NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND BASIS OF PRESENTATION
In this report, the term “Verso” refers to Verso Corporation, which is the ultimate parent entity and the issuer of Class A common stock listed on the New York Stock Exchange. Verso is the sole member of Verso Holding LLC, which is the sole member of Verso Paper Holding LLC. Verso does not have any assets, liabilities, operations or cash flows, other than investment in subsidiaries. As used in this report, the term “Verso Holding” refers to Verso Holding LLC, and the term “Verso Paper” refers to Verso Paper Holding LLC. The term for any such entity includes its direct and indirect subsidiaries when referring to the entity’s consolidated financial condition or results. Unless otherwise noted, references to “the Company,” “we,” “us,” and “our” refer to Verso.
Nature of Business — Verso is a producer of graphic paper, specialty paper, packaging paper and Northern Bleached Hardwood Kraft, or “NBHK,” pulp. These products are used primarily in media, marketing applications and commercial printing applications. Uses include catalogs, magazines, high-end advertising brochures, direct-mail advertising, and specialty applications, such as labeling and other special applications. NBHK pulp is used to manufacture printing, writing and specialty paper grades, tissue and other products. Verso operates in the pulp and paper market segments primarily in North America (see Note 18).
Sale of Androscoggin Mill and Stevens Point Mill — On November 11, 2019, Verso and Verso Paper entered into a membership interest purchase agreement, or the “Purchase Agreement,” with Pixelle Specialty Solution LLC, or “Pixelle,” whereby Verso and Verso Paper agreed to sell to Pixelle, or the “Pixelle Sale,” or "Sale of Androscoggin/Stevens Point Mills," all of the outstanding membership interests in Verso Androscoggin, LLC an indirect wholly owned subsidiary of Verso and the entity that, as of the closing date of the Pixelle Sale, held all the assets primarily related to Verso’s Androscoggin Mill located in Jay, Maine, and Verso’s Stevens Point Mill, located in Stevens Point, Wisconsin. The transaction was approved by Verso’s stockholders on January 31, 2020 and closed on February 10, 2020 (see Note 5). As consideration for the Pixelle Sale, Verso received $352 million in cash, which reflected certain adjustments related to our estimates of cash, indebtedness and working capital of Verso Androscoggin, LLC and Pixelle assumed $37 million of Verso’s unfunded pension liabilities, which reflected certain adjustments in connection with the completed transfer of the unfunded pension liabilities during the year ended December 31, 2020. The Pixelle Sale reduced the aggregate annual production capacity of Verso’s mills by approximately 660,000 tons. The Androscoggin and Stevens Point mills together represented approximately 22% of Verso’s revenues for the year ended December 31, 2019.
Duluth Mill and Wisconsin Rapids Mill — On June 9, 2020, Verso announced plans to indefinitely idle its mills in Duluth, Minnesota and Wisconsin Rapids, Wisconsin, while exploring viable and sustainable alternatives for both mills including restarting, selling or permanently closing one or both mills. Verso’s decision to reduce its production capacity was driven by the accelerated decline in graphic paper demand, primarily resulting from the COVID-19 pandemic. The production capacity of the Duluth Mill was approximately 270,000 tons of supercalendered/packaging paper and the production capacity of the Wisconsin Rapids Mill is approximately 540,000 tons of coated and packaging paper. Verso idled production at the Duluth Mill on July 1, 2020 and at the Wisconsin Rapids Mill on July 27, 2020. In the third quarter of 2020, Verso recognized $3 million in severance and benefit costs, included in Costs of products sold, associated with the idling of our Duluth Mill and in fourth quarter of 2020, Verso recognized $5 million in severance and benefit costs, included in Costs of products sold, associated with the idling of the Wisconsin Rapids Mill. On December 31, 2020, Verso decided to permanently shut down the Duluth Mill, which was subsequently sold on May 13, 2021 (see Note 5). On February 8, 2021, Verso decided to permanently shut down the No. 14 paper machine and certain other long-lived assets at the Wisconsin Rapids Mill. Verso continues to operate the facility at the Wisconsin Rapids Mill to convert paper produced at the Quinnesec and Escanaba mills to sheets for the commercial print market. See Note 15 for additional information.
COVID-19 Pandemic — The COVID-19 pandemic has impacted Verso’s operations and financial results since the first quarter of 2020 and continues to have an impact on the Company. Verso serves as an essential manufacturing business and, as a result, its mills have continued to be operational during the pandemic in order to meet the ongoing needs of its customers, including those in other essential business sectors, which provide food, medical and hygiene products needed in a global health crisis. 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 Verso’s graphic paper business.
There continues 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 or public acceptance of such vaccines; and the impact of COVID-19 on economic conditions, including with respect to labor market conditions, economic activity, consumer behavior, supply chain shortages and disruptions and inflationary pressure; all of which could have a material impact on the Company’s business, financial position, results of operations and cash flows.
While Verso cannot reasonably estimate the full impact of COVID-19 on the business, financial position, results of operations and cash flows, the Company saw its sales, volume and prices continue to recover during 2021.
Basis of Presentation — This report contains the Consolidated Financial Statements of Verso as of December 31, 2020 and 2021, and for the years ended December 31, 2019, 2020 and 2021. Intercompany balances and transactions are eliminated in consolidation.
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or “GAAP,” requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
Revenue Recognition — Verso generates revenue through product sales, and shipping terms generally indicate when the performance obligation has been fulfilled and control of products has been passed to the customer. Verso’s revenue transactions consist of a single performance obligation to transfer promised goods. Verso has pricing agreements with certain customers. These agreements usually define the mechanism for determining the sales price but do not impose a specific quantity on either party. Quantities to be delivered to the customer are determined at a point near the date of delivery through purchase orders or other written instructions Verso receives from the customer. Spot market sales are made through purchase orders or other written instructions. Revenue is recognized when a performance obligation has been fulfilled, which is typically when shipped from the mills or warehouses. For sales with shipping terms that transfer control at the destination point, revenue is recognized when the customer receives the goods and the performance obligation is complete. For sales with shipping terms that transfer control at the shipping point with Verso bearing responsibility for freight costs to the destination, Verso determined that a single performance obligation is fulfilled and revenue is recognized when the goods ship.
Revenue is measured as the consideration expected to be received in exchange for transferring product. Verso reduces the revenue recognized for estimated returns and other customer credits, such as discounts and volume rebates, based on the expected value to be realized. 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 and terms of the arrangements. Revenues are adjusted at the earlier date of when the most likely amount of consideration expected to be received changes or as 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 on the Consolidated Statements of Operations. Sales taxes collected from customers are excluded from revenues. Incidental costs that are immaterial within the context of the contract are expensed when incurred.
The following table presents the revenue disaggregated by product included in Net sales on the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
| Paper | $ | 2,224 | | | $ | 1,175 | | | $ | 1,118 | |
| Pulp | 117 | | | 118 | | | 133 | |
| Packaging | 103 | | | 66 | | | 27 | |
| Net sales | $ | 2,444 | | | $ | 1,359 | | | $ | 1,278 | |
The following table presents the revenue disaggregated by sales channel included in Net sales on the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
| End-users and Converters | $ | 1,119 | | | $ | 476 | | | $ | 402 | |
| Brokers and Merchants | 936 | | | 641 | | | 664 | |
| Printers | 389 | | | 242 | | | 212 | |
| Net sales | $ | 2,444 | | | $ | 1,359 | | | $ | 1,278 | |
Two customers together accounted for 25%, 33% and 24% of Verso’s net sales for the years ended December 31, 2019, 2020 and 2021, respectively.
Shipping and Handling Costs — Shipping and handling costs, such as freight to customer destinations, are included in Cost of products sold on the Consolidated Statements of Operations. When the sales price includes charges to customers for shipping and handling, such amounts are included in Net sales.
Planned Major Maintenance Costs — Costs for all repair and maintenance activities are expensed in the month that the related activity is performed or goods received under the direct expense method of accounting.
Environmental Costs and Obligations — In accordance Accounting Standards Codification, or “ASC,” Asset Retirement and Environmental Obligations, and ASC Topic 450, Contingencies, costs associated with environmental obligations, such as remediation costs, are accrued when such costs are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. The ultimate aggregate financial impact with respect to these matters is subject to many uncertainties and could be material, but management cannot reasonably estimate the total amount or range of potential liability and additional costs at this time (see Note 17).
Equity Compensation — Verso accounts for equity awards in accordance with ASC, Topic 718, Compensation – Stock Compensation. ASC Topic 718 requires employee equity awards to be accounted for under the fair value method. Accordingly, share-based compensation is measured at the grant date based on the fair value of the award. Verso uses the straight-line attribution method to recognize share-based compensation over the service period of the award. Restricted stock units generally vest over 1 to 4 years. Verso has elected to recognize forfeitures as an adjustment to compensation expense in the same period as they occur.
Income Taxes — Verso accounts for income taxes using the liability method pursuant to ASC Topic 740, Income Taxes. Under this method, Verso recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. Verso regularly reviews deferred tax assets for recoverability based upon an analysis of all positive and negative evidence, including expected future book income based on historical data and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it is more likely than not that the recorded deferred tax assets, as adjusted for income tax valuation allowances, will be realized. Verso evaluates uncertain tax positions annually and considers whether the amounts recorded for income taxes are adequate to address its tax risk profile. Verso analyzes the potential tax liabilities of specific transactions and tax positions based on management’s judgment as to the expected outcome.
Earnings Per Share — Verso computes earnings per share by dividing net income or net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is
computed by dividing net income or net loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive common share equivalents outstanding during the period. Potentially dilutive common share equivalents are not included in the computation of diluted earnings per share if they are anti-dilutive.
Fair Value of Financial Instruments — The carrying amounts for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued and other liabilities approximate fair value due to the short maturity of these instruments. Verso determines the fair value of debt based on market information and a review of prices and terms available for similar obligations. See Note 10 and Note 13 for additional information regarding fair value.
Verso uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities and disclosures. Fair value is generally defined as the exit price at which an asset or liability could be exchanged in a current transaction between willing, unrelated parties, other than in a forced or liquidation sale.
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions used to value the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
| | | | | |
| ▪ Level 1: | Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. |
| ▪ Level 2: | Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. |
| ▪ Level 3: | Unobservable inputs reflecting management’s own assumption about the inputs used in pricing the asset or liability at the measurement date. |
Cash and Cash Equivalents — Cash and cash equivalents can include highly liquid investments with a maturity of three months or less at the date of purchase.
Accounts Receivable — Verso maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. Verso manages credit risk related to trade accounts receivable by continually monitoring the creditworthiness of customers to whom credit is granted in the normal course of business. Trade accounts receivable balances were $82 million and $106 million at December 31, 2020 and 2021, respectively. Two customers together accounted for 30% of accounts receivable as of December 31, 2020 and 2021.
Verso establishes allowance for doubtful accounts based upon factors surrounding the credit risks of specific customers, historical trends and other information. Based on this assessment, an allowance is maintained that represents what is believed to be ultimately uncollectible from such customers. The allowance for doubtful accounts was less than $1 million at both December 31, 2020 and 2021.
Verso has accounts receivable factoring arrangements with a third-party financial institution. These arrangements do not contain recourse provisions which would obligate Verso in the event of its customers’ failure to pay. Receivables are considered sold when they are transferred beyond the reach of Verso and its creditors, the purchaser has the right to pledge or exchange the receivables and Verso has surrendered control over the transferred receivables. For the year ended December 31, 2020, Verso incurred factoring fees of less than $1 million in connection with $78 million of accounts receivables sold without recourse. For the year ended December 31, 2021, Verso incurred factoring fees of less than $1 million in connection with $62 million of accounts receivables sold without recourse. These fees were included in Other operating (income) expense on the Consolidated Statements of Operations.
Inventories and Replacement Parts and Other Supplies — Inventory values include all costs directly associated with manufacturing products such as materials, labor and manufacturing overhead. These values are presented at the lower of cost or net realizable value. Costs of raw materials, work-in-process and finished goods are determined using the first-in, first-out method. Replacement parts and other supplies are valued using the average cost method and are reflected in Inventories on the Consolidated Balance Sheets (see Note 4).
Property, Plant and Equipment — Property, plant and equipment is stated at cost, net of accumulated depreciation. Interest is capitalized on projects meeting certain criteria and is included in the cost of the assets. The capitalized interest is depreciated over the same useful lives as the related assets (see Note 6).
Depreciation and amortization are computed using the straight-line method for all assets over the assets’ estimated useful lives. Estimated useful lives are as follows:
| | | | | | | | |
| (Years) | | |
Buildings and building improvements | | 20 - 40 |
Land improvements | | 10 - 20 |
Machinery and equipment | | 3 - 20 |
Furniture and office equipment | | 10 |
Computer hardware and software | | 3 - 7 |
Leasehold improvements | | Over the shorter of the lease term or the useful life of the improvements |
Intangible Assets — Verso accounts for intangible assets in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The intangible assets are comprised of customer relationships with a useful life of 10 years and trademarks with a five-year useful life. Both are amortized on a straight-line basis. The fair value of trademarks was determined based on the Relief from Royalty method. Verso assumed a royalty rate of 0.25% and a five-year economic life for trademarks. The rate was based on analysis of market information.
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. Impaired assets are recorded at estimated fair value, determined principally using discounted cash flows.
Deferred Issuance Costs — Debt issuance costs are included in Long-term debt as a reduction of the carrying amount of outstanding debt. Revolving credit facility debt issuance costs in excess of outstanding long-term debt are included in Intangibles and other assets, net on the Consolidated Balance Sheets. Debt issuance costs for term debt are amortized to interest expense using the effective interest method. Debt issuance costs for revolving debt are amortized to interest expense ratably over the life of the facility.
Asset Retirement Obligations — In accordance with ASC Topic 410, Asset Retirement and Environmental Obligations, a liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists. The liability is accreted over time and the asset is depreciated over its useful life. Verso’s asset retirement obligations under this standard relate primarily to closure and post-closure costs for landfills. Costs of future expenditures for asset retirement obligations are discounted to their present value when the timing of expected cash flows are reliably determinable. Revisions to the liability could occur due to changes in the estimated costs or timing of closure or possible new federal or state regulations affecting the closure.
As of December 31, 2020 and 2021, $2 million of restricted cash was included in Intangibles and other assets, net on the Consolidated Balance Sheets 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.
The following table presents activity related to asset retirement obligations for the periods presented. Long-term obligations are included in Other long-term liabilities and current portions are included in Accrued and other liabilities on the Consolidated Balance Sheets:
| | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Asset retirement obligations, beginning balance | $ | 16 | | | $ | 8 | |
| | | |
| Settlement of existing liabilities | — | | | — | |
| Accretion expense | 1 | | | 1 | |
Adjustments to existing liabilities (1) | (9) | | | 4 | |
| | | |
| Asset retirement obligations, ending balance | 8 | | | 13 | |
| Less: Current portion | — | | | — | |
| Non-current portion of asset retirement obligations, ending balance | $ | 8 | | | $ | 13 | |
(1) In 2020, includes $7 million in asset retirement obligations that were assumed by the buyer in the Pixelle Sale (see Note 5).
In addition to the above obligations, Verso may be required to remove or to remediate certain hazardous or potentially hazardous materials in accordance with current regulations that govern the handling of these materials. At this time, Verso believes that adequate information does not exist to reasonably estimate any such potential obligations. Accordingly, no liability for such remediation has been recorded.
Retirement benefits — Retirement plans cover substantially all of Verso’s employees. The defined benefit plans are funded in conformity with the funding requirements of applicable government regulations. Unrecognized prior service costs and actuarial gains and losses are amortized on a straight-line basis over the estimated remaining service periods of employees. Certain employees are covered by defined contribution plans. The employer contributions to these plans are based on a percentage of employees’ compensation or employees’ contributions.
Accumulated Other Comprehensive Income (Loss) — The following table summarizes the changes in Accumulated other comprehensive income (loss) by balance type for the years ended December 31, 2019, 2020 and 2021:
| | | | | |
| (Dollars in millions) | |
| Accumulated other comprehensive income as of December 31, 2018 | $ | 120 | |
| Pension adjustment, net | 2 | |
| Net increase in other comprehensive income | 2 | |
| Accumulated other comprehensive income as of December 31, 2019 | 122 | |
| Pension adjustment, net | (62) | |
| Net decrease in other comprehensive income | (62) | |
| Accumulated other comprehensive income as of December 31, 2020 | 60 | |
| Pension adjustment, net | 114 | |
| Net increase in other comprehensive income | 114 | |
| Accumulated other comprehensive income as of December 31, 2021 | $ | 174 | |
Related Party Transactions — Net sales for the years ended December 31, 2020 and 2021 include sales to a related party of $7 million and $67 million, respectively. Accounts receivable associated with this related party was $4 million at both December 31, 2020 and 2021.
2. AGREEMENT AND PLAN OF MERGER
Merger Agreement
On December 19, 2021, or the “Agreement Date,” Verso entered into an Agreement and Plan of Merger, or the “Merger Agreement,” with BillerudKorsnäs Inc., a Delaware corporation, or the “Parent,” West Acquisition Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent, or “Merger Sub,” and, solely for purposes of certain sections thereof (as specified therein), BillerudKorsnäs AB, a Swedish limited company, which we refer to as “Guarantor” or “BillerudKorsnäs.” Parent is a wholly owned subsidiary of Guarantor. Pursuant to the Merger Agreement, Merger Sub will merge with and into Verso, or the “Merger,” with Verso surviving the Merger as a wholly owned subsidiary of Parent.
Effect on Capital Stock
On and subject to the terms and conditions set forth in the Merger Agreement, upon the effective time of the Merger, or the “Effective Time,” by virtue of the Merger, among other things, each issued and outstanding share of Verso’s Class A common stock (other than any shares of Class A common stock owned by the Company or owned by Guarantor or any subsidiary of Guarantor or any shares of Class A common stock as to which appraisal rights have been properly exercised in accordance with Delaware law), will be automatically cancelled and converted into the right to receive cash in an amount equal to $27.00 per share (without interest), or the “Per Share Price.”
Pursuant to the terms of the Merger Agreement, the Company will not pay a cash dividend for the first quarter ending March 31, 2022. The Merger Agreement permits the Company to resume paying regular quarterly cash dividends commencing in the second quarter ending June 30, 2022 in an amount not to exceed $0.10 per share and consistent with the Company’s past practice in terms of the timing of declaration and payment of such dividends.
Warrants
In December 2021, after our announcement of the pending Merger with BillerudKorsnäs, certain warrant holders notified Verso of their request for the company to repurchase their warrants. See Note 14 for additional information regarding the warrants.
Equity Awards
In accordance with the Merger Agreement, at the Effective Time, (a) each time-vesting restricted stock unit, or “RSU,” of the Company outstanding as of the Agreement Date and still outstanding immediately prior to the Effective Time, whether vested or unvested, will automatically be cancelled and converted into the right to receive an amount in cash (without interest) equal to (i) the Per Share Price, multiplied by (ii) the total number of shares of Class A common stock subject to such RSU (including, for the avoidance of doubt, any dividend equivalents credited in respect of such RSU), or the “RSU Consideration,” and (b) each performance-vesting restricted stock unit of the Company, or each, a “PSU,” outstanding as of the Agreement Date and still outstanding immediately prior to the Effective Time, whether vested or unvested, will automatically be cancelled and converted into the right to receive an amount in cash (without interest) equal to (i) the Per Share Price, multiplied by (ii) the total number of shares of Class A common stock subject to such PSU (including, for the avoidance of doubt, any dividend equivalents credited in respect of such PSU), with the achievement of the performance-based vesting metrics applicable to each PSU deemed achieved at the target level of performance, or the “PSU Consideration.”
As promptly as reasonably practicable, but in any event no later than ten business days after the date on which the Merger closes, the RSU Consideration will be paid to the holders of such RSUs through the Company’s payroll system. The Merger Agreement provides that Parent will cause the Company to pay the PSU Consideration as soon as practicable following the last day of the applicable performance period, subject to the holder’s continued employment on such last day. However, in the event that the holder’s employment is terminated prior to the last day of the performance period without cause or due to the holder’s death or disability or, to the extent set forth in the applicable award or other applicable agreement, due to the holder’s resignation for good reason, the PSU Consideration payable with respect to the PSU shall be payable on such date notwithstanding such termination.
Any equity award granted following the Agreement Date and outstanding immediately prior to the Effective Time will be converted into a cash-based award in an amount equal to one-third (1/3) of the product of (x) the Per Share Price, multiplied by (y) the number of shares of Company Common Stock that would have been issuable under the Company RSU or Company PSU in respect of which the cash-based award is issued (and, in the case of a Company PSU, with performance criteria deemed achieved at the target level of performance), and including, for the avoidance of doubt, any dividend equivalents credited in respect of such Company RSU or Company PSU, or the “Converted Cash-Based Award,” with such Converted Cash-Based Award vesting in full on December 31, 2022, subject to the holder’s continued employment on such date. However, in the event that the holder’s employment is terminated without “cause,” due to the holder’s death or “disability,” or, to the extent set forth in the applicable award agreement, due to the holder’s resignation for “good reason,” in each case, prior to December 31, 2022, the Converted Cash-Based Award will continue to be payable on such date notwithstanding such earlier termination.
Representations and Warranties and Covenants; Termination Fee
The Company, Guarantor, Parent and Merger Sub have each made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants to use reasonable best efforts to obtain certain regulatory approvals, or the “Regulatory Approvals,” and antitrust clearance. In addition, in connection with obtaining the Regulatory Approvals, none of Guarantor, Parent or Merger Sub is required to take any action that would result in a Burdensome Condition (as defined in the Merger Agreement). Among other things, the Company has agreed, subject to certain exceptions, to conduct its business in all material respects in the ordinary course of business, from the Agreement Date until the Effective Time. In addition, the Merger Agreement provides for a termination fee of $24,690,000 million payable by the Company to Parent under certain circumstances described in the Merger Agreement.
Closing Conditions
The closing of the Merger is subject to certain conditions, including, among other things: (a) the adoption of the Merger Agreement by the Company’s stockholders, (b) the expiration or termination of any applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the “HSR Act,” (c) receipt of the Regulatory Approvals (without the imposition of a Burdensome Condition unless Parent, in its sole discretion, elects to accept an imposition of such Burdensome Condition), (d) the absence of any law or governmental order or other legal restraint or prohibition preventing the consummation of the Merger, (e) the accuracy of the other party’s representations and warranties (subject to certain materiality
qualifiers), (f) the other party’s compliance in all material respects with its covenants under the Merger Agreement and (g) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) since the Agreement Date. On January 11, 2022, Verso and BillerudKorsnäs made the filings required to be made under the HSR Act, and the applicable waiting period under the HSR Act expired on February 10, 2022.
The foregoing description of the Merger Agreement, the Merger and the transactions contemplated by the Merger Agreement is only a summary, does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which is attached as Exhibit 2.2 to this report and incorporated by reference herein. The Merger Agreement and the above description have been included to provide investors and security holders with information regarding the terms of the Merger Agreement. They are not intended to provide any other factual information about the Company or Parent. The representations, warranties and covenants contained in the Merger Agreement were made only for purposes of that agreement and as of specific dates; were solely for the benefit of the parties to the Merger Agreement; and may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made by each contracting party to the other for the purposes of allocating contractual risk between them. Investors should be aware that the representations, warranties and covenants or any description thereof may not reflect the actual state of facts or condition of the Company or Parent. Moreover, information concerning the subject matter of the representations, warranties, and covenants may change after Agreement Date.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2021
Accounting Standards Codification Topic 740, Income Taxes. In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update, or “ASU,” 2019-12, Simplifying the Accounting for Income Taxes, which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce the complexity in accounting for income taxes. Verso adopted this guidance on January 1, 2021, and the effect on the Consolidated Financial Statements was not material.
4. INVENTORIES
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Raw materials | $ | 45 | | | $ | 31 | |
| Work-in-process | 31 | | | 18 | |
| Finished goods | 125 | | | 61 | |
| Replacement parts and other supplies | 23 | | | 17 | |
| Inventories | $ | 224 | | | $ | 127 | |
5. DISPOSITIONS
Sale of Androscoggin Mill and Stevens Point Mill
On February 10, 2020, Verso completed the Pixelle Sale, selling all of the outstanding membership interests in Verso Androscoggin, LLC, an indirect wholly owned subsidiary of Verso and the entity that, as of the closing date of the Pixelle Sale, held all the assets primarily related to Verso’s Androscoggin Mill located in Jay, Maine and Verso’s Stevens Point Mill, located in Stevens Point, Wisconsin. The Pixelle Sale did not qualify as a discontinued operation. As consideration for the Pixelle Sale, Verso received $352 million in cash, which reflected certain adjustments related to Verso’s estimates of cash, indebtedness and working capital of Verso Androscoggin, LLC and Pixelle assumed $37 million of Verso’s unfunded pension liabilities, which reflected certain adjustments in connection with the completed transfer of the unfunded pension liabilities during the year ended December 31, 2020. Following post-closing adjustments, including $8 million of final working capital received in the fourth quarter of 2020, the sale resulted in a gain of $94 million included in Other operating (income) expense on the Consolidated Statement of Operations for the year ended December 31, 2020. In connection with the Pixelle Sale, Verso provided certain transition services to Pixelle and recognized $5 million for these services on the Consolidated Statement of Operations during the year ended December 31, 2020 with $2 million recognized as a reduction of Cost of products sold and $3 million as a reduction of Selling, general and administrative expenses.
The following table summarizes the components of the gain on sale:
| | | | | |
| (Dollars in millions) | |
| Cash proceeds | $ | 352 | |
| Less: costs to sell | (7) |
| Net cash proceeds | 345 | |
| Less: assets and liabilities associated with the sale | |
| Accounts receivable, net | 40 | |
| Inventories | 90 | |
| Property, plant and equipment, net | 195 | |
| Write-off of intangible assets | 5 | |
| Other assets | 4 | |
| Accounts payable | (33) | |
| Pension benefit obligation | (37) | |
| Other liabilities | (13) | |
| Gain on sale | $ | 94 | |
Luke Mill Land Sale
On October 30, 2020, Verso received $4 million of cash proceeds for the sale of ancillary land associated with the Luke Mill with a net book value of $4 million.
Luke Mill Equipment and Other Asset Sales
On August 1, 2020, Verso entered into an equipment purchase agreement with Halkali Kagit Karton Sanayi ve Tic. A.S., or the “Purchaser,” a company organized under the laws of Turkey, whereby Verso agreed to sell, and the Purchaser agreed to purchase, certain equipment at Verso’s Luke Mill, primarily including two paper machines. The purchase price was $11 million in cash due at various milestones, all of which had been received as of December 31, 2021. Management determined that the control over the use of the acquired assets had transferred to the Purchaser in June 2021 and correspondingly recognized the sale of the two paper machines and related assets at that time.
As of December 31, 2020 and 2021, Verso classified $17 million and $3 million, respectively, in Assets held for sale on the Consolidated Balance Sheets.
Sale of Duluth Mill
On May 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 Verso’s Duluth Mill located in Duluth, Minnesota for $7 million in cash, less costs to sell of $1 million. The sale, including related selling costs, resulted in a loss of $3 million, which is included in Other operating (income) expense on the Consolidated Statement of Operations for the year ended December 31, 2021.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Land and land improvements | $ | 26 | | | $ | 27 | |
| Building and leasehold improvements | 116 | | | 107 | |
Machinery, equipment and other (1) | 850 | | | 766 | |
| Construction-in-progress | 17 | | | 57 | |
| Property, plant and equipment, gross | 1,009 | | | 957 | |
Accumulated depreciation (1) | (396) | | | (434) | |
| Property, plant and equipment, net | $ | 613 | | | $ | 523 | |
(1) Includes finance lease assets and related amortization (see Note 9).
Interest costs capitalized, depreciation expense and finance lease asset amortization expense for the periods presented are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
| Interest costs capitalized | $ | 2 | | | $ | 1 | | | $ | — | |
| Depreciation expense | 176 | | | 147 | | | 150 | |
| Finance lease asset amortization expense | 1 | | | 1 | | | 1 | |
Property, plant and equipment as of December 31, 2019, 2020 and 2021 include $15 million, $3 million and $9 million, respectively, of capital expenditures that were unpaid and included in Accounts payable and Accrued and other liabilities on the Consolidated Balance Sheets.
In June 2019, Verso completed the shutdown and closure of the Luke Mill. Depreciation expense for the year ended December 31, 2019 included $76 million in accelerated depreciation associated with this closure, which is included in Depreciation and amortization on the Consolidated Statement of Operations. In connection with the permanent shut down of the Duluth Mill in December 2020, Verso recognized $65 million of accelerated depreciation which is included in Depreciation and amortization on the Consolidated Statement of Operations for the year ended December 31, 2020. In connection with the permanent shutdown of the No. 14 paper machine and certain other long-lived assets at the Wisconsin Rapids Mill, Verso recognized $84 million of accelerated depreciation which is included in Depreciation and amortization on the Consolidated Statement of Operations for the year ended December 31, 2021 (see Note 15).
During 2021, Verso received $9 million in insurance recoveries associated with a 2019 insurance claim at the Quinnesec Mill. These recoveries included $6 million related to property, plant and equipment which is included in Other operating (income) expense and $3 million related to business interruption which is included in Cost of products sold, both on the Consolidated Statement of Operations for the year ended December 31, 2021.
7. INTANGIBLES AND OTHER ASSETS, NET
Intangibles and other assets, net consist of the following:
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2020 | | 2021 |
Intangible assets: | | | |
Customer relationships, net of accumulated amortization of $9 million on December 31, 2020(1) and $11 million on December 31, 2021 | $ | 11 | | | $ | 9 | |
Trademarks, net of accumulated amortization of $12 million on December 31, 2020(1) and $13 million on December 31, 2021 | 1 | | | — | |
Other assets: | | | |
Operating leases | 14 | | | 9 | |
Deferred compensation | 4 | | | 3 | |
Restricted cash | 2 | | | 2 | |
ABL Facility unamortized debt issuance cost, net | 2 | | | 1 | |
Other | 10 | | | 8 | |
| | | |
Intangibles and other assets, net | $ | 44 | | | $ | 32 | |
(1) In connection with the Pixelle Sale in 2020 (see Note 5), Customer relationships gross intangible asset was reduced by $6 million and related accumulated amortization was reduced by $2 million, and Trademarks gross intangible asset was reduced by $3 million and related accumulated amortization was reduced by $2 million.
Amortization expense related to intangible assets for the periods presented is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
| Customer Relationships | $ | 3 | | | $ | 2 | | | $ | 2 | |
| Trademarks | 3 | | | 3 | | | 1 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The estimated future amortization expense for intangible assets over the next five years is as follows:
| | | | | |
| (Dollars in millions) | |
| 2022 | $ | 2 | |
| 2023 | 2 | |
| 2024 | 2 | |
| 2025 | 2 | |
| 2026 | 1 | |
When events or circumstances indicate that the carrying amount of an asset may not be recoverable, Verso assesses the potential impairment of intangibles and other long-lived assets by comparing the expected undiscounted future cash flows to the carrying value of those assets.
8. ACCRUED AND OTHER LIABILITIES
A summary of Accrued and other liabilities is as follows:
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Payroll and employee benefit costs | $ | 43 | | | $ | 31 | |
| Accrued sales rebates | 11 | | | 9 | |
| Accrued restructuring costs | 2 | | | 7 | |
| Accrued energy | 5 | | | 5 | |
| Operating lease liabilities | 8 | | | 4 | |
| Accrued taxes - other than income | 4 | | | 4 | |
| Accrued professional and legal fees | 2 | | | 3 | |
| Accrued environmental | 5 | | | 2 | |
| Accrued freight | 3 | | | 2 | |
| Deferred income on Luke Mill equipment sale | 8 | | | — | |
| Other | 1 | | | 1 | |
| Accrued and other liabilities | $ | 92 | | | $ | 68 | |
9. LEASES
Verso adopted ASC 842, Leases, on January 1, 2019. Verso leases certain office space, warehouses, vehicles and equipment under operating leases and certain equipment under finance leases. Leases with an initial term of 12 months or less, including any renewal options which are not reasonably certain of exercise in 12 months or less, are not recorded on the Consolidated Balance Sheets. Verso recognizes lease expense for these leases on a straight line basis over the lease term and expects payments in 2022 for these short-term leases to be than less than $1 million. Certain assets include renewal terms that generally range from 1 month to 1 year. Certain warehouse leases include only a payment for variable space utilized, not based on an index or rate, and are therefore not used in the valuation of the right-of-use asset and lease obligations. The lease agreements do not include residual value guarantees and do not contain any restrictions or covenants.
The following table details right-of-use assets and associated obligations for operating and finance leases included on the Consolidated Balance Sheets for the periods presented:
| | | | | | | | | | | |
| | December 31, | December 31, |
| (Dollars in millions) | Classification | 2020 | 2021 |
| Assets: | | | |
Operating lease assets | Intangibles and other assets, net | $ | 14 | | $ | 9 | |
Finance lease assets | Property, plant and equipment, net(1) | 5 | | 4 | |
Total leased assets | | $ | 19 | | $ | 13 | |
Liabilities | | | |
Current liabilities: | | | |
| Operating | Accrued and other liabilities | $ | 8 | | $ | 4 | |
Finance | Current maturities of long-term debt and finance leases | 1 | | 1 | |
| Non-current liabilities: | | | |
| Operating | Other long-term liabilities | 6 | | 5 | |
Finance | Long-term debt and finance leases | 4 | | 3 | |
| Total lease liabilities | | $ | 19 | | $ | 13 | |
(1) Finance lease assets are recorded net of accumulated amortization.
The following table details the costs associated with leasing transactions included on the Consolidated Statements of Operations for the periods presented:
| | | | | | | | | | | | | |
| | | | Year Ended | Year Ended |
| (Dollars in millions) | Classification | | | December 31, 2020 | December 31, 2021 |
Operating lease cost | Cost of products sold (exclusive of depreciation and amortization) | | | $ | 10 | | $ | 9 | |
Operating lease cost | Selling, general and administrative expenses | | | 1 | 1 |
Variable lease cost | Cost of products sold (exclusive of depreciation and amortization) | | | 7 | 3 |
Short term lease cost | Cost of products sold (exclusive of depreciation and amortization) | | | 3 | 1 |
Finance lease cost: | | | | | |
Amortization of leased assets | Depreciation and amortization | | | 1 | 1 |
Interest on lease liabilities | Interest expense | | | — | — |
| Net lease cost | | | | $ | 22 | | $ | 15 | |
The following table details the future lease payments associated with leases commenced as of December 31, 2021, including amounts for any renewal options that Verso has determined are reasonably certain to be exercised.
| | | | | | | | | | | | | | | | | |
| Operating | | Finance | | |
| (Dollars in millions) | Leases | | Leases | | Total |
| 2022 | $ | 4 | | | $ | 1 | | | $ | 5 | |
| 2023 | 3 | | | 2 | | | 5 | |
| 2024 | 2 | | | 1 | | | 3 | |
| 2025 | — | | | — | | | — | |
Thereafter | — | | | — | | | — | |
Total lease payments | 9 | | | 4 | | | 13 | |
| Imputed interest | — | | | — | | | — | |
| Present value of lease liabilities | $ | 9 | | | $ | 4 | | | $ | 13 | |
The following assumptions were used to determine the right-of-use assets and obligations associated with Verso’s leases for the periods presented. Verso uses its incremental borrowing rate to value the right-of-use asset and related obligations.
| | | | | | | | |
| December 31, | December 31, |
| 2020 | 2021 |
| Weighted average remaining lease term (years): | | |
| Operating leases | 2.1 | 2.6 |
Finance leases | 3.7 | 3.2 |
| Weighted average discount rate: | | |
| Operating leases | 2.7 | % | 2.0 | % |
Finance leases | 3.4 | % | 3.0 | % |
The following table provides additional cash flow details associated with leases included on the Consolidated Statements of Cash Flows for the periods presented:
| | | | | | | | |
| Year Ended | Year Ended |
| (Dollars in millions) | December 31, 2020 | December 31, 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
| Operating cash flows related to operating leases | 11 | | 10 | |
Operating cash flows related to finance leases | — | | — | |
Financing cash flows related to finance leases | 1 | | 1 | |
| | |
| | |
10. DEBT
As of December 31, 2020 and 2021, Verso Paper had no outstanding borrowings on its ABL Facility (as defined below).
Amounts of interest expense (inclusive of amounts capitalized) and amounts of cash interest payments related to long-term debt for the periods presented, are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
Interest expense (1) | $ | 3 | | | $ | 2 | | | $ | 1 | |
| Cash interest paid | 2 | | | 1 | | | 1 | |
Debt issuance cost and discount amortization (2) | 1 | | | — | | | 1 | |
(1) Represents interest expense incurred on the ABL Facility, exclusive of amortization of debt issuance cost and discount and inclusive of amounts capitalized (see Note 6 for additional information on capitalized interest costs).
(2) Amortization of debt issuance cost and original issue discount are included in Interest expense on the Consolidated Statements of Operations and in Amortization of debt issuance cost and discount on the Consolidated Statements of Cash Flows.
ABL Facility
Verso Paper is the borrower under a $200 million asset-based revolving credit facility, or the “ABL Facility.” From February 6, 2019 until May 10, 2021, the ABL Facility provided for revolving commitments of $350 million, with a $100 million sublimit for letters of credit and a $35 million sublimit for swingline loans. On May 10, 2021, Verso Paper entered into a third amendment to the ABL Facility, or the “Third ABL Amendment.” 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 the ABL Facility is limited to the lesser of $200 million or an amount determined pursuant to a borrowing base ($124 million as of December 31, 2021). As of December 31, 2021, the outstanding balance of the ABL Facility was zero, with $21 million issued in letters of credit and $103 million available for future borrowings. Availability under the ABL Facility is subject to customary borrowing conditions. The ABL Facility will mature on February 6, 2024.
Outstanding borrowings under the ABL Facility bear interest at an annual rate equal to, at the option of Verso Paper, either (i) a customary London interbank offered rate plus an applicable margin ranging from 1.25% to 1.75% or (ii) the Federal Funds Rate plus an applicable margin ranging from 0.25% to 0.75%, determined based upon the average excess availability under the ABL Facility. Verso Paper is also required to pay a commitment fee for the unused portion of the ABL Facility of 0.25% per year, based upon the average revolver usage under the ABL Facility. The ABL Facility provides 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 the ABL Facility are unconditionally guaranteed by Verso Holding and certain of the subsidiaries of Verso Paper. The ABL Facility is secured by 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.
The ABL Facility contains financial covenants requiring Verso, among other things, to maintain a minimum fixed charge coverage ratio if availability were to drop below prescribed thresholds. The ABL Facility also requires that certain payment conditions, as defined therein, are met in order for Verso to incur debt or liens, pay cash dividends, repurchase equity interest, prepay indebtedness, sell or dispose of assets and make investments in or merge with another company.
11. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Asset retirement obligations | $ | 8 | | | $ | 13 | |
| Employee related obligations | 16 | | | 11 | |
| Operating lease liabilities | 6 | | | 5 | |
| | | |
| | | |
| Deferred compensation | 4 | | | 3 | |
| Other | — | | | 5 | |
| Other long-term liabilities | $ | 34 | | | $ | 37 | |
12. EARNINGS PER SHARE
The following table provides a reconciliation of the basic and diluted income (loss) per common share:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2019 | | 2020 | | 2021 |
| Net income (loss) available to common stockholders (in millions) | $ | 70 | | | $ | (101) | | | $ | (3) | |
Weighted average common shares outstanding - basic (in thousands) | 34,625 | | | 34,232 | | | 30,869 | |
Dilutive shares from stock awards (in thousands) | 509 | | | — | | | — | |
Weighted average common shares outstanding - diluted (in thousands) | 35,134 | | | 34,232 | | | 30,869 | |
Basic income (loss) per share | $ | 2.03 | | | $ | (2.95) | | | $ | (0.09) | |
Diluted income (loss) per share | $ | 2.00 | | | $ | (2.95) | | | $ | (0.09) | |
As a result of the net loss from continuing operations for the years ended December 31, 2020 and December 31, 2021, 0.8 million and 0.7 million restricted stock units were excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive. As of December 31, 2019, 2020 and 2021, Verso had 1.8 million, 1.8 million and 1.0 million warrants, respectively, outstanding at an exercise price of $27.86, $21.67 and $20.66, respectively. As a result of the exercise price of the warrants exceeding the average market price of Verso’s common stock during the years ended December 31, 2019, 2020 and 2021, 1.8 million, 2.3 million and 1.3 million shares, respectively, were excluded from the calculation of diluted earnings per share as their inclusion would be anti-dilutive.
13. RETIREMENT BENEFITS
Defined Benefit Plans
As of December 31, 2021, the Verso Corporation Employee Pension Plan covers 51% of Verso’s employees. The pension plan provides defined benefits based on years of service multiplied by a flat monetary benefit or based on a percentage of compensation as defined by the plan document. The pension plan is frozen to new entrants. However, some of the pension plan participants continue to earn service accruals toward their pension benefits but no longer receive multiplier increases. In addition, some pension plan participants continue to earn annual interest credits, but no longer earn cash balance benefit credits.
During the fourth quarter of 2019, Verso offered a voluntary lump-sum option, on a temporary basis, to certain terminated vested and retired participants in the Verso Corporation Employee Pension Plan. The election period to participate began October 24, 2019 and ended November 22, 2019. Lump-sum payments were distributed primarily in November and December 2019 with the remaining payments distributed in 2020, to those participants who were eligible and elected this form of payment. This action resulted in a settlement gain of $13 million, included in Other (income) expense on the Consolidated Statement of Operations for the year ended December 31, 2019.
During the third quarter of 2020, in connection with the completed transfer of the unfunded pension liabilities assumed by Pixelle, as part of the Pixelle Sale (see Note 5), Verso remeasured its pension plan assets and liabilities as of September 30, 2020. For the remeasurement, the discount rate was updated to 2.71% from 3.11%. The remeasurement resulted in a $162 million increase in Pension benefit obligation and a $119 million loss, net of tax, included in Accumulated other comprehensive income (loss) as of September 30, 2020, and a settlement loss of $1 million in the third quarter of 2020 included in Other operating (income) expense on the Consolidated Statement of Operations for the year ended December 31, 2020.
The following tables summarize the components of net periodic pension cost (income) of Verso’s pension plans for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, |
(Dollars in millions) | | | | | | 2019 | | 2020 | | 2021 |
| | | | | | | | | | |
| Service cost | | | | | | $ | 4 | | | $ | 3 | | | $ | 2 | |
| Interest cost | | | | | | 65 | | | 45 | | | 38 | |
| Expected return on plan assets | | | | | | (70) | | | (65) | | | (63) | |
| | | | | | | | | | |
| Settlement | | | | | | (13) | | | 1 | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net periodic pension cost (income) | | | | | | $ | (14) | | | $ | (16) | | | $ | (23) | |
The following table provides detail on net actuarial (gain) loss recognized in Accumulated other comprehensive (income) loss:
| | | | | | | | | | | | | |
| | | December 31, |
| (Dollars in millions) | | | 2020 | | 2021 |
| | | | | |
| | | | | |
| Net actuarial (gain) loss, net of tax | | | $ | (60) | | $ | (114) |
Verso makes contributions that are sufficient to fund actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act. On March 11, 2021, the government signed into law the American Rescue Plan Act of 2021, or “ARPA.” The ARPA provides for pension funding relief that reduced Verso’s 2021 required cash contributions to its pension plan to $25 million from $46 million. Contributions to the pension plans were $42 million in 2019, $49 million in 2020 and $25 million in 2021. In 2022, Verso expects to make cash contributions to the pension plan of $21 million.
The following table sets forth a reconciliation of the pension plans’ benefit obligations, plan assets and funded status for the periods presented:
| | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| (Dollars in millions) | | | 2020 | | 2021 |
| Change in Projected Benefit Obligation: | | | | | |
| Benefit obligation at beginning of period | | | $ | 1,542 | | | $ | 1,527 | |
| Settlement | | | (9) | | | — | |
| Plan amendments | | | — | | | (3) | |
| Service cost | | | 3 | | | 2 | |
| Interest cost | | | 45 | | | 38 | |
| Actuarial (gain) loss | | | 113 | | | (62) | |
| Acquisitions/(divestitures) | | | (58) | | | — | |
| Benefits paid | | | (87) | | | (118) | |
| Curtailment | | | 2 | | | — | |
| Settlement payments | | | (24) | | | — | |
| Benefit obligation at end of period | | | $ | 1,527 | | | $ | 1,384 | |
| Change in Plan Assets: | | | | | |
| Plan assets at fair value at beginning of period | | | $ | 1,173 | | | $ | 1,177 | |
| Settlement payments | | | (24) | | | — | |
| Actual net return on plan assets | | | 87 | | | 152 | |
| Employer contributions | | | 49 | | | 25 | |
| Acquisitions/(divestitures) | | | (21) | | | — | |
| Benefits paid | | | (87) | | | (118) | |
| Plan assets at fair value at end of period | | | $ | 1,177 | | | $ | 1,236 | |
| Funded (underfunded) status at end of period | | | $ | (350) | | | $ | (148) | |
During 2021, the largest contributor to the $62 million actuarial gain affecting the benefit obligation was the increase in the discount rate used to measure the benefit obligation, from 2.57% as of December 31, 2020 to 2.89% as of December 31, 2021. During 2020, the largest contributor to the $113 million actuarial loss affecting the benefit obligation was the decrease in the discount rate used to measure the benefit obligation, from 3.11% as of December 31, 2019 to 2.57% as of December 31, 2020. In addition, the mortality projection scale was updated, which decreased the benefit obligation, and the commencement assumption for terminated vested participants was updated to better align with expectations, which increased the benefit obligation.
The following table summarizes expected future pension benefit payments from the plan:
| | | | | |
| (Dollars in millions) | |
| 2022 | $ | 106 | |
| 2023 | 100 | |
| 2024 | 96 | |
| 2025 | 95 | |
| 2026 | 93 | |
| 2027 - 2031 | 424 | |
Verso evaluates 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). Verso considers changes in these long-term factors based upon market conditions and the requirements of 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.
The actuarial assumptions used in the defined benefit pension plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Nine months ended September 30, | | Three months ended December 31, | | Year Ended December 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 | % |
| Rate of compensation increase | N/A | | N/A | | N/A | | N/A |
| Weighted average assumptions used to determine net periodic pension cost for the period: | | | | | | | |
| Discount rate | 4.17 | % | | 3.11 | % | | 2.71 | % | | 2.57 | % |
| Rate of compensation increase | N/A | | N/A | | N/A | | N/A |
| 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 | % |
The primary investment objective is to ensure, over the long-term life of the pension plan, an adequate pool of sufficiently liquid assets to support the benefit obligations. In meeting this objective, the pension plan seeks to achieve a high level of investment return through long-term stock and bond investment strategies, consistent with a prudent level of portfolio risk. The expected long-term rate of return on plan assets reflects the weighted average expected long-term rates of return for the broad categories of investments currently held in the plan (adjusted for expected changes), based on historical rates of return for each broad category, as well as factors that may constrain or enhance returns in the broad categories in the future. The expected long-term rate of return on plan assets is adjusted when there are fundamental changes in expected returns in one or more broad asset categories and when the weighted average mix of assets in the plan changes significantly.
The following table provides the pension plans’ asset allocation for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Allocation of Plan Assets |
| 2020 | | Allocation on | | 2021 | | Allocation on |
| Targeted | | December 31, | | Targeted | | December 31, |
| Allocation | | 2020 | | Allocation | | 2021 |
| Fixed income: | 25-55% | | | | 25-55% | | |
| | | | | | | |
| Cash and cash equivalent | | | 1 | % | | | | 11 | % |
| Fixed income funds | | | 37 | % | | | | 34 | % |
| | | | | | | |
| Equity securities: | 35-65% | | | | 35-65% | | |
| Domestic equity funds - large cap | | | 29 | % | | | | 25 | % |
| Domestic equity funds - small cap | | | 5 | % | | | | 5 | % |
| International equity funds | | | 18 | % | | | | 15 | % |
| Other: | 4-15% | | | | 4-15% | | |
| Hedge funds, private equity, real estate, commodities | | | 10 | % | | | | 10 | % |
ASC Topic 820, Fair Value Measurements and Disclosures, provides a common definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions used to value the assets or liabilities (see Note 1).
In accordance with accounting guidance ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), certain investments have been valued using the net asset value, or “NAV,” per share
(or its equivalent) practical expedient and are therefore not classified in the fair value hierarchy. The fair value amounts presented in these tables for investments are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the reconciliation of changes in the plan's benefit obligations and fair value of plan assets above.
The following table sets forth by level, within the fair value hierarchy, the pension plans’ assets at fair value as of the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Total | | Level 1 | | Level 2 | | Level 3 | | Assets Valued at NAV Practical Expedient |
| December 31, 2021 | | | | | | | | | |
| Cash and cash equivalent | $ | 132 | | | $ | — | | | $ | 132 | | | $ | — | | | $ | — | |
| Fixed income | 418 | | | 12 | | | 406 | | | — | | | — | |
| Domestic equity - large cap | 309 | | | — | | | — | | | — | | | 309 | |
| International equity | 191 | | | 82 | | | — | | | — | | | 109 | |
| Domestic equity - mid cap | 1 | | | — | | | — | | | 1 | | | — | |
| Domestic equity - small cap | 60 | | | 1 | | | — | | | — | | | 59 | |
| Other (hedge funds, private equity, real estate, commodities) | 129 | | | 17 | | | — | | | — | | | 112 | |
Total assets at fair value(1) | $ | 1,240 | | | $ | 112 | | | $ | 538 | | | $ | 1 | | | $ | 589 | |
| December 31, 2020 | | | | | | | | | |
| Cash and cash equivalent | $ | 10 | | | $ | — | | | $ | 10 | | | $ | — | | | $ | — | |
| Fixed income | 431 | | | 7 | | | 424 | | | — | | | — | |
| Domestic equity - large cap | 344 | | | — | | | 1 | | | — | | | 343 | |
| International equity | 217 | | | 95 | | | — | | | — | | | 122 | |
| | | | | | | | | |
| Domestic equity - mid cap | 1 | | | — | | | — | | | 1 | | | — | |
| Domestic equity - small cap | 54 | | | 3 | | | — | | | — | | | 51 | |
| | | | | | | | | |
| Other (hedge funds, private equity, real estate, commodities) | 122 | | | 13 | | | — | | | — | | | 109 | |
Total assets at fair value(1) | $ | 1,179 | | | $ | 118 | | | $ | 435 | | | $ | 1 | | | $ | 625 | |
| | |
(1) Excludes net payables of $2 million and $4 million as of December 31, 2020 and 2021, which consists of interest, dividends, and receivables and payables related to pending securities sales and purchases.
The following table sets forth a summary of the changes in the fair value of the pension plan’s Level 3 assets, which are corporate debt and equity securities, for the years ended December 31, 2020 and 2021:
| | | | | |
(Dollars in millions) | Fair Value |
| |
| |
| |
| Balance, December 31, 2019 | $ | 14 | |
Purchase of securities | 1 | |
Sale of securities | — | |
Change in the fair value of current securities | — | |
Transfers out of Level 3 | (14) | |
| Balance, December 31, 2020 | 1 | |
| |
| Sale of securities | — | |
| Change in the fair value of current securities | — | |
| |
| |
| Balance, December 31, 2021 | $ | 1 | |
| |
For the years ended December 31, 2020, $14 million of investments transferred from Level 3 to Level 2 and Level 1 due to changes in the observability of significant inputs.
The majority of investments are comprised of investments in publicly traded mutual funds and common/collective trusts. Publicly traded mutual funds are valued based on their publicly traded exchange value and common/collective trusts are valued using a NAV provided by the manager of each fund. The NAV is based on the underlying net assets owned by the fund, divided by the number of shares or units outstanding. The fair value of the underlying securities within the fund, which are generally traded on an active market, are valued at the closing price reported on the active market on which those individual securities are traded.
The table below sets forth the fair values of investments, whose fair values are estimated at December 31, 2021, using the NAV per share derived by the fund managers as a practical expedient that have unfunded commitments and/or redemption restrictions. To derive the estimated NAV per share, the fund managers apply various methodologies, including, but not limited
to, use of proprietary estimation models, quoted market prices or third-party valuations for underlying securities within the investments, evaluating contributions, distributions, interest, dividends and management fees, as well as evaluating the general market conditions and their correlation and impact on the investments.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | |
| (Dollars in millions) | Fair Value | | Unfunded Commitments | | Redemption Frequency | | Redemption Notice Period |
| | | | | | | |
Debt securities hedge fund (1) | $ | 74 | | | $ | — | | | Semi-Annually | | 90 days |
Private equity (2) | 10 | | | 1 | | | N/A | | N/A |
| | | | | | | |
| $ | 84 | | | $ | 1 | | | | | |
| | | | | | | |
(1) The fund’s objective is to achieve superior risk-adjusted total returns by investing primarily in public and private non-investment grade and non-rated debt securities. Securities and other instruments acquired by the fund may include all types of debt obligations consisting primarily of public and private non-investment grade and nonrated debt, convertible bonds, preferred stock, bank debt, middle market loans and notes, trade claims, liquidating trusts, assignments, options swaps and any other securities with fixed-income characteristics, including, without limitation, debentures, notes deferred interest, pay-in-kind or zero coupon bonds, mortgages and mortgage-backed securities, collateralized mortgage obligations and other real estate-related instruments. The fund may also acquire common or preferred stock, warrants to purchase common or preferred stock and any other equity interests.
(2) This category consists of several private equity funds some of which invest in limited partnerships which make equity-oriented investments in young, growing or emerging companies or entities. Additionally, the funds can invest in limited partnerships or other pooled investment vehicles which, in turn, make investments in management buy-in, management buy-out, leveraged buy-out, mezzanine, special situation and recapitalization transactions or other partnerships either directly or purchased in the secondary market, as well as investments in mezzanine, distressed and venture debt. These funds invest in a wide range of industries primarily in the United States. These investments cannot be redeemed. Instead, distributions are received when the underlying assets of the funds are liquidated.
Defined Contribution Plans
Verso also sponsors defined contribution plans for certain employees. Employees may elect to contribute a percentage of their salary on a pre-tax and/or after-tax basis, subject to regulatory limitations, into an account with an independent trustee which can then be invested in a variety of investment options at the employee’s discretion. Verso may also contribute to the employee’s account depending upon the requirements of the plan. For certain employees, these employer contributions may be in the form of a specified percentage of each employee’s total compensation or in the form of discretionary profit-sharing that may vary depending on the achievement of certain company objectives. Certain defined contribution benefits are provided in accordance with collective bargaining agreements. Expenses under these plans are presented below.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, |
(Dollars in millions) | | | | | | 2019 | | 2020 | | 2021 |
Defined Contribution Plans | | | | | | | | | | |
Non-elective employer contribution | | | | | | $ | 13 | | | $ | 8 | | | $ | 7 | |
Employer 401(k) matching contributions | | | | | | 14 | | | 9 | | | 7 | |
14. EQUITY
See Note 2 for information regarding the Merger Agreement, which affects the existing default treatment of certain of our equity awards.
Equity Awards
The Verso Corporation Performance Incentive Plan, or the “2016 Incentive Plan,” became effective on July 15, 2016 and no stock awards were issued on that date. The maximum number of shares of Class A common stock authorized to be issued or transferred pursuant to awards under the 2016 Incentive Plan is 3.6 million. As of December 31, 2021, we had 2.2 million shares of Class A common stock reserved for future issuance under the 2016 Incentive Plan. The Compensation Committee of the Board of Directors is the administrator of the 2016 Incentive Plan. Under the 2016 Incentive Plan, stock awards may be granted to employees, consultants and directors upon approval by the Board of Directors.
During 2021, Verso granted 0.3 million RSUs and 0.2 million PSUs to its executives and certain senior managers. The PSU awards granted vest on the performance determination date following the end of the performance period, as measured using an adjusted EBITDAP (earnings before interest, taxes, depreciation, amortization and pension expense/income) metric and a return on invested capital metric over a 3-year period ending December 31, 2023. The vesting criteria of the PSU awards meet the definition of a performance condition for accounting purposes. The number of shares which will ultimately vest at the vesting
date ranges from 0% to 200% of the number of PSUs granted based on performance during the 3-year cumulative performance period. The compensation expense associated with these performance awards is currently estimated at 200%.
On March 5, 2021, Verso modified certain outstanding restricted stock unit awards as part of a retention arrangement for its former Chief Financial Officer who retired on June 30, 2021. As modified, his PSUs will remain outstanding and may vest on a pro-rata basis based on Verso’s achievement of established targets. In addition, the next tranche of his RSUs vested at June 30, 2021. The foregoing changes were considered a modification and resulted in a revaluation of his 2019 and 2020 PSUs to a fair value of $0.67 and $8.66, respectively, and a revaluation of each of his 2018, 2019 and 2020 RSUs that vested as a result of the modification to a fair value of $13.32.
On May 11, 2020, the threshold requirement for vesting of achieving a 5% annualized TSR was eliminated for PSU’s granted in 2019 and 2020. This change was considered a modification of each award and required Verso to incur additional compensation cost for the incremental difference in the fair value between the modified award (post-modification) and original award (pre-modification) over the remaining vesting period. The incremental difference was $1.60 and $3.75 per unit for the 2019 and 2020 PSU grants, respectively.
Verso recognized equity award expense of $12 million, $5 million and $5 million for the years ended December 31, 2019, 2020 and 2021, respectively. Equity award expense for the year ended December 31, 2020 included $0.3 million related to the accelerated vesting of 108 thousand PSUs and 155 thousand RSUs. Amounts are net of the cancellation of 103 thousand RSU’s and 102 thousand PSUs and dividend equivalent units, pursuant to separation agreements with key members of management. As of December 31, 2021, there was $7 million of unrecognized compensation cost related to the 0.7 million non-vested RSUs, which is expected to be recognized over the weighted average period of 1.9 years.
Time-based Restricted Stock Units
The following table summarizes activity for the RSUs:
| | | | | | | | | | | |
| (In thousands, except per share amounts) | Restricted Stock Units
Outstanding | | Weighted Average Grant Date Fair Value per Share |
| | | |
| | | |
| | | |
| | | |
| Non-vested at December 31, 2018 | 678 | | | $ | 10.04 | |
| Granted | 192 | | | 20.57 | |
| Vested | (154) | | | 14.16 | |
| Forfeited | (137) | | | 13.81 | |
| Non-vested at December 31, 2019 | 579 | | | 11.55 | |
| Granted | 250 | | | 15.55 | |
Dividend equivalent units (1) | 167 | | | — | |
| Vested | (405) | | | 10.00 | |
| Forfeited | (170) | | | 13.76 | |
| Non-vested at December 31, 2020 | 421 | | | 9.95 | |
| Granted | 283 | | | 14.41 | |
Dividend equivalent units (1) | 9 | | | — | |
| Vested | (361) | | | 10.23 | |
| Forfeited | (73) | | | 11.85 | |
| Non-vested at December 31, 2021 | 279 | | | $ | 14.41 | |
(1) Dividend equivalent units on certain restricted stock unit awards for dividends related to the stock units granted but not yet vested at the time cash dividends were paid.
Performance-based Restricted Stock Units
The following table summarizes activity for the PSUs:
| | | | | | | | | | | |
| Restricted Stock Units
Outstanding | | Weighted Average Grant Date Fair Value per Share |
| |
| (In thousands, except per share amounts) | |
| Non-vested at December 31, 2018 | 638 | | | $ | 22.26 | |
| Granted | 244 | | | 17.35 | |
| Vested | (233) | | | 20.92 | |
| Forfeited | (11) | | | 17.50 | |
| Non-vested at December 31, 2019 | 638 | | | 18.84 | |
| Granted | 206 | | | 16.38 | |
Dividend equivalent units (1) | 136 | | | — | |
Incremental shares vested (2) | 161 | | | — | |
| Vested | (555) | | | 21.05 | |
| Forfeited | (162) | | | 13.71 | |
| Non-vested at December 31, 2020 | 424 | | | 12.21 | |
| Granted | 206 | | | 12.82 | |
Dividend equivalent units (1) | 9 | | | — | |
Incremental shares vested (2) | 13 | | | — | |
| Vested | (146) | | | 12.83 | |
| Forfeited | (77) | | | 10.59 | |
| Non-vested at December 31, 2021 | 429 | | | $ | 11.26 | |
(1) Dividend equivalent units on certain restricted stock unit awards for dividends related to the stock units granted but not yet vested at the time cash dividends were paid.
(2) Incremental shares are a result of performance awards at 150% of target level of shares vested in 2020 and 113% of the target level of shares vested in 2021.
Share Repurchases and Outstanding Authorization, and Dividends
On February 26, 2020, Verso’s Board of Directors authorized up to $250 million of net proceeds from the Pixelle Sale to be used to repurchase outstanding shares of Verso’s Class A common stock. In conjunction with the declaration of the special cash dividend of $3.00 per share for an aggregate of $101 million, on August 5, 2020, Verso’s Board of Directors reduced Verso’s total share repurchase authorization from $250 million to $150 million. During the year ended December 31, 2020, Verso purchased under its share repurchase authorization approximately 2.2 million of its Class A common stock through open market purchases and 10b5-1 programs at a weighted average cost of $13.39 per share. During the year ended December 31, 2021, Verso purchased under its share repurchase authorization (i) approximately 1.3 million shares of its Class A common stock through open market purchases and 10b5-1 programs at a weighted average cost of $15.97 per share and (ii) approximately 3.0 million shares at a purchase price of $18.10 per share through the modified Dutch auction tender offer discussed below. As of December 31, 2021, $45 million of the $150 million share repurchase authorization remained.
On May 13, 2021, Verso commenced a modified Dutch auction tender offer to purchase for cash shares of its Class A common stock for an aggregate purchase price of not more than $55 million and at a price per share of Class A common stock of not less than $16.00 and not more than $18.30 per share. The tender offer expired on June 10, 2021. Through the tender offer, Verso accepted for purchase approximately 3.0 million shares of its Class A common stock at a purchase price of $18.10 per share for an aggregate purchase price of approximately $56 million, including fees and expenses. The shares of common stock purchased through the tender offer were immediately retired. The excess purchase price over par value was recorded as a reduction to Paid-in capital on the Consolidated Balance Sheet during the year end December 31, 2021.
Cash dividends on shares of Verso Class A common stock during the year ended December 31, 2021 are shown in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Pursuant to the terms of the Merger Agreement, the Company will not pay a cash dividend for the first quarter ending March 31, 2022. The Merger Agreement permits the Company to resume paying regular quarterly cash dividends commencing in the second quarter ending June 30, 2022 in an amount not to exceed $0.10 per share and consistent with the Company’s past practice in terms of the timing of declaration and payment of such dividends.
Warrants
On July 15, 2016, warrants to purchase up to an aggregate of 1.8 million shares of Class A common stock were issued to holders of first-lien secured debt at an initial exercise price of $27.86 per share and a seven-year term (expiring on July 15, 2023), subject to customary anti-dilution adjustments.
In connection with the 2.2 million shares of Class A common stock repurchased pursuant to Verso’s share repurchase authorization and the ordinary and special dividends declared during the twelve months ended December 31, 2020, the number of shares of Class A common stock issuable upon exercise of each warrant increased from one share of Class A common stock to 1.29 shares of Class A common stock and the warrant exercise price was reduced from $27.86 per share to $21.67 per share. In connection with the 3.0 million shares of Class A common stock repurchased pursuant to the modified Dutch auction tender offer, and the ordinary dividends declared during the twelve months ended December 31, 2021, the number of shares of Class A common stock issuable upon exercise of each warrant increased from 1.29 shares of common stock to 1.35 shares of Class A common stock and the warrant exercise price was reduced from $21.67 per share to $20.66.
In December 2021, after Verso’s announcement of the pending Merger with BillerudKorsnäs, certain warrant holders notified Verso of their request for the company to repurchase their warrants. During December 2021, Verso decided to repurchase and retire 0.8 million warrants at an average price of $11.67, for total consideration of $10 million.
As of December 31, 2021, 1.0 million warrants remained outstanding. From January 1, 2022 through the date of this report, Verso decided to repurchase and retire an additional 0.3 million warrants at an average price of $11.63 for total consideration of $3 million.
Other Awards
In December 2021, 17,589 shares of Class A common stock were issued as part of an annual bonus, pursuant to an executive officer agreement.
15. RESTRUCTURING CHARGES
Wisconsin Rapids Mill - On February 8, 2021, Verso decided to permanently shut down the No. 14 paper machine and certain other long-lived assets at its paper mill in Wisconsin Rapids, Wisconsin, while continuing to explore viable and sustainable alternatives with the remaining assets, including its converting operation, No. 16 paper machine and other remaining long-lived assets. This decision was made in response to the continued accelerated decline in printing and writing paper demand. The decision to permanently shut down the No. 14 paper machine and certain other long-lived assets, which have been idle since July 2020, permanently reduced Verso’s total annual production capacity by approximately 185,000 tons of coated paper.
In connection with the permanent shutdown of the No. 14 paper machine and certain other long-lived assets at the Wisconsin Rapids Mill, Verso recognized $84 million of accelerated depreciation which is included in Depreciation and amortization on the Consolidated Statement of Operations for the year ended December 31, 2021.
The following table details the charges incurred related to the shutdown of No. 14 paper machine and certain other long-lived assets as included in Restructuring charges on the Consolidated Statement of Operations:
| | | | | | | | | | | |
| Year Ended | | Cumulative |
| (Dollars in millions) | December 31, 2021 | | Incurred |
| Property, plant and equipment, net | $ | 5 | | | $ | 5 | |
| | | |
| Write-off of spare parts and inventory | 3 | | | 3 | |
| | | |
| | | |
| Total restructuring costs | $ | 8 | | | $ | 8 | |
Duluth Mill — On December 31, 2020, Verso decided to permanently shut down the paper mill in Duluth, Minnesota while continuing with efforts to sell the mill. Management’s decision to permanently shut down the Duluth Mill was made in response to the continued accelerated decline in printing and writing paper demand resulting from the COVID-19 pandemic. The closure of the Duluth Mill, which had been idle since July 2020, reduced Verso’s total annual production capacity by approximately 270,000 tons of supercalendered/packaging paper. Verso furloughed approximately 190 employees when the mill was idled in July 2020, while a smaller group of approximately 35 employees remained at the mill to maintain critical systems (see Note 1). In May 2021, Verso completed the sale of the Duluth Mill (see Note 5).
In connection with the closure of the Duluth Mill, Verso recognized $65 million of accelerated depreciation which is included in Depreciation and amortization on the Consolidated Statement of Operations for the year ended December 31, 2020.
The following table details the charges incurred related to the Duluth Mill closure as included in Restructuring charges on the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | |
| Year Ended | | Year Ended | | Cumulative |
| (Dollars in millions) | December 31, 2020 | | December 31, 2021 | | Incurred |
| Property, plant and equipment, net | $ | 3 | | | $ | — | | | $ | 3 | |
| Severance and benefit costs | 1 | | | — | | | 1 | |
| Write-off of spare parts and inventory | 2 | | | — | | | 2 | |
| Write-off of purchase obligations and commitments | 1 | | | 10 | | | 11 | |
| Other costs | — | | | 2 | | | 2 | |
| | | | | |
| Total restructuring costs | $ | 7 | | | 12 | | $ | 19 | |
The following table details the changes in the restructuring reserve liabilities related to the permanent shut down of the Duluth Mill which are included in Accrued and other liabilities on the Consolidated Balance Sheets:
| | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Beginning balance of reserve | $ | — | | | $ | 2 | |
| Severance and benefits | 1 | | | — | |
| Severance and benefit payments | — | | | (1) | |
| | | |
| Purchase obligations | 1 | | | 10 | |
| Purchase obligations payments | — | | | (4) | |
| Other costs | — | | | 2 | |
| Payments on other costs | — | | | (2) | |
| | | |
| | | |
| | | |
| Ending balance of reserve | $ | 2 | | | $ | 7 | |
Closure of Luke Mill — On April 30, 2019, Verso announced that it would permanently shut down its paper mill in Luke, Maryland in response to the continuing decline in customer demand for the grades of coated freesheet paper produced at the Luke Mill, along with rising input costs, a significant influx of imports and rising compliance costs and infrastructure challenges associated with environmental regulation. Verso completed the shutdown and closure of the Luke Mill in June 2019, which reduced Verso’s coated freesheet production capacity by approximately 450,000 tons and eliminated approximately 675 positions.
In connection with the announced closure of the Luke Mill, Verso recognized $76 million of accelerated depreciation which is included in Depreciation and amortization on the Consolidated Statement of Operations for the year ended December 31, 2019.
The following table details the charges incurred related to the Luke Mill closure as included in Restructuring charges on the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Year Ended | | Year Ended | | Cumulative |
| (Dollars in millions) | December 31, 2019 | | December 31, 2020 | | December 31, 2021 | | Incurred |
| Property, plant and equipment, net | $ | 10 | | | $ | — | | | $ | 3 | | | $ | 13 | |
| Severance and benefit costs | 19 | | | (1) | | | — | | | 18 | |
| Write-off of spare parts and inventory | 9 | | | — | | | — | | | 9 | |
| Write-off of purchase obligations and commitments | 1 | | | — | | | — | | | 1 | |
| Other costs | 13 | | | 6 | | | — | | | 19 | |
| Total restructuring costs | $ | 52 | | | $ | 5 | | | $ | 3 | | | $ | 60 | |
The following table details the changes in the restructuring reserve liabilities related to the Luke Mill closure which are included in Accounts payable and Accrued and other liabilities on the Consolidated Balance Sheets:
| | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Beginning balance of reserve | $ | 4 | | | $ | — | |
| | | |
| | | |
| Severance and benefits reserve adjustments | (1) | | | — | |
| | | |
| | | |
| Other costs | 5 | | | — | |
| Payments on other costs | (8) | | | — | |
| Ending balance of reserve | $ | — | | | $ | — | |
16. INCOME TAXES
The following is a summary of the components of the (benefit) provision for income taxes for Verso:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
| Current tax (benefit) provision: | | | | | |
| U.S. federal | $ | — | | | $ | — | | | $ | — | |
| U.S. state and local | 1 | | | — | | | — | |
| Total current tax (benefit) provision | 1 | | | — | | | — | |
| Deferred tax (benefit) provision: | | | | | |
| U.S. federal | 22 | | | (9) | | | (1) | |
| U.S. state and local | 1 | | | (9) | | | (2) | |
| Total deferred tax (benefit) provision | 23 | | | (18) | | | (3) | |
| Less: valuation allowance | (115) | | | 9 | | | — | |
| Total income tax (benefit) provision | $ | (91) | | | $ | (9) | | | $ | (3) | |
A reconciliation of income tax expense using the statutory federal income tax rate compared with actual income tax expense follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
| Tax at Statutory U.S. Rate of 21% | $ | (4) | | | $ | (23) | | | $ | (1) | |
| Changes resulting from: | | | | | |
| | | | | |
| Deferred tax adjustments | 26 | | | 12 | | | (1) | |
| Other expenses | — | | | 2 | | | 1 | |
| Net permanent differences | 26 | | | 14 | | | — | |
| Valuation allowance | (115) | | | 9 | | | — | |
| State income taxes (benefit) | 2 | | | (9) | | | (2) | |
| Other | — | | | — | | | — | |
| Total income tax (benefit) provision | $ | (91) | | | $ | (9) | | | $ | (3) | |
The following is a summary of the significant components of the net deferred tax asset (liability):
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2020 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss | $ | 79 | | | $ | 78 | |
| Credit carryforwards | 36 | | | 36 | |
| Pension | 88 | | | 31 | |
| | | |
| Compensation obligations | 10 | | | 5 | |
| Inventory reserves/capitalization | 19 | | | 18 | |
| Capitalized expenses | 4 | | | 4 | |
| | | |
| | | |
| Other | 9 | | | 8 | |
| Gross deferred tax assets | 245 | | | 180 | |
| Less: valuation allowance | (20) | | | (20) | |
| Deferred tax assets, net of allowance | $ | 225 | | | $ | 160 | |
| Deferred tax liabilities: | | | |
| Property, plant and equipment | $ | (95) | | | $ | (70) | |
| Intangible assets | (4) | | | (3) | |
| Other | (4) | | | (2) | |
| Total deferred tax liabilities | (103) | | | (75) | |
| Net deferred tax assets | $ | 122 | | | $ | 85 | |
Verso regularly evaluates the need for an income tax valuation allowance for deferred tax assets by assessing whether it is more likely than not that Verso will realize the deferred tax assets. At December 31, 2021, Verso considered the existence of recent cumulative income from continuing operations as a source of positive evidence resulting in an increase of a portion of the income tax valuation allowance of less than $1 million. To determine the appropriate income tax valuation allowance, Verso considered the timing of future reversal of our taxable temporary differences that supports realizing a portion of Verso’s deferred tax assets.
The income tax valuation allowance for deferred tax assets as of each of December 31, 2020 and 2021 was $20 million. It is less than more likely than not that Verso will realize the carryforward benefits of all of the state tax credits in the future.
In 2019, 2020 and 2021, Verso allocated $1 million of tax expense, $22 million of tax benefit and $40 million of tax expense, respectively, to Other comprehensive income (loss). At December 31, 2020, Accumulated other comprehensive income includes $6 million of allocated tax benefit. At December 31, 2021, Accumulated other comprehensive income includes $34 million of allocated tax expense.
Verso has federal net operating loss carryforwards totaling $423 million as of December 31, 2021, some of which begin to expire at the end of 2034. These net operating losses have been reduced by attribute reduction and Internal Revenue Code Section 382 limits to $315 million available to be utilized in the future. $142 million of the federal net operating loss carryforwards begin to expire at the end of 2034 and $173 million of the federal net operating loss carryforwards never expire under the provisions of the U.S. Tax Cuts and Jobs Act of 2017.
Verso has state net operating loss carryforwards, after apportionment, totaling $217 million available to be utilized in the future as of December 31, 2021. Verso has a state income tax credit of $32 million, with a 15-year carryforward period, which begins to expire in 2024. Verso has research and development credit carryforwards of $4 million which begin to expire in 2036. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | |
| (Dollars in millions) | |
| Balance at December 31, 2019 | $ | 2 | |
| Additions | — | |
| Reductions | — | |
| Balance at December 31, 2020 | 2 | |
| Additions | — | |
| Reductions | — | |
| Balance at December 31, 2021 | $ | 2 | |
Verso’s policy is to record interest paid or received with respect to income taxes as interest expense or interest income, respectively, on the Consolidated Statements of Operations. The total amount of tax-related interest and penalties in the Consolidated Balance Sheets was zero at December 31, 2020 and 2021. The amount of expense (benefit) for interest and penalties included on the Consolidated Statements of Operations was zero for all periods presented.
None of the unrecognized tax benefits are expected to significantly increase or decrease in the next twelve months. None of the unrecognized tax benefits would, if recognized, affect the effective tax rate.
Verso files income tax returns in the United States for federal and various state jurisdictions. As of December 31, 2021, periods beginning in 2018 are still open for examination by various taxing authorities; however, taxing authorities have the ability to adjust net operating loss carryforwards from years prior to 2018. As of December 31, 2021, there are no ongoing federal or state income tax audits.
17. COMMITMENTS AND CONTINGENCIES
Purchase obligations — Verso has entered into unconditional purchase obligations in the ordinary course of business for the purchase of certain raw materials, energy and services. The following table summarizes the unconditional purchase obligations, as of December 31, 2021.
| | | | | |
| (Dollars in millions) | |
| 2022 | $ | 8 | |
| 2023 | 4 | |
| 2024 | 3 | |
| 2025 | 1 | |
| 2026 | — | |
| Thereafter | — | |
| Total | $ | 16 | |
Represented Employees — As of December 31, 2021, 52% of Verso’s workforce is represented by unions. On March 1, 2019, the United Steelworkers International Union, or “USW,” who represented employees at four Verso sites, voted to ratify a new Master Labor Agreement, or the “Agreement,” covering five USW union locals, or approximately 80% of Verso’s hourly represented workforce as of December 31, 2019. Since that time two of the four Verso sites (Stevens Point, Wisconsin and Luke, Maryland) covered by Agreement have been sold or are no longer operating. In addition to the USW, two smaller international unions (the International Brotherhood of Electrical Workers and the International Brotherhood of Teamsters) at the Escanaba site also signed and are participating in the Agreement. The Agreement, which was effective on March 4, 2019, will run for a period of three years with the Wisconsin Rapids site expiring on March 1, 2022 and the Escanaba site expiring on October 27, 2022. In December 2021, the parties agreed to extend the Wisconsin Rapids local contract for one year through February 28, 2023. The remaining four smaller trade unions at the Wisconsin Rapids site ratified new local agreements in the fourth quarter of 2019. During the year ended December 31, 2019, Verso recognized $7 million of expense for signing bonuses and for the settlement of various work arrangement issues, to represented employees covered by the Agreements, which was included in Cost of products sold on the Consolidated Statement of Operations.
Severance Arrangements — Under Verso’s severance policy, and subject to certain terms and conditions, if the employment of an eligible regular full-time salaried or non-represented hourly employee is terminated under specified circumstances, the employee is eligible to receive a termination allowance based on the employee’s eligible pay, classification and applicable service as follows: (i) one week of eligible pay multiplied by years of service up to 10 years of service and (ii) an additional two weeks of eligible pay for each year of service in excess of 10 years of service. In any event, the allowance is not less than two weeks of eligible pay and not more than 52 weeks of eligible pay. Termination allowances for union employees are subject to
collective bargaining rules. Verso may also elect to provide non-represented employees with other severance benefits such as subsidized continuation of medical and dental insurance coverage and outplacement services. Verso’s executive officers are also entitled to receive additional severance benefits under their contracts with Verso in the event of the termination of their employment under certain circumstances.
General Litigation — Verso is involved from time to time in legal proceedings incidental to the conduct of its business. While any proceeding or litigation has the element of uncertainty, Verso believes that the outcome of any of these lawsuits or claims that are pending or threatened or all of them combined (other than those that cannot be assessed due to their preliminary nature) will not have a material effect on the Consolidated Financial Statements.
In April 2019, Verso became aware of and reported that black liquor seeps were emanating from an area in and around the Luke Mill facility on the West Virginia side of the Luke Mill and entering the North Branch of the Potomac River in the state of Maryland. The Luke Mill sits on the border of West Virginia and Maryland. In response, regulatory agencies from Maryland and West Virginia, and a Non-Governmental Organization instituted a series of enforcement actions against Verso which included the issuance of an administrative order and the filing of civil actions requesting as relief that the seeps be stopped, the site be remediated, and that Verso pay civil penalties and for costs of the parties related to the enforcement actions being undertaken.
In November 2019, the state of West Virginia issued Unilateral Order MM-20-10 to Verso asserting that three above-ground storage tanks at Verso’s Luke Mill leaked and that Verso had failed to take certain actions to prevent and report the release of pollutants into the ground and into the North Branch of the Potomac River and required that Verso take steps to remediate the site.
In December 2019, Maryland instituted an initial civil action in Allegany County, Maryland alleging the improper handling, storage and disposal of wastes generated at the Luke Mill and requested as relief that the seeps be stopped and that Verso pay a civil penalty and costs due and owing to the state. That action was followed by the filing of a civil action in March 2020 by the Potomac Riverkeeper Network, or “PRKN,” in the federal district court of Maryland against Verso similarly alleging the same facts related to the improper handling, storage, and disposal of wastes generated at the Luke Mill and similarly requesting that the seeps be stopped and that Verso pay a civil penalty and other fees and costs to PRKN. In May 2020, Maryland chose to join the PRKN lawsuit in federal court and subsequently dismissed its state court action in July of 2020.
On April 1, 2021, a consent decree was approved and entered by the court in the federal lawsuit, setting forth the terms agreed by Verso with the PRKN and the Maryland Department of the Environment, or “the Department,” to settle the claims by PRKN and the state of Maryland. Pursuant to the consent decree, Verso agreed to pay an aggregate of $1 million in penalties and fees to the Department and PRKN. Verso also agreed to reimburse the Department for any future response and oversight costs at the Luke Mill up to a maximum of $25,000 for the first year after the effective date of the consent decree and $20,000 per year thereafter until termination of monitoring oversight under the consent decree. In addition to the penalties and fees paid pursuant to the consent decree, Verso also agreed to continue its ongoing remedial activities to stop the seeps at the Luke Mill and to monitor the site for at least three years after completion of its remedial efforts.
On September 1, 2021, a civil action was filed and a consent decree was simultaneously approved and entered by the circuit court of Mineral County, West Virginia, setting forth the terms agreed by Verso with the West Virginia Department of Environmental Protection, or “the Department of Environmental Protection,” to settle the claims by the Department of Environmental Protection. Pursuant to the consent decree, Verso agreed to pay $650,000 in penalties to the Department of Environmental Protection. In addition to the penalties paid pursuant to the consent decree, Verso also agreed to maintain compliance at the Luke Mill, implement and continue certain remediation actions and abide by certain reporting requirements. Unilateral Order MM-20-10 was rescinded and Verso agreed to enter the Luke Mill site into the West Virginia Voluntary Remediation Program and remediate the site pursuant to the requirements of the program. The Luke Mill was closed in June 2019.
As of December 31, 2021, $7 million of environmental remediation costs are included on the Consolidated Balance Sheet, including $2 million in Accrued and other liabilities and $5 million in Other long-term liabilities. As of December 31, 2020, $5 million of environmental remediation costs, which included the cost related to the consent decrees mentioned above, are included in Accrued and other liabilities on the Consolidated Balance Sheet.
In connection with the closure of former idled mills, claims were asserted against Verso relating to certain contractual obligations, which were settled in 2021. Verso recognized $9 million for the year ended December 31, 2021 included in Restructuring charges on the Consolidated Statements of Operations, associated with these contractual obligations.
18. INFORMATION BY INDUSTRY SEGMENT
We have two operating segments, paper and pulp. We previously determined that the operating income (loss) of the pulp segment was immaterial for disclosure purposes. However, as the price for pulp/ton increased in 2021, we determined that the pulp segment is material for disclosure purposes as of December 31, 2021. Our paper products are used primarily in media, marketing applications and commercial printing applications. Uses include catalogs, magazines, high-end advertising brochures, direct-mail advertising, and specialty applications, such as labeling and other special applications. Our NBHK pulp is used to manufacture printing, writing and specialty paper grades, tissue and other products. Our assets are utilized across operating segments in an integrated mill system and are not identified by operating segment or reviewed by management on an operating segment basis. We operate primarily in one geographic segment, North America.
The following table summarizes the operating segment data:
| | | | | | | | | | | | | | | | | |
| | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2019 | | 2020 | | 2021 |
Net sales(1) | | | | | |
| Paper | $ | 2,327 | | | $ | 1,241 | | | $ | 1,145 | |
| Pulp | 117 | | | 118 | | | 133 | |
| Total Net sales | $ | 2,444 | | | $ | 1,359 | | | $ | 1,278 | |
| Gross margin (exclusive of depreciation and amortization) | | | | | |
| Paper | $ | 276 | | | $ | 21 | | | $ | 170 | |
| Pulp | 30 | | | 4 | | | 46 | |
| Total Gross margin | $ | 306 | | | $ | 25 | | | $ | 216 | |
(1) Intersegment sales from the pulp segment to the paper segment of $98 million, $18 million and $20 million are eliminated from the Net sales above for the years ended December 31, 2019, 2020 and 2021, respectively.