
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
34,173
|
|
$
|
—
|
|
291
|
|
$
|
—
|
|
(9
|
)
|
$
|
—
|
|
$
|
676
|
|
$
|
(62
|
)
|
$
|
132
|
|
$
|
746
|
|
Net income (loss)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
85
|
|
—
|
|
85
|
|
Other comprehensive income (loss), net
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
1
|
|
Treasury shares acquired
|
—
|
|
—
|
|
—
|
|
—
|
|
(7
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Common stock issued for restricted stock
|
106
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Class B stock converted to Class A stock
|
291
|
|
—
|
|
(291
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Equity award expense
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6
|
|
—
|
|
—
|
|
6
|
|
Reclassification of stranded tax effects (ASU 2018-02)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(7
|
)
|
7
|
|
—
|
|
Balance - September 30, 2018
|
34,570
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
(16
|
)
|
$
|
—
|
|
$
|
682
|
|
$
|
16
|
|
$
|
140
|
|
$
|
838
|
|
See notes to Unaudited Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
VERSO CORPORATION
|
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
Cash Flows From Operating Activities:
|
|
|
|
Net income (loss)
|
$
|
(66
|
)
|
|
$
|
85
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
Depreciation and amortization
|
87
|
|
|
83
|
|
Net periodic pension cost (income)
|
5
|
|
|
(5
|
)
|
Pension plan contributions
|
(25
|
)
|
|
(35
|
)
|
Amortization of debt issuance cost and discount
|
6
|
|
|
19
|
|
Equity award expense
|
1
|
|
|
6
|
|
(Gain) loss on sale or disposal of assets
|
1
|
|
|
(8
|
)
|
Prepayment premium on Term Loan Facility
|
—
|
|
|
1
|
|
Changes in assets and liabilities:
|
|
|
|
Accounts receivable, net
|
(21
|
)
|
|
(44
|
)
|
Inventories
|
46
|
|
|
8
|
|
Prepaid expenses and other assets
|
5
|
|
|
3
|
|
Accounts payable
|
54
|
|
|
39
|
|
Accrued and other liabilities
|
(29
|
)
|
|
(6
|
)
|
Net cash provided by (used in) operating activities
|
64
|
|
|
146
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
Proceeds from sale of assets
|
—
|
|
|
17
|
|
Capital expenditures
|
(29
|
)
|
|
(61
|
)
|
Grant proceeds from Maine Technology Institute
|
—
|
|
|
1
|
|
Net cash provided by (used in) investing activities
|
(29
|
)
|
|
(43
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
Borrowings on ABL Facility
|
156
|
|
|
379
|
|
Payments on ABL Facility
|
(151
|
)
|
|
(335
|
)
|
Payments on Term Loan Facility
|
(40
|
)
|
|
(146
|
)
|
Prepayment premium on Term Loan Facility
|
—
|
|
|
(1
|
)
|
Net cash provided by (used in) financing activities
|
(35
|
)
|
|
(103
|
)
|
Change in Cash and cash equivalents and restricted cash
|
—
|
|
|
—
|
|
Cash and cash equivalents and restricted cash at beginning of period
|
9
|
|
|
9
|
|
Cash and cash equivalents and restricted cash at end of period
|
$
|
9
|
|
|
$
|
9
|
|
See notes to Unaudited Condensed Consolidated Financial Statements.
VERSO CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF BUSINESS AND BASIS OF PRESENTATION
Nature of Business —
Verso operates in the pulp and paper market segments. However, Verso determined that the operating income (loss) of the pulp segment is immaterial for disclosure purposes. Verso’s core business platform is as a producer of coated freesheet, specialty and coated groundwood papers. Verso’s 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. Verso’s market kraft pulp is used to manufacture printing, writing and specialty paper grades, tissue, containerboard, bag and other products. Verso’s assets are utilized across segments in an integrated mill system and are not identified by segment or reviewed by management on a segment basis. Verso operates 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
September 30, 2018
and for the three months and
nine months
ended
September 30, 2017
and
September 30, 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 Verso’s opinion, 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
.
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. Verso early adopted this guidance in the first quarter of 2018 and recorded an adjustment from Accumulated other comprehensive income to Retained earnings (deficit) of
$7 million
associated with pension obligations during the three months ended March 31, 2018. Verso’s 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, Verso 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. Verso elected to apply the practical expedient, which allows for the reclassification of 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 the Unaudited Condensed Consolidated Statement of Operations for the
three months
and
nine months
ended
September 30, 2017
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
(Dollars in millions)
|
Previously reported
|
|
As revised
|
|
Effect of change higher/(lower)
|
Cost of products sold (exclusive of depreciation and amortization)
|
$
|
552
|
|
|
$
|
554
|
|
|
$
|
2
|
|
Selling, general and administrative expenses
|
24
|
|
|
24
|
|
|
—
|
|
Other (income) expense
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
(Dollars in millions)
|
Previously reported
|
|
As revised
|
|
Effect of change higher/(lower)
|
Cost of products sold (exclusive of depreciation and amortization)
|
$
|
1,683
|
|
|
$
|
1,690
|
|
|
$
|
7
|
|
Selling, general and administrative expenses
|
81
|
|
|
81
|
|
|
—
|
|
Other (income) expense
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
In connection with the adoption of ASU 2017-07, Verso 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. This guidance did not have a material impact on the Unaudited Condensed Consolidated Financial Statements.
ASC Topic 606, Revenue from Contracts with Customers
. On January 1, 2018, Verso 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 at the date of initial application using the modified retrospective method. The core principle of the new revenue standard 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 a customer upon receipt and acknowledgment of a customer purchase order. After evaluating open contracts at January 1, 2018, Verso determined that there was no cumulative effect on the 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. Adoption of this standard did not have a material impact on sales or operating results. See Note 3 for additional related revenue disclosures.
Verso also adopted the following standards in 2018, neither of which had a material impact to the 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. Verso plans to adopt this guidance on January 1, 2019. The guidance requires the use of a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11 which provides a practical expedient to adopt the standard
with a cumulative effect at the adoption date without restating prior periods. Verso plans to adopt the practical expedient and expects to recognize a liability and corresponding asset associated with in-scope leases. Verso’s implementation team is reviewing the lease population, but is still in the process of determining those amounts to be recognized as liabilities and right of use assets and the changes in processes required to account for leasing activity on an ongoing basis.
ASC Topic 350, Intangible Assets - Goodwill & Other
. In August 2018, the FASB issued ASU 2018-15
Customer’s Accounting for Implementation Costs in a Cloud Computing Arrangement that is a Service Contract,
which aligns the accounting for such costs with guidance on capitalizing costs associated with developing or obtaining internal use software. The guidance is effective for fiscal years beginning after December 15, 2019. Verso is currently evaluating the impact of this guidance.
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 Verso’s mills or warehouses. Revenue is measured as the amount of consideration Verso expects to receive in exchange for transferring goods reflecting any variable consideration, the most significant of which is the volume rebate program. Sales taxes collected concurrent with revenue are excluded from revenues. Incidental costs immaterial to the context of the contract are expensed as incurred. Verso does not have any significant payment terms as payment is received shortly after the point of sale.
With respect to variable consideration, the amount of consideration expected to be received and revenue recognized includes the most likely amount of credits based on historical experience. Revenues are adjusted at the earlier date of when the most likely amount of consideration expected to be received changes or the consideration becomes fixed. Verso recognizes 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 the revenues disaggregated by product included on the Unaudited Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2018
|
|
September 30, 2018
|
Printing paper
|
$
|
393
|
|
|
$
|
1,112
|
|
Coated groundwood
|
51
|
|
|
158
|
|
Specialty paper
|
173
|
|
|
490
|
|
Pulp
|
39
|
|
|
95
|
|
Supercalendared paper
|
48
|
|
|
132
|
|
Total Net sales
|
$
|
704
|
|
|
$
|
1,987
|
|
The following table presents the revenue disaggregated by sales channel included on the Unaudited Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2018
|
|
September 30, 2018
|
Direct sales
|
$
|
399
|
|
|
$
|
1,115
|
|
Merchant sales
|
248
|
|
|
735
|
|
Broker sales
|
57
|
|
|
137
|
|
Total Net sales
|
$
|
704
|
|
|
$
|
1,987
|
|
4.
SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Restricted Cash —
As of December 31, 2017 and
September 30, 2018
,
$2 million
of restricted cash was included in Intangibles and other assets, net on the Unaudited Condensed Consolidated Balance Sheets primarily 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. As of
September 30, 2017
and
September 30, 2018
, Cash and cash equivalents and restricted cash on 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,
|
|
September 30,
|
(Dollars in millions)
|
2017
|
|
2018
|
Raw materials
|
$
|
75
|
|
|
$
|
91
|
|
Work-in-process
|
54
|
|
|
57
|
|
Finished goods
|
228
|
|
|
201
|
|
Replacement parts and other supplies
|
28
|
|
|
28
|
|
Inventories
|
$
|
385
|
|
|
$
|
377
|
|
Property, plant and equipment —
Depreciation expense for the
three months
and
nine months
ended
September 30, 2017
was
$25 million
and
$82 million
, respectively. Depreciation expense for the
three months
and
nine months
ended
September 30, 2018
was
$26 million
and
$78 million
, respectively. Interest costs capitalized for the
three months
and
nine months
ended
September 30, 2017
were each
zero
. Interest cost capitalized for the
three months
and
nine months
ended
September 30, 2018
were
zero
and
$1 million
, respectively.
Property, plant and equipment includes capital expenditures unpaid as of
September 30, 2017
and
September 30, 2018
of
$3 million
. As of
September 30, 2018
, Property, plant and equipment was reduced by
$4 million
as a result of meeting all pertinent milestones of the Maine Technology Asset Fund 2.0 challenge grant, covering a portion of the capital costs associated with the upgrade of the previously shuttered No. 3 paper machine and pulp line at the Androscoggin Mill in Jay, Maine. Verso received
$1 million
of the grant funds in July 2018 and an additional
$1 million
in October 2018. The remaining
$2 million
of the grant funds are scheduled to be received in January 2019. As of September 30, 2018,
$3 million
related to outstanding grant funds is recorded in Accounts receivable on the Unaudited Condensed Consolidated Balance Sheet.
5.
ACQUISITIONS AND DISPOSITIONS
Sale of Wickliffe Mill
— On August 16, 2018, Verso Paper entered into a purchase agreement with Global Win Wickliffe LLC (“Purchaser”), pursuant to which Verso Paper agreed to sell, and Purchaser agreed to purchase, one of Verso’s subsidiaries, Verso Wickliffe LLC (“Verso Wickliffe”), for a purchase price of
$16 million
in cash. Verso Wickliffe owned substantially all of the assets that comprised Verso’s Wickliffe, Kentucky paper mill (the “Wickliffe Mill”) and related operations. Verso previously announced its decision to permanently close the Wickliffe Mill in April 2016. The sale closed on September 5, 2018, and resulted in a gain of
$9 million
, included in Other operating (income) loss on the Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2018.
6.
DEBT
The following table summarizes debt:
|
|
|
|
|
|
|
|
|
|
|
Original
|
December 31,
|
|
September 30,
|
(Dollars in millions)
|
Maturity
|
2017
|
|
2018
|
ABL Facility
|
7/14/2021
|
$
|
65
|
|
|
$
|
110
|
|
Term Loan Facility
|
10/14/2021
|
146
|
|
|
—
|
|
Unamortized (discount) and debt issuance costs, net
|
|
(21
|
)
|
|
(2
|
)
|
Less: Current portion
|
|
(60
|
)
|
|
—
|
|
Total long-term debt
|
|
$
|
130
|
|
|
$
|
108
|
|
As of
September 30, 2018
, the fair value of Verso’s total debt outstanding was
$110 million
.
During the nine months ended
September 30, 2018
, Verso made scheduled principal payments totaling
$9 million
on the Term Loan Facility (as defined below). As a result of the excess cash flow requirement in the Term Loan Facility, Verso was obligated to fund additional principal payments during the nine months ended September 30, 2018 of
$21 million
. Verso also elected to make additional voluntary principal prepayments on the Term Loan Facility totaling
$116 million
during the nine months ended September 30, 2018 from available liquidity, including amounts borrowed under the ABL Facility (as defined below). The mandatory and voluntary principal prepayments resulted in the full pay off of the Term Loan Facility on September 10, 2018.
During the nine months ended
September 30, 2017
, scheduled principal payments totaling
$13 million
were made on the Term Loan Facility. As a result of the excess cash flow requirement in the Term Loan Facility, Verso was obligated to fund additional principal payments during the nine months ended
September 30, 2017
of
$7 million
. Verso also elected to make additional voluntary principal prepayments totaling
$20 million
during the nine months ended
September 30, 2017
from available liquidity, including amounts borrowed under the ABL Facility.
Amounts included in interest expense and amounts of cash interest payments related to long-term debt for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
Interest expense
(1)
|
$
|
7
|
|
|
$
|
3
|
|
|
$
|
23
|
|
|
$
|
14
|
|
Cash interest paid
|
8
|
|
|
4
|
|
|
23
|
|
|
15
|
|
Debt issuance cost and discount amortization
(2)
|
3
|
|
|
12
|
|
|
6
|
|
|
19
|
|
(1) Represents interest expense incurred on the Credit Facilities (as defined below), exclusive of amortization of debt issuance cost and discount and inclusive of amounts capitalized. See Note 4 for additional information on capitalized interest costs.
(2) Amortization of debt issuance cost and original issue discount, including the accelerated amortization associated with the early extinguishment of the Term Loan Facility, are included in Interest expense on the Unaudited Condensed Consolidated Statements of Operations and in Amortization of debt issuance cost and discount on the Unaudited Condensed Consolidated Statements of Cash Flows.
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 (
$349 million
as of
September 30, 2018
). As of
September 30, 2018
, the outstanding balance of the ABL Facility was
$110 million
, with $
38 million
issued in letters of credit and
$201 million
available for future borrowings, and the weighted-average interest rate on outstanding borrowings was
4.11%
.
7.
EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
Net income (loss) available to common shareholders (in millions)
|
$
|
4
|
|
|
$
|
86
|
|
|
$
|
(66
|
)
|
|
$
|
85
|
|
Weighted average common shares outstanding - basic (in thousands)
|
34,456
|
|
|
34,562
|
|
|
34,421
|
|
|
34,511
|
|
Dilutive shares from stock awards (in thousands)
|
4
|
|
|
489
|
|
|
—
|
|
|
357
|
|
Weighted average common shares outstanding - diluted (in thousands)
|
34,460
|
|
|
35,051
|
|
|
34,421
|
|
|
34,868
|
|
Basic income (loss) per share
|
$
|
0.12
|
|
|
$
|
2.49
|
|
|
$
|
(1.92
|
)
|
|
$
|
2.46
|
|
Diluted income (loss) per share
|
$
|
0.12
|
|
|
$
|
2.45
|
|
|
$
|
(1.92
|
)
|
|
$
|
2.44
|
|
As a result of the net loss from continuing operations for the nine months ended September 30, 2017,
0.3 million
restricted stock units as of
September 30, 2017
were excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. Verso has
1.8 million
warrants outstanding at an exercise price of
$27.86
(see Note 9 for more information on warrants). 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, 2017 and 2018,
1.8 million
warrants as of
September 30, 2017
and
September 30, 2018
were 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.
8.
RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
The following table summarizes the components of net periodic pension cost of the pension plans for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
Service cost
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
12
|
|
|
$
|
4
|
|
Interest cost
|
17
|
|
|
15
|
|
|
49
|
|
|
45
|
|
Expected return on plan assets
|
(19
|
)
|
|
(18
|
)
|
|
(56
|
)
|
|
(54
|
)
|
Net periodic pension cost (income)
|
$
|
2
|
|
|
$
|
(2
|
)
|
|
$
|
5
|
|
|
$
|
(5
|
)
|
Verso makes contributions to fund retirement benefits on an actuarially-determined basis, generally equal to the minimum amounts required by the Employee Retirement Income Security Act. Verso made contributions to the pension plans of
$13 million
and
$25 million
in the
three months
and
nine months
ended
September 30, 2017
, respectively, and
$21 million
and
$35 million
in the
three months
and
nine months
ended
September 30, 2018
, respectively. Verso expects to make additional cash contributions of
$8 million
to the pension plans in the remainder of
2018
.
9.
EQUITY
Equity Awards
On February 22, 2018, Verso granted
0.2 million
service based restricted stock units to its executives and certain senior managers. 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
September 30, 2018
, there was approximately
$15 million
of unrecognized compensation cost related to the
1.3 million
non-vested restricted stock units, which is expected to be recognized over the weighted average period of
1.9
years.
Time-based Restricted Stock Units
Changes to non-vested time-based restricted stock units for the
nine months
ended
September 30, 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
|
(106
|
)
|
|
7.42
|
|
Forfeited
|
(3
|
)
|
|
14.08
|
|
Non-vested at September 30, 2018
|
664
|
|
|
9.64
|
|
Performance-based Restricted Stock Units
Changes to non-vested performance-based restricted stock units for the
nine months
ended
September 30, 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
|
(2
|
)
|
|
18.22
|
|
Non-vested at September 30, 2018
|
638
|
|
|
22.26
|
|
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 exercise price of
$27.86
per share. As of
September 30, 2018
,
no
warrants have been exercised.
10.
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 the Unaudited Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Nine Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Cumulative
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
|
Incurred
|
Severance and benefit costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Write-off of purchase obligations
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Other costs
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total restructuring costs
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
6
|
|
The following table details the changes in the restructuring reserve liabilities related to the Memphis office headquarters closure which are included in Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
Beginning balance of reserve
|
$
|
3
|
|
|
$
|
2
|
|
Severance and benefit costs
|
1
|
|
|
—
|
|
Severance and benefit payments
|
(4
|
)
|
|
—
|
|
Purchase obligations
|
2
|
|
|
—
|
|
Other costs
|
1
|
|
|
—
|
|
Payments on other costs
|
(1
|
)
|
|
—
|
|
Ending balance of reserve
|
$
|
2
|
|
|
$
|
2
|
|
Androscoggin/Wickliffe Capacity Reductions —
During 2015, Verso announced production capacity reductions at its Androscoggin Mill in Jay, Maine, and its Wickliffe Mill in Wickliffe, Kentucky. Together, these actions reduced Verso’s annual 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 the Unaudited Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Nine Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Cumulative
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
|
Incurred
|
Severance and benefit costs
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Write-off of purchase obligations and commitments
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
3
|
|
Other costs
|
2
|
|
|
—
|
|
|
3
|
|
|
2
|
|
|
8
|
|
Total restructuring costs
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
16
|
|
The following table details the changes in the restructuring reserve liabilities related to the Androscoggin/Wickliffe capacity reductions which are included in Accrued liabilities on the Unaudited Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
Beginning balance of reserve
|
$
|
6
|
|
|
$
|
1
|
|
Severance and benefit payments
|
(5
|
)
|
|
(1
|
)
|
Purchase obligations
|
1
|
|
|
—
|
|
Payments on purchase obligations
|
(1
|
)
|
|
—
|
|
Other costs
|
3
|
|
|
2
|
|
Payments on other costs
|
(3
|
)
|
|
(2
|
)
|
Ending balance of reserve
|
$
|
1
|
|
|
$
|
—
|
|
In connection with the temporary idling of the No. 3 paper machine at the Androscoggin Mill in the fourth quarter of 2016, Verso recognized
$6 million
of accelerated depreciation during the three months ended March 31, 2017, which is included in Depreciation and amortization on the Unaudited Condensed Consolidated Statement of Operations. In September 2018, the Wickliffe Mill was sold. See Note 5 for additional information related to the sale.
11.
COMMITMENTS AND CONTINGENCIES
Represented Employees —
Approximately
70%
of Verso’s 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
—
From time to time, Verso is involved in legal proceedings incidental to the conduct of the business. Management does not believe that any liability that may result from these proceedings will have a material, adverse effect on the Unaudited Condensed Consolidated Financial Statements.
Settlement Agreement
—
On March 20, 2018, Verso entered into a settlement agreement, or “the 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 is referred to as the “Changed Circumstances Request”. Included in the Changed Circumstances Request, among other things, was 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.
On July 5, 2018, Commerce granted the request and revoked the countervailing duties retroactively to August 3, 2015, the date the tariffs were originally imposed, which will result in a refund to Canadian producers of supercalendered paper of the countervailing duties previously collected on supercalendered paper imported into the United States from such producers. Pursuant to the Settlement Agreement, Irving and Port Hawkesbury agreed to pay Verso a percentage, totaling up to
$42 million
, of the duties refunded to such parties over time. During the three months ended
September 30, 2018
,
$20 million
in settlement payments were received by Verso and are included in Other (income) expense on the Unaudited Condensed Consolidated Statements of Operations. See Note 12 for additional information.
12. SUBSEQUENT EVENT
In October 2018, we received the remaining
$22 million
of payments in connection with the Settlement Agreement. See Note 11 for additional information.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are the leading North American producer of coated papers, which are used primarily in commercial print, magazines, catalogs, high-end advertising brochures and annual reports, among other media and marketing publications.
We produce a wide range of products, ranging from coated freesheet and coated groundwood, to specialty papers, to inkjet and digital paper, supercalendered papers and uncoated freesheet.
We also produce and sell both unbleached and bleached market kraft pulp, which is used to manufacture printing, writing and specialty paper grades, tissue, containerboard, bag and other products.
Headquartered in Miamisburg, Ohio, Verso operates
seven
mills located in Maine, Maryland, Michigan, Minnesota and Wisconsin with a total annual production capacity of approximately
2,870,000
tons of paper.
Upgrade/Restart Paper Machine at Androscoggin Mill
During the first quarter of 2018, we announced plans to upgrade the previously shuttered No. 3 paper machine and pulp line at our Androscoggin Mill in Jay, Maine, enabling this equipment to restart for the manufacture of packaging products. It began production in July 2018. This project created approximately 120 full-time jobs at the Androscoggin Mill and will increase annual paper production capacity by approximately 200,000 tons. The estimated total capital cost of the project is $19 million, $4 million of which is being reimbursed from the Maine Technology Asset Fund 2.0 challenge grant administered by the Maine Technology Institute. Funds from the grant become available as certain milestones in the project are met. As of September 30, 2018, all pertinent milestones have been met and as a result $4 million was recognized as a reduction of Property, plant and equipment. We received $1 million of the funds in July 2018 and an additional $1 million in October 2018. The remaining $2 million of the funds are scheduled to be received in January 2019. As of September 30, 2018, $3 million in funds outstanding are recorded in Accounts receivable. Capital expenditures incurred for the nine months ended
September 30, 2018
, include the $17 million in capital cost related to the upgrade of the No. 3 paper machine and pulp line.
Settlement Agreement
On March 20, 2018, we entered into a settlement agreement, or “the 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, we 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. We refer to this request as the “Changed Circumstances Request”. We included in our 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.
On July 5, 2018, Commerce granted our request and revoked the countervailing duties retroactively to August 3, 2015, the date the tariffs were originally imposed, which will result in a refund to Canadian producers of supercalendered paper of the countervailing duties previously collected on supercalendered paper imported into the United States from such producers. Pursuant to the Settlement Agreement, Irving and Port Hawkesbury agreed to pay us a percentage, totaling up to $42 million, of the duties refunded to such parties over time. During the three months ended
September 30, 2018
, we received
$20 million
in settlement payments which are included in Other (income) expense on our Unaudited Condensed Consolidated Statements of Operations. Subsequent to September 30, 2018, we received the remaining $22 million of payments in connection with the Settlement Agreement.
Sale of Wickliffe Mill
On August 16, 2018, Verso Paper entered into a purchase agreement with Global Win Wickliffe LLC, pursuant to which Verso Paper agreed to sell one of Verso’s subsidiaries, Verso Wickliffe LLC (“Verso Wickliffe”) for a purchase price of
$16 million
in cash. Verso Wickliffe owned substantially all of the assets that comprised the Wickliffe Mill and related operations. We previously announced our decision to permanently close the Wickliffe Mill in April 2016. The sale closed on September 5, 2018, and resulted in a gain of
$9 million
, included in Other operating (income) loss on the Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2018.
Results of Operations
The following tables set forth the historical results of operations of Verso for the periods indicated below. The following discussion of our financial condition and results of operations should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and notes thereto included elsewhere in this quarterly report.
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
|
|
Ended
|
|
Ended
|
|
Three Month
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
$ Change
|
Net sales
|
$
|
621
|
|
|
$
|
704
|
|
|
$
|
83
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of products sold (exclusive of depreciation and amortization)
|
554
|
|
|
580
|
|
|
26
|
|
Depreciation and amortization
|
27
|
|
|
28
|
|
|
1
|
|
Selling, general and administrative expenses
|
24
|
|
|
25
|
|
|
1
|
|
Restructuring charges
|
4
|
|
|
—
|
|
|
(4
|
)
|
Other operating (income) expense
|
—
|
|
|
(9
|
)
|
|
(9
|
)
|
Operating income (loss)
|
12
|
|
|
80
|
|
|
68
|
|
Interest expense
|
10
|
|
|
15
|
|
|
5
|
|
Other (income) expense
|
(2
|
)
|
|
(21
|
)
|
|
(19
|
)
|
Income (loss) before income taxes
|
4
|
|
|
86
|
|
|
82
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss)
|
$
|
4
|
|
|
$
|
86
|
|
|
$
|
82
|
|
Net sales.
Net sales for the three months ended
September 30, 2018
increased by
$83 million
, or
13%
, compared to the three months ended
September 30, 2017
. Average price increased from
$830
per ton during the three months ended
September 30, 2017
to
$934
per ton for the same period of the current year, resulting in a
$78 million
increase in revenue based on a weighted average price across all product lines. The increase in average price is primarily attributable to improved product mix including increased specialty sales, driven by continued economic growth and evolution of e-commerce markets, and price increases across all product lines. Specialty paper price increases are being driven by inflationary costs and higher pulp prices. Volume was up from
748 thousand
tons during the three months ended September 30, 2017, to
754 thousand
tons during the same period of the current year, resulting in $5 million of increased revenue based on a weighted average price across all product lines. Volume improvement was driven primarily by the increased sales of our specialty products, partially offset by a reduction in external pulp sales due to internal needs.
Cost of sales.
Cost of products sold, excluding depreciation and amortization expenses, increased
$26 million
, or
5%
, in the three months ended
September 30, 2018
, compared to the three months ended
September 30, 2017
. Our gross margin, excluding depreciation and amortization expenses, was
17.6%
for the three months ended
September 30, 2018
, compared to
10.8%
for the three months ended
September 30, 2017
, reflecting an incremental increase of
$57 million
in gross margin. Gross margin for the three months ended
September 30, 2018
was impacted favorably by higher average pricing and improved product mix, reduced downtime, lower major maintenance costs and reduction of pension costs, partially offset by reliability issues at our Luke Mill, increased freight expense and inflation of chemical, energy and fiber costs.
Selling, general and administrative expenses
. Selling, general and administrative expenses for the three months ended
September 30, 2018
increased
$1 million
compared to the same period of the prior year primarily attributable to costs incurred during the three months ended
September 30, 2018
associated with an increase in cash incentive expense and non-cash equity award expense, partially offset by cost reduction initiatives implemented across the Company. As a percentage of sales, Selling, general and administrative expenses were
3.6%
for the three months ended
September 30, 2018
and
3.9%
for the three months ended
September 30, 2017
.
Other operating (income) expense.
Other operating (income) expense for the three months ended
September 30, 2018
includes a
$9 million
gain on the sale of our Wickliffe Mill.
Interest expense.
Interest expense for the three months ended
September 30, 2018
increased
$5 million
, or
50%
, from the three months ended
September 30, 2017
. Interest expense for the three months ended
September 30, 2018
and
September 30, 2017
includes $11 million and $1 million, respectively, in accelerated amortization of debt issuance cost and discount associated with the voluntary principal prepayments on our Term Loan Facility. This increase in interest expense was partially offset by the reduction in amounts outstanding under the Term Loan Facility.
Other (income) expense.
Other (income) expense for the three months ended
September 30, 2018
includes
$20 million
of income related to the Settlement Agreement, partially offset by $1 million in prepayment premium expense on the Term Loan Facility. Additionally, the three months ended
September 30, 2018
and
September 30, 2017
includes income of $3 million and $2 million, respectively, associated with the non-operating components of net periodic pension cost (income) in connection with the adoption of ASU 2017-07 (see Note 2 to our Unaudited Condensed Consolidated Financial Statements included elsewhere in this report).
Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
|
|
Ended
|
|
Ended
|
|
Nine Month
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
$ Change
|
Net sales
|
$
|
1,822
|
|
|
$
|
1,987
|
|
|
$
|
165
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of products sold (exclusive of depreciation and amortization)
|
1,690
|
|
|
1,742
|
|
|
52
|
|
Depreciation and amortization
|
87
|
|
|
83
|
|
|
(4
|
)
|
Selling, general and administrative expenses
|
81
|
|
|
78
|
|
|
(3
|
)
|
Restructuring charges
|
8
|
|
|
2
|
|
|
(6
|
)
|
Other operating (income) expense
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Operating income (loss)
|
(44
|
)
|
|
89
|
|
|
133
|
|
Interest expense
|
29
|
|
|
32
|
|
|
3
|
|
Other (income) expense
|
(7
|
)
|
|
(28
|
)
|
|
(21
|
)
|
Income (loss) before income taxes
|
(66
|
)
|
|
85
|
|
|
151
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
Net income (loss)
|
$
|
(66
|
)
|
|
$
|
85
|
|
|
$
|
151
|
|
Net sales.
Net sales for the
nine months
ended
September 30, 2018
, increased by
$165 million
, or
9%
, compared to the
nine months
ended
September 30, 2017
. Average price increased from
$824
per ton during the
nine months
ended
September 30, 2017
to
$911
per ton for the same period of the current year, resulting in a
$188 million
increase in revenue based on a weighted average price across all product lines. The increase in average price is primarily attributable to improved product mix including increased specialty sales and price increases across all product lines. Volume was down from
2,210 thousand
tons during the
nine months
ended
September 30, 2017
, to
2,182 thousand
tons during the same period of the current year, resulting in
$23 million
of
reduced
revenue based on a weighted average price across all product lines. Volume decline was driven primarily by declining graphic paper sales and a reduction in external pulp sales due to internal needs, partially offset by increased sales of our specialty products.
Cost of sales.
Cost of products sold, excluding depreciation and amortization expenses, increased
$52 million
, or
3%
, in the
nine months
ended
September 30, 2018
, compared to the
nine months
ended
September 30, 2017
. Our gross margin, excluding depreciation and amortization expenses, was
12.3%
for the
nine months
ended
September 30, 2018
, compared to
7.2%
for the
nine months
ended
September 30, 2017
, reflecting an incremental increase of
$113 million
in gross margin. Gross margin for the
nine months
ended
September 30, 2018
was impacted favorably by average pricing and improved product mix, reduced downtime and reduction of pension costs, partially offset by higher planned major maintenance costs, operational performance issues, increased freight expense and inflation of chemical, energy and fiber costs.
Depreciation and amortization
. Depreciation and amortization expenses for the
nine months
ended
September 30, 2018
decreased
$4 million
from the
nine months
ended
September 30, 2017
. The reduction in depreciation and amortization is attributable to the capacity reductions at our Androscoggin Mill, in which $6 million of accelerated depreciation was recognized in the first quarter of 2017 in connection with the temporary idling of the No. 3 paper machine.
Selling, general and administrative expenses
. Selling, general and administrative expenses for the
nine months
ended
September 30, 2018
decreased
$3 million
, or
4%
, compared to the same period of the prior year, primarily attributable to cost reduction initiatives implemented across the Company, partially offset by higher costs associated with the strategic alternatives initiative and non-cash equity award expense. As a percentage of sales, Selling, general and administrative expenses were
3.9%
for the
nine months
ended
September 30, 2018
and
4.4%
for the
nine months
ended
September 30, 2017
.
Other operating (income) expense.
Other operating (income) expense for the nine months ended
September 30, 2018
includes a
$9 million
gain on the sale of the Wickliffe Mill, partially offset by fees associated with our prior Chapter 11 cases.
Interest expense.
Interest expense for the
nine months
ended
September 30, 2018
increased
$3 million
, or
10%
, compared to the
nine months
ended
September 30, 2017
. Interest expense for the nine months ended
September 30, 2018
and
September 30, 2017
includes $15 million and $1 million, respectively, in accelerated amortization of debt issuance cost and discount associated with the voluntary principal prepayments and excess cash flow payments on our Term Loan Facility. This increase in interest expense was partially offset by the reduction in amounts outstanding under the Term Loan Facility.
Other (income) expense.
Other (income) expense for the nine months ended
September 30, 2018
includes
$20 million
of income related to the Settlement Agreement, partially offset by $1 million in prepayment premium expense on the Term Loan Facility. Additionally, the nine months ended
September 30, 2018
and
September 30, 2017
include income of $9 million and $7 million, respectively, associated with the non-operating components of net periodic pension cost (income) in connection with the adoption of ASU 2017-07 (see Note 2 to our Unaudited Condensed Consolidated Financial Statements included elsewhere in this report).
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
EBITDA consists of earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA reflects adjustments to EBITDA to eliminate the impact of certain items that we do not consider to be indicative of our performance. We use EBITDA and Adjusted EBITDA as a way of evaluating our performance relative to that of our peers and to assess compliance with our credit facilities. We believe that EBITDA and Adjusted EBITDA are non-GAAP operating performance measures commonly used in our industry that provide investors and analysts with measures of ongoing operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies.
We believe that the supplemental adjustments applied in calculating Adjusted EBITDA are reasonable and appropriate to provide additional information to investors.
Because EBITDA and Adjusted EBITDA are not measurements determined in accordance with GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. You should consider our EBITDA and Adjusted EBITDA in addition to, and not as a substitute for, or superior to, our operating or net income (loss) or cash flows from operating activities, which are determined in accordance with GAAP.
The following table reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
Nine Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
|
September 30, 2017
|
|
September 30, 2018
|
Net income (loss)
|
$
|
4
|
|
|
$
|
86
|
|
|
$
|
(66
|
)
|
|
$
|
85
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest expense
|
10
|
|
|
15
|
|
|
29
|
|
|
32
|
|
Depreciation and amortization
|
27
|
|
|
28
|
|
|
87
|
|
|
83
|
|
EBITDA
|
$
|
41
|
|
|
$
|
129
|
|
|
$
|
50
|
|
|
$
|
200
|
|
Adjustments to EBITDA:
|
|
|
|
|
|
|
|
|
Restructuring charges
(1)
|
4
|
|
|
—
|
|
|
8
|
|
|
2
|
|
|
Non-cash equity award compensation
(2)
|
—
|
|
|
2
|
|
|
1
|
|
|
6
|
|
|
Androscoggin PM No. 3 startup costs
(3)
|
—
|
|
|
3
|
|
|
—
|
|
|
10
|
|
|
Countervailing duty settlement
(4)
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
(20
|
)
|
|
(Gain) loss on sale or disposal of assets
(5)
|
—
|
|
|
(8
|
)
|
|
1
|
|
|
(8
|
)
|
|
Post-reorganization
(6)
|
1
|
|
|
1
|
|
|
1
|
|
|
3
|
|
|
Strategic initiatives
(7)
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
Other severance costs
(8)
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
Other items, net
(9)
|
1
|
|
|
1
|
|
|
3
|
|
|
2
|
|
Adjusted EBITDA
|
$
|
47
|
|
|
$
|
108
|
|
|
$
|
69
|
|
|
$
|
200
|
|
(1) Charges are primarily associated with the closure and relocation of the Memphis office headquarters and closure of the Wickliffe Mill.
(2) Amortization of non-cash incentive compensation.
(3) Costs incurred in connection with the upgrade of previously shuttered No. 3 paper machine and pulp line at the Androscoggin Mill.
(4) Countervailing duty settlement gains pursuant to the Settlement Agreement.
(5) Realized (gain) loss on the sale or disposal of assets, including a $9 million gain on the sale of the Wickliffe Mill in September 2018.
(6) Fees associated with our prior Chapter 11 cases.
(7) Professional fees and other charges associated with the strategic alternatives initiative.
(8) Severance and related benefit costs not associated with restructuring activities.
(9) Costs incurred in 2017 in connection with the re-engineering of information systems, costs in 2017 associated with the temporary idling of the No. 3 paper machine at the Androscoggin Mill and other miscellaneous non-recurring adjustments in 2017 and 2018.
Liquidity and Capital Resources
During the three months ended September 30, 2018, we received $20 million in settlement payments related to the Settlement Agreement and subsequent to September 30, 2018, we received the remaining $22 million of payments in connection with the Settlement Agreement.
As of
September 30, 2018
, the outstanding balance of the ABL Facility was
$110 million
, with
$38 million
in letters of credit issued, and
$201 million
available for future borrowings.
During the nine months ended September 30, 2018, we made scheduled principal payments totaling $9 million on the Term Loan Facility. As a result of the excess cash flow requirement in our Term Loan Facility, we were obligated to fund additional principal payments during the nine months ended September 30, 2018 of $21 million. We also elected to make additional voluntary principal prepayments totaling $116 million during the nine months ended September 30, 2018 from available liquidity, including amounts borrowed under our ABL Facility which resulted in the full pay off of the Term Loan Facility on September 10, 2018.
During the nine months ended September 30, 2017, we made scheduled principal payments totaling $13 million on the Term Loan Facility. As a result of the excess cash flow requirement in our Term Loan Facility, we were obligated to fund additional principal payments during the nine months ended September 30, 2017 of $7 million. We also elected to make additional voluntary principal prepayments totaling $20 million during the nine months ended September 30, 2017 from available liquidity, including amounts borrowed under our ABL Facility.
Our cash flows from operating, investing and financing activities, as reflected on the Unaudited Condensed Consolidated Statements of Cash Flows, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
Nine Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
September 30, 2017
|
|
September 30, 2018
|
Net cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
64
|
|
|
$
|
146
|
|
Investing activities
|
(29
|
)
|
|
(43
|
)
|
Financing activities
|
(35
|
)
|
|
(103
|
)
|
Change in Cash and cash equivalents and restricted cash
|
$
|
—
|
|
|
$
|
—
|
|
Operating activities.
In the first
nine months
of 2018, net cash provided by operating activities of $146 million primarily reflects net income of $85 million, non-cash depreciation and amortization of $83 million and amortization of debt issuance cost and discount of $19 million, partially offset by pension plan contributions of $35 million and gain on sale or disposal of assets of $8 million. In the first
nine months
of 2017, net cash provided by operating activities of $64 million primarily reflects a net loss of $66 million, partially offset by cash provided from working capital of $55 million, primarily attributable to an increase in accounts payable and reductions in inventory levels, and non-cash depreciation and amortization of $87 million.
Investing activities.
In the first
nine months
of 2018, net cash used in investing activities of $43 million consisted of $61 million of capital expenditures, $17 million of which related to the upgrade of the previously shuttered No. 3 paper machine and pulp line at our Androscoggin Mill in Jay, Maine, partially offset by $17 million of proceeds from the sale of assets, including the sale of our Wickliffe Mill. In the first
nine months
of 2017, net cash used in investing activities consisted of $29 million of capital expenditures.
Financing activities.
In the first
nine months
of 2018, net cash used in financing activities of $103 million primarily reflects $146 million of payments on the Term Loan Facility, partially offset by $44 million of net borrowings on our ABL Facility. In the first
nine months
of 2017, net cash used in financing activities of $35 million, resulted primarily from $40 million of repayments related to our Term Loan Facility partially offset by net borrowings of $5 million on our ABL Facility.
Credit Facilities
On July 15, 2016, VPH entered into a
$375 million
ABL Facility and a Term Loan Facility that provided for term loan commitments of
$220 million
with loan proceeds of
$198 million
after the deduction of the original issue discount of $22 million. On September 10, 2018, we paid off in full the Term Loan Facility. 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 (
$349 million
as of
September 30, 2018
). As of
September 30, 2018
, the outstanding balance of the ABL Facility was
$110 million
, with $
38 million
issued in letters of credit and
$201 million
available for future borrowings, and the weighted-average interest rate on outstanding borrowings was
4.11%
.
As of
September 30, 2018
, we were in compliance with the covenants in our ABL Facility.
We believe our current cash, cash equivalents and cash generated from operations as well as our ABL Facility will be sufficient to meet our working capital, debt and capital expenditure needs for at least the next twelve months.
Critical Accounting Policies
Our accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. Our Unaudited Condensed Consolidated Financial Statements are prepared in conformity with GAAP and follow general practices within the industry in which we operate. The preparation of the financial statements requires management to make certain judgments and assumptions in determining accounting estimates. Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and different estimates reasonably could have been used in the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, that would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.
For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2017, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2017.
Recent Accounting Pronouncements
See Note 2, “Recent Accounting Pronouncements” in the Notes to our Unaudited Condensed Consolidated Financial Statements included elsewhere in this report.