BILLERUD AMERICAS CORPORATION Overview
We are a leading North American producer of coated paper, shipped in both roll and sheet formats, which is used primarily in printing applications to produce high-end advertising brochures, catalogs and magazines among other media and marketing publications as well as specialty and packaging applications. We also produce and sell NBHK pulp, which is used to manufacture printing and writing paper grades and tissue products. As of the date of this report, we operate three paper machines at our mill inEscanaba, Michigan and one paper machine and one NBHK pulp machine at our mill inQuinnesec, Michigan . The mills have an aggregate annual production capacity of approximately 1,400,000 tons of paper and NBHK pulp. In 2019, we shut down our paper mill inLuke, Maryland . In 2020, we sold our mills located inJay, Maine andStevens Point, Wisconsin , and indefinitely idled our mills inDuluth, Minnesota andWisconsin Rapids, Wisconsin , but continue to operate the sheeting facility at ourWisconsin Rapids mill to convert paper produced at ourMichigan mills to sheets for the commercial print market. 24 --------------------------------------------------------------------------------
Financial Overview
Net sales for the year endedDecember 31, 2021 declined by$81 million or 6% compared to the prior year, as a result of a significant decline in sales volume partially offset by greatly improved price/mix. Strong market conditions fueled favorable price/mix of$129 million , which was more than offset by a volume decrease of$210 million , or 15%, primarily related to our soldDuluth ,Androscoggin andStevens Point mills and idledWisconsin Rapids mill. Total company sales volume was down from 1,674 thousand tons during the year endedDecember 31, 2020 , to 1,407 thousand tons during the same period of the current year, primarily attributable to our soldDuluth ,Androscoggin andStevens Point mills and idledWisconsin Rapids mill.
Recent Developments
Agreement and Plan of Merger
For information regarding our pending Merger with BillerudKorsnäs and the Merger Agreement, see Note 2 to the Consolidated Financial Statements.
Sale of
OnMay 13, 2021 ,Verso Minnesota Wisconsin LLC , an indirect wholly owned subsidiary of Verso, entered into an asset purchase agreement with ST Paper 1, LLC and sold all of the assets primarily related to ourDuluth Mill located inDuluth, Minnesota for$7 million in cash less costs to sell of$1 million . The sale, including related sale costs, resulted in a loss of$3 million included in Other operating (income) expense on the Consolidated Statement of Operations for the year endedDecember 31, 2021 .
OnFebruary 8, 2021 , we decided to permanently shut down the No. 14 paper machine and certain other long-lived assets at our paper mill inWisconsin Rapids, Wisconsin , while continuing to explore viable and sustainable alternatives with the remaining assets, including our converting operations, No. 16 paper machine and other remaining long-lived assets. This decision permanently reduced our total annual production capacity by 185,000 tons of coated paper. In connection with the permanent shutdown of the No. 14 paper machine and certain other long-lived assets, we recognized$84 million of accelerated depreciation which is included in Depreciation and amortization on the Consolidated Statement of Operations for the year endedDecember 31, 2021 . In addition, we recognized$8 million in charges associated with the write-off of property, plant and equipment and spare parts and inventory which is included in Restructuring charges on the Consolidated Statement of Operations for the year endedDecember 31, 2021 .
Luke Mill Equipment and Other Asset Sales
OnAugust 1, 2020 , we entered into an equipment purchase agreement with Halkali Kagit Karton Sanayi ve Tic.A.S ., a company organized under the laws ofTurkey , whereby we agreed to sell, and the buyer agreed to purchase, certain equipment at ourLuke Mill , primarily including two paper machines. The purchase price was$11 million in cash due at various milestones, all of which had been received as ofDecember 31, 2021 . We determined that the control over the use of the acquired assets had transferred to the purchaser inJune 2021 and correspondingly recognized the sale of the two paper machines and related assets at that time. COVID-19 Pandemic The COVID-19 pandemic has impacted our operations and financial results since the first quarter of 2020 and continues to have an impact on us. We serve as an essential manufacturing business and, as a result, we have continued to be operational during the pandemic in order to meet the ongoing needs of our customers, including those in other essential business sectors, which provide food, medical and hygiene products needed in a global health crisis. However, the guidelines and orders enacted by federal, state and local governments in 2020 impacted demand from retailers, political campaigns, and sports and entertainment events, driving reduced purchases of printed materials and substantially impacting our graphic paper business. There continue to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the resurgence of new and more contagious variants of the virus; the efficacy of the vaccines introduced to combat the virus and the public acceptance of such vaccines; and the impact of COVID-19 on economic conditions, including with respect to labor market 25 -------------------------------------------------------------------------------- conditions, economic activity, consumer behavior, supply chain shortages and disruptions and inflationary pressure; all of which could have a material impact on our business, financial position, results of operations and cash flows.
While we cannot reasonably estimate the full impact of COVID-19 on our business, financial position, results of operations and cash flows, we saw our sales, volume and prices continue to recover during 2021.
Share Repurchases and Outstanding Authorization
OnFebruary 26, 2020 , our Board of Directors authorized up to$250 million of net proceeds from the Pixelle Sale to be used to repurchase outstanding shares of our common stock. In conjunction with the declaration of the special cash dividend of$3.00 per share, for an aggregate of$101 million , onAugust 5, 2020 , our Board of Directors reduced the total amount of the share repurchase authorization from$250 million to$150 million . In addition, onMay 13, 2021 , we commenced a modified Dutch auction tender offer to purchase for cash shares of our common stock for an aggregate purchase price of not more than$55 million . The tender offer expired onJune 10, 2021 . Through the tender offer, we accepted for payment approximately 3.0 million shares at a purchase price of$18.10 per share for an aggregate purchase price of approximately$56 million , including fees and expenses. The shares purchased through the tender offer were immediately retired. During the years endedDecember 31, 2020 and 2021, we purchased approximately 2.2 million and 1.3 million shares, respectively, of our common stock through open market purchases, the modified Dutch auction tender offer and 10b5-1 programs under the share repurchase authorization at a weighted average cost of$13.39 and$15.97 per share, respectively.
As of
Return of Proceeds to Stockholders
InFebruary 2020 , we announced our intention to utilize no less than$225 million and up to$282 million of the net cash proceeds from the Pixelle Sale for the benefit of our stockholders. As ofDecember 31, 2021 , we have returned$225 million to our stockholders through a combination of share repurchases and special and quarterly cash dividends, including the modified Dutch auction tender offer inMay 2021 .
Warrants
InDecember 2021 , after our announcement of the pending Merger with BillerudKorsnäs, certain warrant holders notified us of their request for the company to repurchase their warrants. DuringDecember 2021 , we decided to repurchase and retire 0.8 million warrants at an average price of$11.67 , for total consideration of$10 million . As ofDecember 31, 2021 , 1.0 million warrants remained outstanding. FromJanuary 1, 2022 through the date of this report, we decided to repurchase and retire an additional 0.3 million warrants at an average price of$11.63 for total considerations of$3 million .
Selected Factors Affecting Operating Results
Our sales, which we report net of rebates, allowances and discounts, are a function of the number of tons of paper that we sell and the price at which we sell our paper. Paper prices historically have been a function of macroeconomic factors which influence supply and demand. Price has historically been substantially more variable than volume and can change significantly over relatively short time periods. We are primarily focused on serving the following end-user categories: specialty converters, general commercial print, catalogs and magazine publishers. Coated paper demand is primarily driven by advertising and print media usage. To offset the decline in demand for graphic paper, we are constantly looking at new product development and production improvements to reposition our assets into more stable markets.
Many of our customers provide us with forecasts, which allow us to plan our production runs in advance, optimizing production over our integrated mill system and thereby reducing costs and increasing overall efficiency. Generally, our sales agreements do not extend beyond the calendar year and provide for quarterly or semiannual price adjustments based on market price movements.
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We reach our end-users through several channels, including merchants, brokers,
printers and direct sales to end-users. We sell our products to approximately
200 customers which comprise approximately 900 end-user accounts. In 2021, our
two largest customers, Central National-Gottesman and Veritiv Corporation,
together accounted for 24% of our net sales.
Cost of Products Sold
We are subject to changes in our cost of sales caused by movements in underlying commodity prices. The principal components of our cost of sales are wood fiber, wood pulp, chemicals, energy, labor and maintenance. Costs for commodities, including wood fiber, wood pulp, chemicals and energy, are the most variable component of our cost of sales because their prices can fluctuate substantially, sometimes within a relatively short period of time. In addition, our aggregate commodity purchases fluctuate based on the volume of paper that we produce.Wood Fiber . We source our wood fiber from a broad group of timberland and sawmill owners located in the regions around our mills. Our cost to purchase wood is affected directly by the market price of wood in our regional markets and indirectly by the variability of fuel cost for the logging and transportation of timber to our facilities. While we have fiber supply agreements in place that ensure delivery of a substantial portion of our wood requirements, purchases under these agreements are typically at market rates.
Wood Pulp. We source bleached wood pulp from market producers to supplement fiber requirements at our mills. The primary pulp procured is NBSK. We expect weather events and imbalances in supply and demand to create volatility in prices for NBSK from time to time.
Chemicals. Chemicals utilized in the manufacturing of coated paper include latex, clay, starch, calcium carbonate, caustic soda, sodium chlorate and titanium dioxide. We purchase these chemicals from a variety of suppliers and are not dependent on any single supplier to satisfy our chemical needs. We expect imbalances in supply and demand and weather events to periodically create volatility in prices and supply for certain chemicals. Energy. We produce a significant portion of our energy needs for our paper mills from sources such as waste wood, waste heat recovery, liquid biomass from our pulping process and internal energy cogeneration facilities. Our external energy purchases include fuel oil, natural gas, coal and electricity. Our overall energy expenditures are mitigated by our internal energy production capacity and ability to switch between certain energy sources. The use of derivative contracts is also considered as part of our risk management strategy to manage our exposure to market fluctuations in energy prices. Our indirect wholly-owned subsidiary CWPCo has 33.3 megawatts of generating capacity on 39 generators located in five hydroelectric plants on theWisconsin River . CWPCo is a regulated public utility that provides electricity to ourWisconsin Rapids facility, and a small number of industrial, light commercial and residential customers. Labor. Labor cost includes wages, salary and benefit expenses attributable to our mill personnel. Mill employees at a non-managerial level are compensated on an hourly basis. Management employees at our mills are compensated on a salaried basis. Wages, salary and benefit expenses included in cost of sales do not vary significantly from year to year. In addition, we have not experienced significant labor shortages. Maintenance. Maintenance expense includes day-to-day maintenance, equipment repairs and larger maintenance projects, such as paper machine shutdowns for periodic maintenance. Maintenance activities can produce quarter-to-quarter fluctuations in our maintenance expenses. In conjunction with our periodic maintenance shutdowns, we have incidental incremental costs that are primarily comprised of unabsorbed fixed costs from lower production volumes and other incremental costs for purchased materials and energy that would otherwise be produced as part of the normal operation of our mills.
Depreciation and Amortization
Depreciation and amortization expense represents the periodic charge to earnings through which the cost of tangible assets and intangible assets are recognized over the asset's life. Changes in our asset basis, such as capital investments and impairment or sale of tangible or intangible assets, may produce year-to-year fluctuations in expense.
Selling, General and Administrative Expenses
The principal components of our Selling, general and administrative expenses are
wages, salaries and benefits for our office personnel at our headquarters and
our sales force, travel and entertainment expenses, advertising expenses,
expenses relating to certain information technology systems and research and
development expenses.
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--------------------------------------------------------------------------------Critical Accounting Policies
Our accounting policies are fundamental to understanding management's discussion and analysis of financial condition and results of operations. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted inthe United States of America , or "GAAP." 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. Management believes the following critical accounting policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments. These judgments about critical accounting estimates are based on information available to us as of the date of the financial statements.
Impairment of Long-lived Assets
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to the estimated undiscounted future cash flows generated by their use. Management believes that the accounting estimates associated with determining fair value as part of an impairment analysis are critical accounting estimates because estimates and assumptions are made about our future performance and cash flows. The estimated fair value is generally determined on the basis of discounted future cash flows. We also consider a market-based approach and a combination of both. While management uses the best information available to estimate future performance and cash flows, future adjustments to management's projections may be necessary if economic conditions differ substantially from the assumptions used in making the estimates.
Pension
We offer various pension and retirement benefits to certain employees. Our
defined benefit pension plan is frozen to new entrants. The calculation of the
obligations and related expenses under the plan requires the use of actuarial
valuation methods and assumptions, including the expected long-term rate of
return on plan assets, discount rates and changes in mortality rates. The table
below shows assumptions used by us for the periods shown:
Year Ended December Nine months ended Three months ended Year Ended December
31, September 30, December 31, 31,
2019 2020 2020 2021
Weighted average assumptions used to
determine benefit obligations as of end of
period:
Discount rate 3.11 % 2.71 % 2.57 % 2.89 %
Weighted average assumptions used to
determine net periodic pension cost for
the period:
Discount rate 4.17 % 3.11 % 2.71 % 2.57 %
Expected long-term return on plan assets 7.00 % 6.50 % 6.50 % 6.20 %
Cash balance interest credit rate 4.49 % 4.33 % 4.33 % 3.32 %
We evaluate the actuarial assumptions annually as of December 31 (the
measurement date), unless a significant event occurs during the year requiring a
remeasurement (such as a plan amendment, settlement, or curtailment). We
consider changes in these long-term factors based upon market conditions and the
requirements of Accounting Standards Codification, or "ASC," Topic 715,
Compensation-Retirement Benefits. These assumptions are used to calculate
benefit obligations as of December 31 of the current year and pension expense to
be recorded for the following year. The discount rate assumption reflects the
yield on a portfolio of high quality fixed-income instruments that have a
similar duration to the plan's liabilities. The expected long-term rate of
return assumption reflects the average return expected on the assets invested to
provide for the plan's liabilities.
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Actuarial valuations and assumptions used in the determination of future values
of plan assets and liabilities are subject to management judgment and may differ
significantly if different assumptions are used. The following table highlights
the sensitivity of our pension obligations and 2022 net periodic pension cost
(income) to changes in these assumptions, assuming all other assumptions remain
constant.
Impact on 2022 Net
Periodic Impact on Pension
Change in Assumption Pension Cost (Income) Benefit Obligation
0.25 percentage point decrease in discount rate Decrease $3 million Increase $39 million
0.25 percentage point increase in discount rate Increase $3 million Decrease $37 million
0.25 percentage point decrease in expected rate of Increase $3 million
return on assets 0.25 percentage point increase in expected rate of Decrease$3 million return on assets Contingent Liabilities A liability is contingent if the outcome or amount is not presently known, but may become known in the future as a result of the occurrence of some uncertain future event. We estimate our contingent liabilities based on management's estimates about the probability of outcomes and their ability to estimate the range of exposure. Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated. In addition, it must be probable that the loss will be confirmed by some future event. As part of the estimation process, management is required to make assumptions about matters that are by their nature highly uncertain. The assessment of contingent liabilities, including legal contingencies, asset retirement obligations and environmental costs and obligations, involves the use of critical estimates, assumptions and judgments. Management's estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. However, there can be no assurance that future events will not differ from management's assessments.
Income Taxes
We are subject to income taxes inthe United States . Significant judgments and estimates are required in determining the consolidated income tax expense. The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. Under GAAP, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss and credit carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the enactment date occurs. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. In the event that the actual outcome of future tax consequences differs from our estimates and assumptions due to changes or future events, the resulting change to the provision for income taxes could have a material effect on our Consolidated Financial Statements. The recoverability of deferred tax assets and the recognition and measurement of uncertain tax positions are subject to various assumptions and judgment by us. If actual results differ from the estimates made by us in establishing or maintaining valuation allowances against deferred tax assets, the resulting change in the valuation allowance would generally impact earnings or other comprehensive income depending on the nature of the respective deferred tax asset. Positive and negative evidence is considered in determining the need for a valuation allowance against deferred tax assets, which includes such evidence as historical earnings, projected future earnings, tax planning strategies and expected timing of reversal of existing temporary differences. Additionally, the positions taken with regard to tax contingencies may be subject to audit and review by tax authorities, which may result in future taxes, interest and penalties. In determining the recoverability of deferred tax assets, we give consideration to all available positive and negative evidence including reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. We place the most weight to historical earnings and we consider three years of cumulative income or loss. In addition, we have reflected increases and decreases in our valuation allowance based on the overall weight of positive versus negative evidence on a jurisdiction by jurisdiction basis. 29 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Part II, Item 8, Note 3 of Notes to Consolidated Financial Statements, which is incorporated by reference in response to this item.
Results of Operations
The following table sets forth the historical results of operations of Verso for
the periods presented. The following discussion of our financial condition and
results of operations should be read in conjunction with our Consolidated
Financial Statements and the related notes thereto included elsewhere in this
annual report.
Year Ended December 31,
(Dollars in millions) 2019 2020 2021
Net sales $ 2,444 $ 1,359 $ 1,278
Costs and expenses:
Cost of products sold (exclusive of depreciation and
amortization) 2,138 1,334 1,062
Depreciation and amortization 183 153 154
Selling, general and administrative expenses 104 77 76
Restructuring charges 52 12 23
Other operating (income) expense 4 (89) (8)
Operating income (loss) (37) (128) (29)
Interest expense 2 1 2
Other (income) expense (18) (19) (25)
Income (loss) before income taxes (21) (110) (6)
Income tax expense (benefit) (91) (9) (3)
Net income (loss) $ 70 $ (101) $ (3)
2021 Compared to 2020
Net sales. Net sales for the year ended December 31, 2021 declined by $81
million or 6% compared to the year ended December 31, 2020 , attributable to
favorable price/mix of $129 million , which was more than offset by a decrease in
sales of $210 million , or 15%, primarily related to our sold Duluth ,
Androscoggin and Stevens Point mills and idled Wisconsin Rapids mill. Total
company sales volume was down from 1,674 thousand tons during the year ended
December 31, 2020 , to 1,407 thousand tons during 2021, primarily attributable to
our sold Duluth , Androscoggin and Stevens Point mills and idled Wisconsin Rapids
mill.
Operating income (loss). Operating loss was
Our operating results for the year endedDecember 31, 2021 were positively impacted by: •Favorable price/mix of$129 million driven by price increase realization across all grades, including pulp •Improved operating income of$34 million resulting from the conversion to our current two mill system •Lower net operating expenses of$78 million primarily driven by lower closed/idled mill spend, as well as lower wood cost, improved performance and cost reduction initiatives across our mill system •Lower planned major maintenance costs of$7 million driven by reduced scope •Lower Selling, general and administrative expenses of$1 million driven primarily by cost savings in connection with the sale of the two specialty mills in 2020, offset by higher incentive expense and Merger Agreement costs in 2021 Our operating results for the year endedDecember 31, 2021 were negatively impacted by: •Lower sales volume resulting in a decrease of$6 million in net operating income •Inflationary costs of$51 million driven by purchased pulp, latex, energy and freight •Higher depreciation expense of$1 million due primarily to$84 million in accelerated depreciation at ourWisconsin Rapids Mill in 2021, partially offset by$65 million in accelerated depreciation associated with the closure of our 30 --------------------------------------------------------------------------------Duluth Mill inDecember 2020 and approximately$16 million of nonrecurring depreciation associated with these events •Higher Restructuring charges of$11 million primarily associated with the permanent shutdown of ourDuluth Mill inDecember 2020 and the No. 14 paper machine and certain other long-lived assets at ourWisconsin Rapids Mill inFebruary 2021 •Lower other operating income of$81 million , primarily as a result of the$94 million gain on the sale of ourAndroscoggin andStevens Point mills in 2020, partially offset by$6 million in insurance recoveries in 2021, associated with a 2019 insurance claim at ourQuinnesec Mill Other (income) expense. Other income for the year endedDecember 31, 2021 and 2020 includes income of$25 million and$20 million , respectively, associated primarily with the non-operating components of net periodic pension cost (income). Income tax expense (benefit). Income tax benefit of$3 million for the year endedDecember 31, 2021 reflects estimated tax benefit for the period. Income tax benefit of$9 million for the year endedDecember 31, 2020 primarily reflects estimated tax benefit for the period, partially offset by$9 million of additional valuation allowance recognized against state tax credits. The year endedDecember 31, 2020 includes$7 million of income tax expense related to the year endedDecember 31, 2019 . This resulted from recording an adjustment for the federal tax effect on deferred tax assets for state net operating losses and state tax credits established in 2019 without a federal tax effect.
2020 Compared to 2019
Net sales. Net sales for the year endedDecember 31, 2020 declined by$1,085 million or 44% compared to the prior year, as a result of significant declines in sales volume and unfavorable price/mix. Of the$1,085 million , or 44% net sales decline,$186 million , or 8%, was attributable to the closure of ourLuke Mill inJune 2019 ,$489 million , or 20%, was a result of the sale of ourAndroscoggin andStevens Point mills inFebruary 2020 , and$146 million , or 6%, was attributable to the indefinite idling of ourDuluth andWisconsin Rapids mills inJuly 2020 . Total company sales volume was down from 2,647 thousand tons during the year endedDecember 31, 2019 , to 1,674 thousand tons during the year endedDecember 31, 2020 . Of the 973 thousand ton volume decline, 185 thousand tons were attributable to the closure of ourLuke Mill inJune 2019 , 479 thousand tons were a result of the sale of ourAndroscoggin andStevens Point mills inFebruary 2020 , 170 thousand tons were attributable to the indefinite idling of ourDuluth andWisconsin Rapids mills inJuly 2020 , and the additional decline resulted from lower customer demand driven by the COVID-19 pandemic.
Operating income (loss). Operating loss was
Operating results for the year endedDecember 31, 2020 were positively impacted by: •Lower input costs of$20 million , driven by lower chemical, energy and purchased pulp costs, partially offset by higher fiber costs •Lower freight costs of$9 million •Lower depreciation expense of$30 million primarily due to$76 million in accelerated depreciation associated with the closure of ourLuke Mill inJune 2019 , as well as the sale of ourAndroscoggin andStevens Point mills inFebruary 2020 , partially offset by$65 million in accelerated depreciation associated with the closure of ourDuluth Mill inDecember 2020 •Reduced planned major maintenance costs of$28 million , primarily driven by the cancellation of the annual outage at ourWisconsin Rapids Mill , costs incurred at ourAndroscoggin Mill in 2019 that did not recur in 2020 and timing of a biannual outage at ourQuinnesec Mill •Lower restructuring charges of$40 million primarily associated with the closure of ourLuke Mill inJune 2019 , partially offset by the closure of ourDuluth Mill inDecember 2020 •Lower Selling, general and administrative costs of$27 million primarily driven by cost reduction initiatives in connection with the sale of ourAndroscoggin andStevens Point mills inFebruary 2020 and lower equity compensation expense, partially offset by increased severance costs incurred due to our headcount reduction initiatives and costs associated with the proxy solicitation contest •Higher other operating income of$93 million , primarily as a result of the$94 million gain on the sale of ourAndroscoggin andStevens Point mills, partially offset by a$1 million loss on related pension settlement Operating results for the year endedDecember 31, 2020 were negatively impacted by: •Unfavorable price/mix of$123 million 31 -------------------------------------------------------------------------------- •Lower sales volume resulting in a decrease of$131 million in net operating income, driven by the impact of the COVID-19 pandemic, the closure of ourLuke Mill inJune 2019 , the sale of ourAndroscoggin andStevens Point mills inFebruary 2020 and the indefinite idling of ourDuluth andWisconsin Rapids mills inJuly 2020 •Higher net operating expenses of$84 million primarily driven by market downtime, costs incurred to idle ourDuluth andWisconsin Rapids mills, severance costs and an extension of the planned outage at ourQuinnesec Mill , partially offset by cost reduction initiatives across our mill system, reduced corporate overhead and union ratification expense for signing bonuses and for the settlement of various work arrangement issues in 2019 that did not recur in 2020 Other (income) expense. Other income for the year endedDecember 31, 2020 andDecember 31, 2019 included income of$20 million and$18 million , respectively, associated with the non-operating components of net periodic pension cost (income). Income tax expense (benefit). Income tax benefit was$9 million for the year endedDecember 31, 2020 , which primarily reflects estimated tax benefit for the period, partially offset by$9 million of additional valuation allowance recognized against state tax credits. The year endedDecember 31, 2020 includes$7 million of income tax expense related to the year endedDecember 31, 2019 . This resulted from recording an adjustment for the federal tax effect on deferred tax assets for state net operating losses and state tax credits established in 2019 without a federal tax effect. Income tax benefit for the year endedDecember 31, 2019 was primarily offset by the valuation allowance adjustment.
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 ongoing 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), which are determined in accordance with GAAP.
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--------------------------------------------------------------------------------The following table reconciles Net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:
Year Ended December 31,
(Dollars in millions) 2019 2020 2021
Net income (loss) $ 70 $ (101) $ (3)
Income tax expense (benefit) (91) (9) (3)
Interest expense 2 1 2
Depreciation and amortization 183 153 154
EBITDA $ 164 $ 44 $ 150 Adjustments to EBITDA:
Restructuring charges (1) 52 12 23
Luke Mill post-closure costs (2) 9 15 9
Noncash equity award compensation (3) 12 5 5
Gain on Sale of Androscoggin/Stevens Point Mills (4) - (94) -
Loss on Sale of Duluth Mill (5) - - 3
Duluth and Wisconsin Rapids mills idle/post-closure
costs (6) - 37 20
(Gain) loss on sale or disposal of assets (7) 2 4 (1)
Other severance costs (8) 4 18 4
Strategic initiatives costs (9) 6 - -
Stockholders proxy solicitation costs (10) 1 4 -
Merger related costs (11) - - 6
Other items, net (12) 1 2 4
Adjusted EBITDA (13) $ 251 $ 47 $ 223
(1) For 2019, charges are associated with the closure of our Luke Mill in June
2019. For 2020, charges are associated with the closure of our Luke Mill and the
closure of our Duluth Mill in December 2020 . For 2021, charges are associated
with the closure of our Luke Mill , the closure of our Duluth Mill and of the No.
14 paper machine and certain other long-lived assets at our Wisconsin Rapids
Mill in February 2021 .
(2) Costs recorded after the permanent shutdown of our Luke Mill that are not
associated with product sales or restructuring activities, including costs
relating to the ongoing environmental remediation and monitoring efforts.
(3) Amortization of noncash incentive compensation.
(4) Gain on the sale of outstanding membership interests in Verso Androscoggin,
LLC in February 2020 , which included our Androscoggin Mill and Stevens Point
Mill .
(5) Loss on the sale of our Duluth Mill in May 2021 .
(6) Idle/post-closure costs associated with our Duluth and Wisconsin Rapids
mills that are not associated with product sales or restructuring activity.
(7) Realized (gain) loss on the sale or disposal of assets.
(8) Severance and related benefit costs not associated with restructuring
activities.
(9) Professional fees and other charges associated with our strategic
alternatives initiative, including certain costs incurred in 2019 related to the
Pixelle Sale.
(10) Costs incurred in connection with the stockholders proxy solicitation
contest.
(11) Professional fees and other charges associated with Merger related
activity, including the Merger Agreement entered on December 19, 2021 with
BillerudKorsnäs.
(12) For 2019 and 2020, other miscellaneous adjustments. For 2021, professional
fees and other changes associated with strategic matters and other miscellaneous
adjustments.
(13) Adjusted EBITDA for 2019 and 2020, includes $13 million of income and $1
million of expense, respectively, related to pension settlements (see Note 13 to
our Consolidated Financial Statements).
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Sources and Uses of Cash
Our principal cash requirements in both the short term and long term typically include ongoing operating costs for working capital needs, capital expenditures for maintenance and strategic investments in our mills, payment of dividends, and pension contributions. In the past year, we have also used cash for share purchases, including a tender offer, and to repurchase certain warrants associated with the pending Merger with BillerudKorsnäs. We believe our cash and cash equivalents atDecember 31, 2021 , future cash generated from operations and, to the extent necessary, the availability under our ABL Facility (as defined below) will be sufficient to meet our principal cash requirements for at least the next twelve months. While changes in these ongoing operating costs can impact operating cash generation, we believe that our planning and strategies on pricing and cost control have resulted in our improved liquidity in recent years. We also utilize factoring of accounts receivable from time to time (for example, discounted accelerated payment programs sponsored by customers) as an alternative source of funds when cost is favorable to our ABL Facility or due to other considerations. Our ability to sustain our working capital position is subject to a number of risks that we discuss in "Part I, Item 1A, Risk Factors." As ofDecember 31, 2021 , we had cash and cash equivalents of$172 million while the outstanding balance of our ABL Facility was zero, with$21 million issued in letters of credit and$103 million available for future borrowings.
Share Repurchases and Outstanding Authorization
OnFebruary 26, 2020 , our Board of Directors authorized up to$250 million of net proceeds from the Pixelle Sale to be used to repurchase outstanding shares of our common stock. In conjunction with the declaration of the special cash dividend of$3.00 per share, for an aggregate of$101 million , onAugust 5, 2020 , our Board of Directors reduced the total amount of the share repurchase authorization from$250 million to$150 million . In addition, onMay 13, 2021 , we commenced a modified Dutch auction tender offer to purchase for cash shares of our common stock for an aggregate purchase price of not more than$55 million . The tender offer expired onJune 10, 2021 . Through the tender offer, we accepted for payment approximately 3.0 million shares at a purchase price of$18.10 per share for an aggregate purchase price of approximately$56 million , including fees and expenses. The shares purchased through the tender offer were immediately retired. During the years endedDecember 31, 2020 and 2021, we purchased approximately 2.2 million and 1.3 million shares, respectively, of our common stock through open market purchases, a modified Dutch auction tender offer and 10b5-1 programs under the share repurchase authorization at a weighted average cost of$13.39 and$15.97 per share, respectively.
As of
Warrants
InDecember 2021 , after our announcement of the pending Merger with BillerudKorsnäs, certain warrant holders notified us of their request for the company to repurchase their warrants. DuringDecember 2021 , we decided to repurchase and retire 0.8 million warrants at an average price of$11.67 , for total consideration of$10 million . As ofDecember 31, 2021 , 1.0 million warrants remained outstanding. FromJanuary 1, 2022 through the date of this report, we decided to repurchase and retire an additional 0.3 million warrants at an average price of$11.63 for total considerations of$3 million .
Dividends
We initiated a$0.10 per share quarterly dividend starting in the second quarter of 2020. See Note 2 and Note 14 to our Consolidated Financial Statements for further information.
Our Board of Directors declared the following dividends in 2021:
Quarter Date Declared Date of Record Date Paid Amount
1st February 5 March 18 March 29 $0.10
2nd May 7 June 17 June 29 $0.10
3rd August 6 September 17 September 28 $0.10
4th November 4 December 17 December 29 $0.10
34-------------------------------------------------------------------------------- Pursuant to the terms of the Merger Agreement, we will not pay a cash dividend for the first quarter endingMarch 31, 2022 . The Merger Agreement permits us to resume paying regular quarterly cash dividends commencing in the second quarter endingJune 30, 2022 in an amount not to exceed$0.10 per share and consistent with our past practice in terms of the timing of declaration and payment of such dividends. Pension Plan Obligation
In 2022, we expect to make cash contributions to the pension plan of
Other Material Cash Requirements
The following table reflects our payments in connection with contractual obligations as of :
Payments Due by Period
(Dollars in millions) Total 2022 2023-2024 2025-2026 Thereafter
Operating leases(1) $ 9 $ 4 $ 5 $ - $ -
Finance leases 4 1 3 - -
Purchase obligations(2) 16 8 7 1 -
Other long-term obligations(3) 30 4 10 3 13
Total $ 59 $ 17 $ 25 $ 4 $ 13
(1) The payments of $1 million for short-term leases are excluded from this
table (see Note 9 to our Consolidated Financial Statements).
(2) Unconditional purchase obligations in the ordinary course of business for
the purchase of certain raw materials, energy and services.
(3) Primarily consists of asset retirement obligations, employee related
obligations and deferred compensation (see Note 11 to our Consolidated Financial
Statements). Pension benefit obligation has been excluded from the table above
(see Note 13 to our Consolidated Financial Statements).
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected
in the accompanying Consolidated Statements of Cash Flows, are summarized in the
following table.
Year Ended December 31,
(Dollars in millions) 2019 2020 2021
Net cash provided by (used in):
Operating activities $ 125 $ (62) $ 180
Investing activities (104) 303 (42)
Financing activities (5) (146) (103)
Change in cash and cash equivalents and restricted
cash $ 16 $ 95 $ 35
Operating Activities
Our operating cash flow requirements are primarily for salaries and benefits,
the purchase of raw materials including wood fiber, wood pulp, chemicals and
energy, and other expenses such as maintenance and warehousing costs. In 2021,
our net cash provided by operating activities of $180 million primarily reflects
noncash depreciation and amortization of $154 million , noncash restructuring
charges of $11 million and cash provided by working capital related changes of
$65 million , partially offset by a net loss of $3 million , noncash pension
income of $23 million and pension plan contributions of $25 million . The net
cash provided from working capital related changes was primarily attributable to
reductions in finished goods inventory levels.
In 2020, our net cash used in operating activities of $62 million primarily
reflects a net loss of $101 million adjusted for noncash pension income of $16
million , pension plan contributions of $49 million , gain on Sale of
Androscoggin /Stevens Point Mills of $94 million and deferred taxes of $9
million , partially offset by noncash depreciation and amortization of $153
million , $5 million of noncash restructuring charges related to the closure of
our Duluth Mill , $5 million of equity award expense and cash provided by working
capital related changes of $40 million . The net cash provided from working
capital related changes was primarily attributable to collections on our
accounts receivable and reductions in finished goods inventory levels, partially
offset by payments that reduced our accounts payable and accrued liabilities.
35
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In 2019, our operating cash flow requirements are primarily for salaries and
benefits, the purchase of raw materials including wood fiber, wood pulp,
chemicals and energy, and other expenses such as maintenance and warehousing
costs. In 2019, our net cash provided by operating activities of $125 million
primarily reflects a net income of $70 million adjusted for noncash depreciation
and amortization of $183 million , $20 million of noncash restructuring charges
related to the closure of our Luke Mill and $12 million of equity award expense,
partially offset by noncash pension income of $14 million , pension plan
contributions of $42 million , deferred taxes of $91 million and cash used for
working capital related changes of $16 million . The net cash used for working
capital related changes was primarily attributable to payments that reduced our
accounts payable and accrued liabilities, partially offset by collections on our
accounts receivable.
Investing Activities
In 2021, our net cash used in investing activities of
In 2020, our net cash provided by investing activities of$303 million consisted primarily of$345 million in net proceeds from the sale of ourAndroscoggin andStevens Point mills, partially offset by$48 million of capital expenditures.
In 2019, our net cash used in investing activities of
Financing Activities
In 2021, our net cash used in financing activities of$103 million consisted primarily of$56 million in repurchases of our common stock,$12 million of cash dividends paid to stockholders,$10 million in repurchases of our warrants and$24 million in acquisition of treasury stock, consisting of$21 million of share repurchases and$3 million associated with the vesting of restricted stock units. In 2020, our net cash used in financing activities of$146 million consisted primarily of$111 million of dividends paid to stockholders,$34 million in acquisition of treasury stock, as well as borrowings with offsetting payments on our ABL Facility.
In 2019, our net cash used in financing activities of
ABL Facility
Verso Paper maintains an asset-based revolving credit facility, or, as amended from time to time, our "ABL Facility." OnMay 10, 2021 , Verso Paper entered into the Third Amendment to the ABL Facility, or the "Third ABL Amendment" to the ABL Facility. As a result of the Third ABL Amendment, the ABL Facility provides for revolving commitments of$200 million , with a$75 million sublimit for letters of credit and a$20 million sublimit for swingline loans. The amount of borrowings and letters of credit available to Verso Paper pursuant to our ABL Facility is limited to the lesser of$200 million or an amount determined pursuant to a borrowing base ($124 million as ofDecember 31, 2021 ). As ofDecember 31, 2021 , there were no borrowings outstanding under our ABL Facility,$21 million issued in letters of credit and$103 million available for future borrowings. Verso Paper may request one or more incremental revolving commitments in an aggregate principal amount up to the greater of (i)$75 million or (ii) the excess of the borrowing base over the revolving facility commitments of$200 million ; however, the lenders are not obligated to increase the revolving commitments upon any such request. Availability under our ABL Facility is subject to customary borrowing conditions. Our ABL Facility will mature onFebruary 6, 2024 . Outstanding borrowings under our ABL Facility bear interest at an annual rate equal to, at the option of Verso Paper, either (i) a customaryLondon interbank offered rate plus an applicable margin ranging from 1.25% to 1.75% or (ii) the Federal Funds Rate plus an applicable margin ranging from 0.25% to 0.75%, determined based upon the average excess availability under our ABL Facility. Verso Paper also is required to pay a commitment fee for the unused portion of our ABL Facility of 0.25% per year, based upon the average revolver usage under our ABL Facility. In addition, pursuant to the Third ABL Amendment, certain modifications were made to the existing ABL Facility in order to, among other things, provide for determination of a benchmark replacement interest rate when LIBOR is no longer available, subject to the terms, and upon the satisfaction of conditions, specified therein. All obligations under our ABL Facility are unconditionally guaranteed byVerso Holding and certain of the subsidiaries of Verso Paper. The security interest with respect to our ABL Facility consists of a first-priority lien on certain assets of Verso Paper,Verso Holding and the other guarantor subsidiaries, including accounts receivable, inventory, certain deposit accounts, securities accounts and commodities accounts. 36 -------------------------------------------------------------------------------- Our ABL Facility contains financial covenants requiring Verso, among other things, to maintain a minimum fixed charge coverage ratio if availability were to drop below prescribed thresholds. As ofDecember 31, 2021 , we were above the prescribed thresholds in our ABL Facility. Our ABL Facility also requires that certain payment conditions, as defined therein, are met in order for Verso to incur debt or liens, pay cash dividends, repurchase equity interest, prepay indebtedness, sell or dispose of assets and make investments in or merge with another company. If Verso Paper were to violate any of the covenants under our ABL Facility and were unable to obtain a waiver, it would be considered a default after the expiration of any applicable grace period. If Verso Paper were in default under our ABL Facility, then the lenders thereunder may exercise remedies in accordance with the terms thereof. In addition, if Verso Paper were in default under our ABL Facility, no additional borrowings under our ABL Facility would be available until the default was waived or cured. Our ABL Facility provides for customary events of default, including a cross-event of default provision with respect to any other existing debt instrument having an aggregate principal amount that exceeds$25 million .
As of
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