Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Lean -
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.22pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.65pp
Lean -
Net-tone change vs last year's 10-K.
MD&A
+0.20pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
complaint+15
against+9
adversely+7
purported+7
alleges+5
Positive rising
opportunities+2
satisfied+2
able+1
favorable+1
beneficial+1
Risk Factors (Item 1A)
9,750 words
Item 1A. Risk Factors
Our business is subject to various risks. Set forth below are certain of the more material risks that we face and that could cause our actual results to differ materially from our historical results and negatively impact our business, cash flows, financial condition or results of operation. Our business could also be affected by other risks that are presently unknown to us or that we currently believe are immaterial to our business.
RISKS RELATED TO THE PROPOSED MERGER WITH BILLERUDKORSNÄS AB
There are material uncertainties and risks associated with the Merger Agreement and proposed Merger.
We may not be able to complete the proposed Merger within the time frame we anticipate or at all, which could have a material adverse effect on our business, financial results and/or operations. In addition, compliance with the terms of the Merger Agreement in the interim could adversely affect our business.
On December 19, 2021, we entered into the Merger Agreement with Parent, Merger Sub and solely for the purposes of certain sections thereof, BillerudKorsnäs, providing for the merger of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Parent.
Consummation of the proposed Merger remains subject to certain customary conditions, including, without :
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+5
restructuring+2
idled+1
against+1
shortages+1
Positive rising
favorable+3
greatly+1
strong+1
improvement+1
satisfaction+1
MD&A (Item 7)
8,183 words
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading North American producer of coated paper, shipped in both roll and sheet formats, which is used primarily in printing applications to produce high-end advertising brochures, catalogs and magazines among other media and marketing publications as well as specialty and packaging applications. We also produce and sell NBHK pulp, which is used to manufacture printing and writing paper grades and tissue products.
As of the date of this report, we operate three paper machines at our mill in Escanaba, Michigan and one paper machine and one NBHK pulp machine at our mill in Quinnesec, Michigan. The mills have an aggregate annual production capacity of approximately 1,400,000 tons of paper and NBHK pulp. In 2019, we shut down our paper mill in Luke, Maryland. In 2020, we sold our mills located in Jay, Maine and Stevens Point, Wisconsin, and indefinitely idled our mills in Duluth, Minnesota and Wisconsin Rapids, Wisconsin, but continue to operate the sheeting facility at our Wisconsin Rapids mill to convert paper produced at our Michigan mills to sheets for the commercial print market.
Financial Overview
Net sales for the year ended December 31, 2021 declined by $81 million or 6% compared to the prior year, as a result of a significant in sales volume partially offset by price/mix. market conditions fueled price/mix of $129 million, which was more than offset by a volume decrease of $210 million, or 15%, primarily related to our sold Duluth, Androscoggin and Stevens Point mills and Wisconsin Rapids mill. Total company sales volume was down from 1,674 thousand tons during the year ended December 31, 2020, to 1,407 thousand tons during the same period of the current year, primarily attributable to our sold Duluth, Androscoggin and Stevens Point mills and Wisconsin Rapids mill.
• certain regulatory approvals consisting of approval from (i) the Federal Energy Regulatory Commission, (ii) the Nuclear Regulatory Commission, (iii) State of Wisconsin Department of Health Services and (iv) the Public Service Commission of Wisconsin either (x) having been obtained from the applicable government authorities and remain in full force and effect, without the imposition of any Burdensome Condition (as defined in the Merger Agreement) or (y) being no longer required by applicable law.
• the consummation of the Merger not being restrained, enjoined, rendered illegal or otherwise prohibited or prevented by any law or order issued by any court of competent jurisdiction, and
• the approval by our stockholders of the Merger Agreement.
As a result of the proposed Merger, the following may occur:
• the attention of management and employees may be diverted from ongoing business operations as they focus on matters relating to the proposed Merger;
• the public announcement or pendency of the Merger may disrupt or otherwise adversely affect our business relationships, operating results and business generally;
• our ability to retain our key management, sales and marketing personnel may be adversely affected due to the uncertainties created by the proposed Merger; and
• the restrictions and limitations on our conduct of business pending the Merger, and the requirement that we conduct our business in the ordinary course, may delay or prevent us from undertaking business opportunities that may arise before the completion of the Merger that, absent the Merger Agreement, we might have pursued. Any delay in consummating the Merger may exacerbate these issues.
There can be no assurance that all of the conditions to closing will be satisfied, or where possible, waived, or that the Merger will become effective. Investors should not place undue reliance on the consummation of the Merger. If the Merger does not become effective because all conditions to closing are not satisfied, or because one of the parties or all of the parties mutually terminate the Merger Agreement, then, among other possible adverse effects:
• our stockholders will not receive payment of the merger consideration for their shares of common stock;
• our stock price could potentially decrease since the current stock price may reflect a market assumption that the proposed Merger will be consummated;
• we may experience difficulties in attracting customers or obtaining financing due to changed perceptions about our competitive position, our management, our liquidity or other aspects of our business;
• we may be unable to find a partner willing to engage in a similar transaction on terms as favorable as those set forth in our agreements with Parent and Merger Sub;
• our business may have been adversely affected; and
• we will have incurred significant transaction costs.
We cannot predict or give any assurances as to our stock price at any time before the completion of the proposed Merger.
The pendency of the proposed Merger could materially adversely affect our operations and the future of our business.
In connection with the pending Merger, our directors, senior management and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the Merger, which could negatively impact our revenues, earnings and cash flows, regardless of whether the Merger is completed. Similarly, we may have abandoned or delayed certain projects, business opportunities and divestitures which may materially adversely affect the future of our business.
Failure to complete the proposed Merger could negatively impact our stock price and our future businesses and financial results.
If the proposed Merger is not completed, we will be subject to several risks and consequences, including the following:
• under the Merger Agreement, we may be required, under certain circumstances, to pay to Parent a termination fee of $24,690,000;
• we may be required to pay certain costs relating to the Merger, including litigation costs, whether or not the Merger is completed, such as legal, accounting, financial advisor and printing fees;
• our stock price could potentially decrease since the current stock price may reflect a market assumption that the proposed Merger will be consummated;
• under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the proposed Merger that may adversely affect our ability to execute certain of our business strategies;
• matters relating to the proposed Merger may require our management to devote substantial commitments of time and resources, which could otherwise have been devoted to other opportunities that may have been beneficial to us; and
• we may experience negative reactions from the financial markets and from our customers and employees.
In addition, the following action has been commenced by purported stockholders of the Company:
On January 21, 2022, a purported stockholder complaint was filed in the United States District Court for the Southern District of New York, against us and the individual members of our Board, captioned O’Dell v. Verso Corporation et al., Civil Action No. 1:21-cv-00575, or the “O’Dell Complaint.” On January 27, 2022, a purported stockholder complaint was filed in the United States District Court for the Southern District of New York, against us and the individual members of our Board, captioned Whitfield v. Verso Corporation et al., Case No. 1:22-cv-00715, or the “Whitfield Complaint.” On February 1, 2022, a purported stockholder complaint was filed in the United States District Court for the Southern District of New York, against us and the individual members of our Board, captioned Trinh v. Verso Corporation et al. , Case No. 1:22-cv-00874, or the “Trinh Complaint.” On February 16, 2022, a purported stockholder complaint was filed against us and the individual members of our Board in the Eastern District of New York, captioned Collins v. Verso Corporation et al. , Case No. 1:22-cv-00875, or the “Collins Complaint,” and collectively with the O’Dell Complaint, the Whitfield Complaint and the Trinh Complaint the “Stockholder Complaints.”
The O’Dell Complaintalleges generally that the Company and the members of its Board of Directors violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material information from the Proxy Statement rendering it false and misleading and seeks, among other things, an injunctionagainst the Merger.
The Whitfield Complaintalleges generally that the Company and the members of its Board of Directors violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material information from the Proxy Statement rendering it false and misleading and seeks, among other things, an injunctionagainst the Merger.
The Trinh Complaintalleges generally that the Company and the members of its Board of Directors violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material information from the Proxy Statement rendering it false and misleading, and that the defendantsbreached their fiduciary duties in connection with the Merger, and seeks, among other things, an injunctionagainst the Merger.
The Collins Complaintalleges generally that the Company and the members of its Board of Directors violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder by omitting material information from the Proxy Statement rendering it false and misleading, and seeks, among other things, an injunctionagainst the Merger.
On February 17, 2022, Verso received a letter on behalf of a purported stockholder of Verso requesting to inspect certain of Verso’s books and records pursuant to Section 220 of the Delaware General Corporation Law, or the “Demand Letter.” The purported stockholder alleges that he has concerns regarding the process that led to the Merger, the disclosures in the Proxy Statement, and the adequacy of the Merger consideration.
We believe the allegations in the Stockholder Complaints and the Demand Letter to be without merit. Additional lawsuits may be filed in the future related to the Merger. We cannot predict the outcome of the proceeding related to the Stockholder Complaints or any other proceeding that may be commenced against us.
RISKS RELATED TO OUR OPERATIONS
We could be required to idle production, shut down machines or facilities, restructure operations, or sell non-core assets, which could result in recording significant closure costs and long-lived asset impairment or accelerated depreciation charges.
We have responded to changing market dynamics by optimizing assets and streamlining our production, including idling or shutting down certain paper machines and facilities. For example, in June 2020, we idled production at our mills in Duluth, Minnesota and Wisconsin Rapids, Wisconsin. In December 2020, we decided to permanently shut down our paper mill in Duluth and in February 2021, we decided to permanently shut down the No. 14 paper machine and certain other long-lived assets at our Wisconsin Rapids Mill. In April 2019, we announced the permanent shutdown of our mill in Luke, Maryland. If demand for our products continues to decline, or if the pace of decline accelerates, it may be necessary to curtail production even further or permanently shut down certain machines and facilities. In addition to the potential loss of production, curtailments and shutdowns have in the past resulted, and could in the future result, in asset impairments or accelerated depreciation and cash closure costs for the affected facilities, including restructuring charges and exit or disposal costs.
Losses related to the impairment of long-lived assets to be held and used are recognized when circumstances, such as continuing losses or demand declines in certain businesses, indicate the carrying value of an asset group may not be recoverable. When indicators that the carrying value of an asset group may not be recoverable are present, we evaluate the carrying value of the asset group in relation to its estimated undiscounted future cash flows. If the carrying value of an asset group is greater than the estimated undiscounted future cash flows to be generated by the asset group, an impairment charge is recognized based on the excess of the asset group’s carrying value over its fair value. If it is determined that the carrying value of an asset group is recoverable, we review and adjust, as necessary, the estimated useful lives of the assets in the group. If there were to be a triggering event, it is possible that we could record noncash long-lived asset impairment or accelerated depreciation charges in future periods.
We may be unable to obtain energy or raw materials, including petroleum-based chemicals, at favorable prices or at all.
We purchase substantial amounts of energy, wood fiber, market pulp, chemicals and other raw materials from third parties. We may experience shortages of energy supplies or raw materials or be forced to seek alternative sources of supply. If we are forced to seek alternative sources of supply, we may not be able to do so on terms as favorable as our current terms or at all. The prices for energy and many of our raw materials, especially petroleum-based chemicals, have been volatile and may be volatile in the future, including as a result of rising prices due to overall inflationary pressure. Chemical suppliers that use petroleum-based products in the manufacture of their chemicals may, due to a supply shortage and/or cost increase, ration the amount of chemicals available to us and/or we may not be able to obtain the chemicals we need to operate our business at favorable prices, if at all. In addition, certain specialty chemicals that we currently purchase are available only from a small number of suppliers. If any of these suppliers were to cease operations or cease doing business with us in the future, we may be unable to obtain such chemicals at favorable prices, if at all.
The supply of energy or raw materials may be adversely affected by, among other things, natural disasters or an outbreak or escalation of hostilities between the United States and any foreign power, and, in particular, events in the Middle East or weather events such as hurricanes could result in a real or perceived shortage of oil or natural gas, which could result in an increase in energy or chemical prices. In addition, wood fiber is a commodity and prices historically have been cyclical. The primary source for wood fiber is timber. Environmental litigation and regulatory developments have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in Canada and the United States. In addition, future domestic or foreign legislation, litigation advanced by aboriginal groups, litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest biodiversity and the response to and prevention of wildfires and campaigns or other measures by environmental activists also could affect timber supplies.
Any disruption in the supply of energy or raw materials also could affect our ability to meet customer demand in a timely manner and could harm our reputation. We have limited ability to pass through increases in our costs to our customers absent increases in market prices for our products. Furthermore, we may be required to post letters of credit or other financial assurance obligations with certain of our energy and other suppliers, which could limit our financial flexibility.
We are subject to physical and financial risks associated with global, regional, and local weather conditions and climate change.
Our operations and the operations of our suppliers are subject to climate variations which impact the productivity of forests, the frequency and severity of wildfires, the distribution and abundance of species, and other such events, which in turn may adversely or positively affect timber production and availability. Over the past several years, changing weather patterns and climatic conditions have added to the unpredictability of natural disasters. These natural disasters could affect our woodlands or cause variations in the cost of raw materials, such as virgin fiber, and adversely affect timber harvesting.
We are involved in continuous manufacturing processes with a high degree of fixed costs. Any interruption in the operations of our manufacturing facilities may affect our operating performance.
We run our paper machines on a nearly continuous basis for maximum efficiency. Any downtime at any of our paper mills, including as a result of or in connection with planned maintenance and capital expenditure projects, results in unabsorbed fixed costs that could negatively affect our results of operations for the period in which we experience the downtime. Due to the extreme operating conditions inherent in some of our manufacturing processes, we may incur unplanned business interruptions from time to time due to, among other things, transportation interruptions and mechanical, power or structural failures at our facilities. As a result, we may not generate sufficient cash flow to satisfy our operational needs. In addition, the geographic areas where our production is located and where we conduct our business has been, and may in the future be affected by natural disasters, including snow storms, forest fires and flooding which could cause our mills to stop running. Furthermore, during periods of weak demand for paper products or periods of rising costs, we have experienced and may in the future experience market-related downtime.
Work stoppages and slowdowns and legal action by our unionized employees may have a material adverse effect on our business.
As of December 31, 2021, we had approximately 1,600 employees of which 52% are represented by eight union locals of six different international 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 the 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 Wisconsin Rapids site ratified new local agreements in the fourth quarter of 2019. We may become subject to material cost increases as a result of future actions taken by the labor unions, which could increase expenses in absolute terms and/or as a percentage of net sales. In addition, although we believe we have a good relationship with our employees, work stoppages or other labor disturbances may occur in the future. Any of these factors could lead to operational delays or increased costs
Data security incidents and breaches and other disruptions to our information technology infrastructure may interfere with our operations and could compromise our information and the information of our customers and suppliers, exposing us to liability which would cause our business and reputation to suffer.
In the ordinary course of business, we rely upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information and to manage or support a variety of business processes and activities, including supply chain, manufacturing, distribution, invoicing and collection of payments from customers. We use information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, the propriety business information of our customers and suppliers, as well as personally identifiable information of our employees, in data centers and on information technology networks. The secure operation of these information technology networks and the processing and maintenance of this information is critical to our business operations and strategy. Despite security measures and disaster recovery plans, our information technology networks and infrastructure have, from time to time, experienced cyber incidents and we may be vulnerable to damage, disruptions or shutdowns in the future due to cyber incidents, including those caused by physical or electronic break-ins, computer viruses, malware, worms, phishing, attacks by hackers, employee error and disruptions caused from unauthorized access and tampering, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, telecommunication or utility failures or natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. In addition, we believe cyberattack attempts are increasing in number and that cyber attackers are developing increasingly sophisticated systems and means to not only access and attack systems, but also to evade detection or to obscure their activities. As a result, we may suffer cyber incidents even where we have implemented cybersecurity protections. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and damage our reputation.
We rely on third parties for certain transportation services.
We rely primarily on third parties for transportation of our products to our customers and transportation of our raw materials to us, in particular, by truck and train. The transportation industry is subject to legislative and regulatory changes that can affect the economics of those third-party transportation providers by requiring changes in their operating practices or influencing the demand for, and the cost of providing transportation services. If any third-party transportation provider fails to deliver our products in a timely manner, we may be unable to sell them at full value. Similarly, if any transportation provider fails to deliver raw materials to us in a timely manner, we may be unable to manufacture our products on a timely basis. Shipments of products and raw materials may be delayed due to weather conditions, strikes or other events. Any failure of a third-party transportation provider to deliver raw materials or products in a timely manner could harm our reputation and negatively impact our customer relationships. In addition, our ability to deliver our products on a timely basis could be adversely affected by the lack of adequate availability of transportation services, especially rail capacity, whether because of work stoppages or otherwise. If any of these third-party transportation providers were to cease operations or cease doing business with us, we may be unable to replace them at a reasonable cost. Furthermore, we may experience increases in the cost of our transportation services as a result of rising fuel costs and surcharges (primarily in diesel fuel), which we may not be able to pass through to our customers.
The COVID-19 pandemic and related efforts to mitigate the pandemic have adversely impacted and may continue to adversely impact our business.
The COVID-19 pandemic has impacted our operations and financial results since the first quarter of 2020 and continues to have an impact on us. We serve as an essential manufacturing business and, as a result, we have continued to be operational during the pandemic in order to meet the ongoing needs of our customers, including those in other essential business sectors, which provide food, medical and hygiene products needed in a global health crisis. However, the guidelines and orders enacted by federal, state and local governments in 2020 impacted demand from retailers, political campaigns, and sports and entertainment events, driving reduced purchases of printed materials and substantially impacting our graphic paper business.
There 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 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 our business, financial position, results of operations and cash flows.
While we cannot predict the ultimate impact of COVID-19 on our business at this time, the pandemic and related efforts to mitigate the pandemic have impacted and could continue to impact our business in a number of ways, including but not limited to:
• a decline in economic conditions and consumer confidence that have negatively affected, and will continue to negatively affect, consumer spending, commercial printing and advertising, and political campaign spending, all of which have adversely impacted and could continue to adversely impact sales volume and demand for our products, particularly in our graphic paper business;
• an adverse impact on timing of payments by customers;
• disruption of our mill operations, including the possible need to implement increased downtime at one or more of our mills due to decreased demand, new governmental mandates or for voluntary reasons, which could result in unabsorbed fixed costs, the loss of production, asset impairments or accelerated depreciation and cash closure costs for the affected facilities, including restructuring charges and exit or disposal costs if it becomes necessary to permanently shut down certain machines or facilities;
• the financial deterioration of, or the disruption to, one or more of our suppliers of energy or raw materials or the third parties we rely on for transportation of our products to customers, which may result in the inability of our suppliers or service providers to meet our needs in a timely manner, cause delays in delivery to our customers, result in cancellation of customer orders or a reduction in purchase prices and, ultimately, termination of customer relationships;
• limitations on our access to capital and other sources of funding, which could adversely affect the availability and terms of future borrowings, refinancing activities or other forms of capital raising;
• decreased availability of trucking and other transportation providers;
• increased difficulty in maintaining our workforce during this uncertain time;
• increased employee absenteeism due to illness or fear of infection;
• lawsuits or regulatory actions due to any COVID-19 spread in the workplace; and
• productivity of management and our employees that are working remotely, including the ability to maintain our financial reporting processes and related controls.
These risks could accelerate or intensify depending on the severity and length of the pandemic.
Our liquidity during the pandemic and the recovery period after we emerge from the pandemic will depend on multiple factors, including the impact on demand for our products, our ability to continue operations at our mills, the impact of the pandemic on our suppliers and third party service providers, and our operating performance.
As a result of the COVID-19 outbreak, we continually evaluate the impact on our long-lived assets, including the potential for impairment charges. For example, in June 2020, we announced plans to indefinitely idle our mills in Duluth, Minnesota and Wisconsin Rapids, Wisconsin and in January and February 2021, we reported our decision to permanently shut down our paper mill in Duluth, Minnesota and the No. 14 paper machine and certain other long-lived assets at our Wisconsin Rapids Mill, respectively. Depending on future events, we may be required to record future impairment charges. In addition, depending on the ongoing impact of the pandemic, we may also be required to reserve for incremental credit losses. Any material increase in our allowances for credit losses would have a corresponding effect on our results of operations and related cash flows.
While our mills have continued in operation as “essential businesses” during the COVID-19 outbreak, we have implemented strict health and sanitization protocols to keep our employees safe, including enhanced and more frequent cleaning of work areas, requiring social distancing while at our facilities, providing facemasks to employees and installing barriers in locations where employees work in closer proximity. These additional safety precautions may also impact the productivity and profitability at our mills.
The ultimate magnitude of COVID-19, including the extent of its impact on our financial condition and results of operations, which could be material, will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time.
We are subject to various environmental, health and safety laws and regulations that could impose substantial costs or other liabilities upon us.
We are subject to a wide range of federal, state, regional and local general and industry-specific environmental, health and safety laws and regulations, including those relating to air emissions (including greenhouse gases and hazardous air pollutants), wastewater discharges, solid and hazardous waste management and disposal, site remediation and natural resources. Compliance with these laws and regulations, and permits issued thereunder, is a significant factor in our business and may be
subject to the same or even increased scrutiny and enforcement actions by regulators. We have made, and will continue to make significant expenditures to comply with these requirements and permits, which may impose increasingly more stringent standards over time as they are renewed or modified by the applicable governmental authorities. In addition, we handle and dispose of waste arising from our mill operations and operate a number of on-site landfills to handle that waste. We are required to maintain financial assurance (in the form of letters of credit and other similar instruments) for the projected cost of closure and post-closure care for certain landfill operations. We could be subject to potentially significant fines, penalties, criminal sanctions, mill shutdowns or interruptions in operations for any failure to comply with applicable environmental, health and safety laws, regulations and permits. Moreover, under certain environmental laws, a current or previous owner or operator of real property, and parties that generate or transport hazardous substances that are disposed of at real property, may be held liable for the full cost to investigate or clean up such real property and for related damages to natural resources. We also may be subject to liability, including liability for investigation and cleanup costs, if contamination is discovered at one of our current or former paper mills, other properties or other locations where we have disposed of or arranged for the disposal of waste. For example, in November 2019, the state of West Virginia asserted in an administrative enforcement action that three above-ground storage tanks at our Luke Mill leaked and that we had failed to take certain actions to prevent and report the release of pollutants into the North Branch of the Potomac River. In March 2020, PRKN filed a federal lawsuit against us alleging the improper handling, storage, and disposal of wastes generated at our Luke Mill. In May 2020, Maryland joined the PRKN lawsuit and in July 2020, Maryland obtained dismissal of a lawsuit that it previously had filed with respect to the same facts. 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 to settle the claims by PRKN and the state of Maryland. 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 to settle the claims by the Department of Environmental Protection. 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.
RISKS RELATED TO OUR INDUSTRY
The printing and writing paper industry has been facing a long-term structural decline and our profitability may continue to be adversely impacted by such decline.
The coated paper industry faces a long-term, structural decline. From 2018 to 2021, demand for printing and writing paper in North America fell by roughly 30%. North America demand for coated freesheet has declined 34% from 2018 to 2021. Similarly, North America demand for coated groundwood has declined 50% from 2018 to 2021.
Adverse developments in general business and economic conditions could have an adverse effect on the demand for our products.
General economic conditions may adversely affect industrial non-durable goods production, consumer spending, commercial printing and advertising activity, and consumer confidence, all of which impact demand for our products. During an economic downturn, end-users may reduce magazine subscriptions, contributing to lower demand for our products and advertising in printed magazines and catalogs may also decline. In addition, we could experience volatility in the capital and credit markets, which would impact interest and the availability of credit.
Furthermore, significant changes in, and uncertainty with respect to, legislation, regulations and monetary, tax and trade policy, among other things could have an adverse effect on the demand for our products. While it is not possible to predict whether and when any such changes will occur, changes at the local, state or federal level could significantly impact our business and the industry in which we compete.
Foreign overcapacity could also result in an increase in the supply of paper products available in the North American market. An increased supply of paper available in North America could put downward pressure on prices and/or cause us to lose sales to competitors.
Developments in alternative media could adversely affect the demand for our products.
Trends in advertising, electronic data transmission and storage and the internet have had and likely will continue to have adverse effects on traditional print media, including the use of and demand for our products and those of our customers. Our magazine and catalog publishing customers may increasingly use (both for content and advertising), and compete with businesses that use, other forms of media and advertising and electronic data transmission and storage, particularly the internet,
instead of paper made by us. As the use of these alternative media continues to grow, the demand for our paper products will likely continue to decline.
The industry in which we operate is highly competitive.
Competition in our industry is based largely on price. We compete with foreign producers, some of which are lower-cost producers than we are or are subsidized by certain foreign governments. We also face competition from numerous North American coated paper manufacturers. Some of our competitors have advantages over us, including lower raw material and labor costs and may be subject to fewer environmental and governmental regulations.
Furthermore, due to the trend toward consolidation in our industry, some of our competitors have greater financial and other resources than we do or may be better positioned than we are to compete for certain opportunities. There is no assurance that we will be able to continue to compete effectively in the markets we serve.
Competition could cause us to lower our prices or lose sales to competitors. In addition, our ability to compete will be affected by product availability, the quality of our products, our breadth of product offerings, our ability to maintain mill efficiencies and to achieve high operating rates, manufacturing costs, our ability to distribute our products on time and availability and/or cost of wood fiber, market pulp, chemicals, energy, other raw materials and labor.
We have limited ability to control the pricing of our products or pass through increases in our costs to our customers.
Our earnings are sensitive to price changes in coated paper. Fluctuations in paper prices (and coated paper prices in particular) historically have had a direct effect on our net income (loss) and EBITDA for several reasons:
• Market prices for paper products are a function of supply and demand, factors over which we have limited control. We therefore have limited ability to control the pricing of our products. Market prices of grade No. 3, 60 lb. basis weight paper, which is an industry benchmark for coated freesheet paper pricing, have fluctuated since 2000 from a high of $1,255 per ton to a low of $740 per ton. In addition, since 2000, market prices of grade No. 4, 50 lb. basis weight paper, which is an industry benchmark for coated groundwood paper pricing, have fluctuated between a high of $1,200 per ton to a low of $710 per ton over the same period. As market conditions determine the price for our paper products, the price for our products could fall below our cash production costs.
• Market prices for paper products typically are not directly affected by raw material costs or other costs of sales, and consequently we may have limited ability to pass through increases in these raw materials and/or other sales costs to our customers absent increases in the market price. Thus, even though our costs may increase, we may not have the ability to increase the prices for our products or the prices for our products may decline.
• The manufacturing of coated paper is highly capital-intensive and a large portion of our operating costs are fixed. Additionally, paper machines are large, complex machines that are more efficient when operated continuously. Consequently, both we and our competitors typically continue to run our machines whenever marginal sales exceed the marginal costs, adversely impacting prices at times of lower demand.
Therefore, our ability to achieve acceptable margins is principally dependent on (a) our cost structure, (b) changes in the prices of raw materials, electricity, energy and fuel, which will represent a large component of our operating costs and will fluctuate based upon factors beyond our control and (c) general conditions in the paper market including the demand for paper products, the amount of foreign imports, the amount spent on advertising, the circulation of magazines and catalogs, the use of electronic readers and other devices and postal rates. Any one or more of these economic conditions could affect our sales and operating costs.
RISKS RELATED TO OUR BUSINESS STRATEGY
Our annual production capacity has been significantly reduced and our business has become less diversified because of the Pixelle Sale, closure of our Luke Mill, our Duluth Mill and the No. 14 paper machine and certain other long-lived assets at our Wisconsin Rapids Mill.
The reduction in the scale and scope of our business as a result of the Pixelle Sale, closure of our Luke Mill, our Duluth Mill and the No. 14 paper machine and certain other long-lived assets at our Wisconsin Rapids Mill has significantly reduced our annual production capacity and exposed a larger portion of our business to the risks associated with the market for graphic paper. Our total annual production capacity is now 1.4 million tons. Our total company sales volume was down from 1,674 thousand tons during the year ended December 31, 2020, to 1,407 thousand tons during the year ended December 31, 2021. In
addition, a greater portion of our product line will now be exposed to greater secular and cyclical risks associated with our business. If these difficulties or challenges cannot be overcome, our business may not be successful.
We depend on a small number of customers for a significant portion of our business. Furthermore, we may have credit exposure to these customers through extension of trade credits.
Our two largest customers, Central National-Gottesman and Veritiv Corporation, together accounted for 24% of our net sales in 2021. In 2021, our ten largest customers (including Central National-Gottesman and Veritiv Corporation) together accounted for 62% of our net sales. The loss of, or reduction in orders from, any of these customers or significant customer disputes regarding shipments, price, quality, or other matters could adversely impact our business.
In addition, we generally do not have long-term contracts with our customers that ensure a continuing level of business from them. Our agreements with our customers are not exclusive and generally do not contain minimum volume purchase commitments. Our relationship with our customers is dependent on our ability to continue to meet their needs for quality products and services at competitive prices. If we lose customers or if we experience a significant decline in sales volume, we may not be able to quickly replace the lost revenue.
Furthermore, we extend trade credit to certain of these customers to facilitate the purchase of our products, and we rely on these customers’ creditworthiness and ability to obtain credit from lenders. Accordingly, a bankruptcy or a significant deterioration in the financial condition of any of these significant customers could result in a reduction in sales, a longer collection cycle or an inability to collect accounts receivable.
We may not realize certain projected cost savings or productivity improvements, which could result in lower profitability for our business.
As part of our business strategy, we identify opportunities to improveprofitability by reducing costs and enhancing productivity. For example, through our continuous process improvement program, we have implemented focused programs to optimize material and energy sourcing and usage, reduce repair costs and control overhead. We will continue to utilize the process improvement program to drive cost reductions and operating improvements in our mill system and have targeted additional profitabilityenhancements in the next twelve months. Our strategy assumes that increases in productivity through our continuous process improvement program, including through a more efficient manufacturing process or engineering design enhancements, will result in economies of scale, and global competitive sourcing of our materials will reduce our raw material and other costs. Any cost savings or productivity enhancements that we expect to realize from such efforts may differ materially from our estimates. Cost savings or productivity enhancements that we realize may be offset, in whole or in part, by reductions in pricing or volume, or through increases in other expenses, including wood, chemicals and energy. We cannot assure you that these initiatives will be completed as anticipated or that the benefits we expect will be achieved on a timely basis, or at all.
The loss of members of our senior management team or other key personnel could adversely impact our business.
We are highly dependent on the efforts of our senior management team and other key personnel. The loss of services of members of our senior management team and other key personnel could adversely affect our business until suitable replacements can be found. There may be a limited number of persons with the requisite skills to serve in these senior management positions and we may be unable to locate or employ qualified personnel on acceptable terms. In addition, our future success requires us to continue to attract and retain competent personnel. Currently we are experiencing an increasingly tight and competitive labor market and could face unforeseenchallenges in the availability of labor. A sustained labor shortage or increased turnover rates within our employee base in the future could lead to increased costs, such as increased overtime to meet demand and increased wages to attract and retain employees. If we fail to attract and retain key personnel it could lead to a material adverse effect on our business and may require substantial additional costs to recruit replacement personnel.
We may from time to time pursue opportunistic acquisitions, the success of which could have a material adverse effect on our business.
If we identify an acquisition candidate to complement or expand our business, we may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses with our existing business and services. Future acquisitions could result in potentially dilutive issuances of equity securities and the incurrence of debt and contingent liabilities, amortization expenses and goodwill. The negotiation of any transaction, its completion and subsequent integration of any business acquired may be complex and time consuming, involve significant costs and may result in a distraction of management’s attention from ongoing business operations. We may be affected materially and adversely if we are unable to successfully integrate businesses that we acquire. Similarly, we may divest portions of our business, which may also have material and adverse effects.
RISKS RELATED TO OUR FINANCIAL OBLIGATIONS
Currency fluctuations may adversely affect our competitive position and selling prices.
We compete with producers from around the world, particularly in North America. In addition to the impact of product supply and demand, changes in the relative strength or weakness of international currencies, particularly the U.S. dollar, can also affect international trade flows in certain products. A stronger U.S. dollar may attract imports, thereby increasing product supply and possibly creating downward pressure on prices. Conversely, a weaker U.S. dollar might encourage U.S. exports, thereby decreasing product supply and possibly creating upward pressure on prices.
We may incur debt from time to time under our ABL Facility or through other means.
We had $103 million of borrowing availability under our ABL Facility (as defined below) as of December 31, 2021, and no amount outstanding. We also may incur additional debt in the future through other means. Our ability to make scheduled payments of principal and interest or to refinance our indebtedness will depend on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service any current or future debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive.
Financial covenants and restrictions under our ABL Facility could result in an event of default or limit our ability to pursue business strategies and changes relating to LIBOR could impact borrowing cost under our ABL Facility.
Under our ABL Facility, we are required to maintain a minimum fixed charge coverage ratio when the excess availability under such facility is less than the greater of (a) 10% of the lesser of (i) the borrowing base at such time and (ii) the aggregate amount of revolving facility commitments at such time or (b) $27.5 million.
Our ABL Facility also contains certain covenants which, among other things and subject to certain exceptions, restrict Verso Paper and certain of its subsidiaries’ ability to incur additional debt or liens, pay dividends, repurchase equity interests, prepay other indebtedness, sell, transfer, lease or dispose of assets and make investments in or merge with another company, make capital expenditures, enter into sale and leaseback provisions, engage or enter into any new line of business, enter into transactions with our affiliates or amend or modify certain provisions of our, and our subsidiaries’, organizational documents.
If we were to violate any of the covenants under our ABL Facility and were unable to obtain a waiver, it would be considered a default after the expiration of any applicable grace period and no additional borrowings would be available until the default was waived or cured. If we were in default under our ABL Facility, then the lenders thereunder may exercise remedies under such facility in accordance with the terms thereof, including declaring all outstanding borrowings immediately due and payable and the termination of any commitments they have to provide further borrowings. If we are unable to repay our indebtedness when due or declared due, the lenders thereunder will also have the right to proceed against the collateral pledged to them to secure the indebtedness. If such indebtedness were to be accelerated, our assets may not be sufficient to repay in full our secured indebtedness.
Certain covenants also apply to, and similarly restrict the operations of, Verso Holding. Any default under our ABL Facility could adversely affect our operations and our ability to satisfy our obligations as they come due.
In addition, borrowings under our ABL Facility bear interest at variable rates, primarily based on LIBOR as the reference rate. LIBOR is subject to national and international proposals for reform. Certain tenors of LIBOR ceased publication after December 31, 2021 and other tenors of LIBOR (including overnight and one, three, six and 12 months) will cease publication after June 30, 2023. Organizations are currently working on industry wide and company specific transition plans as it relates to financial and other derivative contracts exposed to LIBOR. Although the secured overnight financing rate (“SOFR”) has been endorsed by the Alternative Reference Rates Committee as its preferred replacement for LIBOR, it remains uncertain whether or when SOFR or other alternative reference rates will be widely accepted by lenders as the replacement for LIBOR. If future rates based upon a successor reference rate are higher or more volatile than LIBOR rates as currently determined or if our lenders have increased costs due to changes in LIBOR, we may experience potential increases in interest rates on any variable rate debt. We also have the ability to borrow under our ABL Facility based on the Federal Funds Rate as an alternative to the use of LIBOR.
We have certain material pension obligations. Future funding requirements related to these obligations could restrict cash available for our operations, capital expenditures or other requirements or require us to borrow additional funds.
As of December 31, 2021, we have a defined benefit pension plan covering 51% of our employees. The pension plan is frozen to new entrants. As of December 31, 2021, the projected benefit obligation for our pension plan was $1,384 million and the fair value of the pension plan assets was $1,236 million. The total underfunded status of the pension obligation calculated on a projected benefit obligation basis as of December 31, 2021 was $148 million. In connection with the Pixelle Sale on February 10, 2020, Pixelle assumed $37 million of Verso’s unfunded pension liabilities (see Note 5 to our Consolidated Financial Statements). In 2022, we expect to make cash contributions to the pension plan of $21 million (see Note 13 to our Consolidated Financial Statements). A deterioration in the value of plan assets could cause the unfunded status of the pension plan to increase, thereby increasing our obligation to make additional contributions to the plan. In addition, we will require future operating cash flows to fund our pension obligations, which could restrict available cash for our operations, capital expenditures and other requirements. We also may not generate sufficient cash to satisfy these obligations, which could require us to seek funding from other sources, including through additional borrowings, which could materially increase our outstanding debt or debt service requirements.
RISKS RELATED TO INVESTMENT IN OUR COMMON STOCK
Our stock price has been, and could continue to be volatile, and stockholders may be unable to sell shares at or above the price at which they purchased them.
Since January 1, 2021 to the date of filing this annual report on Form 10-K, our Class A common stock price ranged from $11.25 per share to $27.29 per share. The market price of our common stock may continue to be highly volatile and could be subject to wide fluctuations. In addition, the trading volume of our common stock may fluctuate and cause significant price variations to occur. Volatility in the market price of our common stock may prevent stockholders from being able to sell shares at or above the price at which they purchased them. The market price for our common stock could fluctuate significantly for various reasons, including:
• the pendency of, or the failure to complete, the proposed Merger (see “Risks Related to the Proposed Merger with BillerudKorsnäs AB” above);
• our operating and financial performance and prospects;
• our quarterly or annual earnings or those of other companies in our industry;
• conditions that impact demand for our paper products;
• the public’s reaction to our press releases, other public announcements and filings with the SEC;
• changes in earnings estimates or recommendations by securities analysts who track our common stock;
• market and industry perception of our success and competitive position within the industry in which we operate;
• strategic actions by us or our competitors, such as acquisitions, dispositions or restructurings;
• changes in government regulations;
• arrival and departure of key personnel;
• changes in our capital structure;
• sales of common stock by us or members of our management team; and
• changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.
The exercise of all or any number of outstanding Plan Warrants or the issuance of stock-based awards may dilute the value of the shares of our common stock.
As of the date of filing this annual report on Form 10-K, we have (i) outstanding warrants to purchase 0.9 million shares of our common stock, or the “Plan Warrants,” at an adjusted exercise price of $20.66 per share that expire on July 15, 2023, (ii) 0.8 million restricted stock units outstanding and (iii) 2.2 million shares of common stock reserved for future issuance under our Verso Corporation Performance Incentive Plan. The exercise of equity awards, including any stock options that we may grant in the future, the Plan Warrants, and the sale of shares of our common stock underlying any such options or the Plan Warrants, could have an adverse effect on the market for our common stock, including the price that an investor could obtain for their shares. Investors may experience dilution in the net tangible book value of their investment upon the exercise of the Plan Warrants and any stock options that may be granted or issued pursuant to the Verso Corporation Performance Incentive Plan in the future.
Our Amended and Restated Bylaws, our Certificate of Incorporation and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of our Amended and Restated Bylaws and Amended and Restated Certificate of Incorporation, as amended, or the “Certificate of Incorporation,” and Delaware law may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our Board of Directors. These provisions include:
• not providing for cumulative voting in the election of directors;
• establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings;
• prohibiting stockholder action by written consent; and
• authorizing the issuance of “blank check” preferred stock without any need for action by stockholders.
Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our Class A Common Stock. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of the Company, thereby potentially reducing the likelihood that our stockholders could receive a premium for their common stock in an acquisition.
Our Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our Certificate of Incorporation provides that, unless we consent in writing to alternative forums, the Court of Chancery of the State of Delaware will be the exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us by our directors, officers, or stockholders, (iii) any action asserting a claim against us arising under the Delaware General Corporation Law or to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine. We may consent in writing to alternative forums. This exclusive forum provision is intended to apply to claims arising under Delaware state law and would not apply to claims brought pursuant to the Exchange Act or Securities Act or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum provision in our Certificate of Incorporation does not relieve us of our duties to comply with the federal securities laws and the rules and regulations thereunder, and our stockholders are not deemed to have waived our compliance with these laws, rules and regulations.
This choice of forum provision in our Certificate of Incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us, which may discourage lawsuits against Verso and our directors, officers and other employees. In addition, stockholders who do bring a claim in the Court of Chancery of the State of Delaware could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. The Court of Chancery of the State of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder would otherwise choose to bring the action, and such judgments or results may be more favorable to Verso than to our stockholders. However, the enforceability of similar exclusive forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find this type of provision to be inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings. If a court were to find the exclusive forum provision contained in Verso’s Certificate of Incorporation to be inapplicable or unenforceable in an action, Verso might incur additional costs associated with resolving such action in other jurisdictions.
Actions of activist stockholders could cause us to incur substantial costs, divert management's attention and resources, and have an adverse effect on our business.
Future activist stockholder activities could adversely affect our business as (i) responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disruptive to our operations and divert the attention of management and our employees and (ii) perceived uncertainties as to our future direction, strategy or leadership could result in the loss of potential business opportunities, harm our ability to attract new investors, customers, employees, suppliers and other strategic partners, and cause the price of our common stock to experience periods of volatility or stagnation.
Corporate responsibility, specifically related to environmental, social and governance, or “ESG,” matters, may impose additional costs and expose us to new risks.
Public ESG and sustainability reporting is becoming more broadly expected by investors, stockholders and other third parties. Certain organizations that provide corporate governance and other corporate risk information to investors and stockholders have developed scores and ratings to evaluate companies and investment funds based upon ESG or “sustainability” metrics. These ratings may impact our investor base universe. Ongoing focus on corporate responsibility matters by investors and other parties may impose additional costs or expose us to new risks.
Item 1B . Unresolved Staff Comments
None.
decline
greatly
improved
Strong
favorable
idled
idled
Recent Developments
Agreement and Plan of Merger
For information regarding our pending Merger with BillerudKorsnäs and the Merger Agreement, see Note 2 to the Consolidated Financial Statements.
Sale of 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 our Duluth Mill located in Duluth, Minnesota for $7 million in cash less costs to sell of $1 million. The sale, including related sale costs, resulted in a loss of $3 million included in Other operating (income) expense on the Consolidated Statement of Operations for the year ended December 31, 2021.
Wisconsin Rapids Mill
On February 8, 2021, we decided to permanently shut down the No. 14 paper machine and certain other long-lived assets at our paper mill in Wisconsin Rapids, Wisconsin, while continuing to explore viable and sustainable alternatives with the remaining assets, including our converting operations, No. 16 paper machine and other remaining long-lived assets. This decision permanently reduced our total annual production capacity by 185,000 tons of coated paper. In connection with the permanent shutdown of the No. 14 paper machine and certain other long-lived assets, we recognized $84 million of accelerated depreciation which is included in Depreciation and amortization on the Consolidated Statement of Operations for the year ended December 31, 2021. In addition, we recognized $8 million in charges associated with the write-off of property, plant and equipment and spare parts and inventory which is included in Restructuring charges on the Consolidated Statement of Operations for the year ended December 31, 2021.
Luke Mill Equipment and Other Asset Sales
On August 1, 2020, we entered into an equipment purchase agreement with Halkali Kagit Karton Sanayi ve Tic. A.S., a company organized under the laws of Turkey, whereby we agreed to sell, and the buyer agreed to purchase, certain equipment at our 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. We 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.
COVID-19 Pandemic
The COVID-19 pandemic has impacted our operations and financial results since the first quarter of 2020 and continues to have an impact on us. We serve as an essential manufacturing business and, as a result, we have continued to be operational during the pandemic in order to meet the ongoing needs of our customers, including those in other essential business sectors, which provide food, medical and hygiene products needed in a global health crisis. However, the guidelines and orders enacted by federal, state and local governments in 2020 impacted demand from retailers, political campaigns, and sports and entertainment events, driving reduced purchases of printed materials and substantially impacting our graphic paper business.
There continue to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the resurgence of new and more contagious variants of the virus; the efficacy of the vaccines introduced to combat the virus and the public acceptance of such vaccines; and the impact of COVID-19 on economic conditions, including with respect to labor market
conditions, economic activity, consumer behavior, supply chain shortages and disruptions and inflationary pressure; all of which could have a material impact on our business, financial position, results of operations and cash flows.
While we cannot reasonably estimate the full impact of COVID-19 on our business, financial position, results of operations and cash flows, we saw our sales, volume and prices continue to recover during 2021.
Share Repurchases and Outstanding Authorization
On February 26, 2020, our Board of Directors authorized up to $250 million of net proceeds from the Pixelle Sale to be used to repurchase outstanding shares of our common stock. In conjunction with the declaration of the special cash dividend of $3.00 per share, for an aggregate of $101 million, on August 5, 2020, our Board of Directors reduced the total amount of the share repurchase authorization from $250 million to $150 million. In addition, on May 13, 2021, we commenced a modified Dutch auction tender offer to purchase for cash shares of our common stock for an aggregate purchase price of not more than $55 million. The tender offer expired on June 10, 2021. Through the tender offer, we accepted for payment approximately 3.0 million shares at a purchase price of $18.10 per share for an aggregate purchase price of approximately $56 million, including fees and expenses. The shares purchased through the tender offer were immediately retired.
During the years ended December 31, 2020 and 2021, we purchased approximately 2.2 million and 1.3 million shares, respectively, of our common stock through open market purchases, the modified Dutch auction tender offer and 10b5-1 programs under the share repurchase authorization at a weighted average cost of $13.39 and $15.97 per share, respectively.
As of December 31, 2021, $45 million of the $150 million share repurchase authorization remained.
Return of Proceeds to Stockholders
In February 2020, we announced our intention to utilize no less than $225 million and up to $282 million of the net cash proceeds from the Pixelle Sale for the benefit of our stockholders. As of December 31, 2021, we have returned $225 million to our stockholders through a combination of share repurchases and special and quarterly cash dividends, including the modified Dutch auction tender offer in May 2021.
Warrants
In December 2021, after our announcement of the pending Merger with BillerudKorsnäs, certain warrant holders notified us of their request for the company to repurchase their warrants. During December 2021, we decided to repurchase and retire 0.8 million warrants at an average price of $11.67, for total consideration of $10 million.
As of December 31, 2021, 1.0 million warrants remained outstanding. From January 1, 2022 through the date of this report, we decided to repurchase and retire an additional 0.3 million warrants at an average price of $11.63 for total considerations of $3 million.
Selected Factors Affecting Operating Results
Net Sales
Our sales, which we report net of rebates, allowances and discounts, are a function of the number of tons of paper that we sell and the price at which we sell our paper. Paper prices historically have been a function of macroeconomic factors which influence supply and demand. Price has historically been substantially more variable than volume and can change significantly over relatively short time periods.
We are primarily focused on serving the following end-user categories: specialty converters, general commercial print, catalogs and magazine publishers. Coated paper demand is primarily driven by advertising and print media usage. To offset the decline in demand for graphic paper, we are constantly looking at new product development and production improvements to reposition our assets into more stable markets.
Many of our customers provide us with forecasts, which allow us to plan our production runs in advance, optimizing production over our integrated mill system and thereby reducing costs and increasing overall efficiency. Generally, our sales agreements do not extend beyond the calendar year and provide for quarterly or semiannual price adjustments based on market price movements.
We reach our end-users through several channels, including merchants, brokers, printers and direct sales to end-users. We sell our products to approximately 200 customers which comprise approximately 900 end-user accounts. In 2021, our two largest customers, Central National-Gottesman and Veritiv Corporation, together accounted for 24% of our net sales.
Cost of Products Sold
We are subject to changes in our cost of sales caused by movements in underlying commodity prices. The principal components of our cost of sales are wood fiber, wood pulp, chemicals, energy, labor and maintenance. Costs for commodities, including wood fiber, wood pulp, chemicals and energy, are the most variable component of our cost of sales because their prices can fluctuate substantially, sometimes within a relatively short period of time. In addition, our aggregate commodity purchases fluctuate based on the volume of paper that we produce.
Wood Fiber. We source our wood fiber from a broad group of timberland and sawmill owners located in the regions around our mills. Our cost to purchase wood is affected directly by the market price of wood in our regional markets and indirectly by the variability of fuel cost for the logging and transportation of timber to our facilities. While we have fiber supply agreements in place that ensure delivery of a substantial portion of our wood requirements, purchases under these agreements are typically at market rates.
Wood Pulp. We source bleached wood pulp from market producers to supplement fiber requirements at our mills. The primary pulp procured is NBSK. We expect weather events and imbalances in supply and demand to create volatility in prices for NBSK from time to time.
Chemicals. Chemicals utilized in the manufacturing of coated paper include latex, clay, starch, calcium carbonate, caustic soda, sodium chlorate and titanium dioxide. We purchase these chemicals from a variety of suppliers and are not dependent on any single supplier to satisfy our chemical needs. We expect imbalances in supply and demand and weather events to periodically create volatility in prices and supply for certain chemicals.
Energy. We produce a significant portion of our energy needs for our paper mills from sources such as waste wood, waste heat recovery, liquid biomass from our pulping process and internal energy cogeneration facilities. Our external energy purchases include fuel oil, natural gas, coal and electricity. Our overall energy expenditures are mitigated by our internal energy production capacity and ability to switch between certain energy sources. The use of derivative contracts is also considered as part of our risk management strategy to manage our exposure to market fluctuations in energy prices.
Our indirect wholly-owned subsidiary CWPCo has 33.3 megawatts of generating capacity on 39 generators located in five hydroelectric plants on the Wisconsin River. CWPCo is a regulated public utility that provides electricity to our Wisconsin Rapids facility, and a small number of industrial, light commercial and residential customers.
Labor. Labor cost includes wages, salary and benefit expenses attributable to our mill personnel. Mill employees at a non-managerial level are compensated on an hourly basis. Management employees at our mills are compensated on a salaried basis. Wages, salary and benefit expenses included in cost of sales do not vary significantly from year to year. In addition, we have not experienced significant labor shortages.
Maintenance. Maintenance expense includes day-to-day maintenance, equipment repairs and larger maintenance projects, such as paper machine shutdowns for periodic maintenance. Maintenance activities can produce quarter-to-quarter fluctuations in our maintenance expenses. In conjunction with our periodic maintenance shutdowns, we have incidental incremental costs that are primarily comprised of unabsorbed fixed costs from lower production volumes and other incremental costs for purchased materials and energy that would otherwise be produced as part of the normal operation of our mills.
Depreciation and Amortization
Depreciation and amortization expense represents the periodic charge to earnings through which the cost of tangible assets and intangible assets are recognized over the asset’s life. Changes in our asset basis, such as capital investments and impairment or sale of tangible or intangible assets, may produce year-to-year fluctuations in expense.
Selling, General and Administrative Expenses
The principal components of our Selling, general and administrative expenses are wages, salaries and benefits for our office personnel at our headquarters and our sales force, travel and entertainment expenses, advertising expenses, expenses relating to certain information technology systems and research and development expenses.
Critical Accounting Policies
Our accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America, or “GAAP.” The preparation of the financial statements requires management to make certain judgments and assumptions in determining accounting estimates. Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and different estimates reasonably could have been used in the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, that would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.
Management believes the following critical accounting policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments. These judgments about critical accounting estimates are based on information available to us as of the date of the financial statements.
Impairment of Long-lived Assets
Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to the estimated undiscounted future cash flows generated by their use.
Management believes that the accounting estimates associated with determining fair value as part of an impairment analysis are critical accounting estimates because estimates and assumptions are made about our future performance and cash flows. The estimated fair value is generally determined on the basis of discounted future cash flows. We also consider a market-based approach and a combination of both. While management uses the best information available to estimate future performance and cash flows, future adjustments to management’s projections may be necessary if economic conditions differ substantially from the assumptions used in making the estimates.
Pension
We offer various pension and retirement benefits to certain employees. Our defined benefit pension plan is frozen to new entrants. The calculation of the obligations and related expenses under the plan requires the use of actuarial valuation methods and assumptions, including the expected long-term rate of return on plan assets, discount rates and changes in mortality rates. The table below shows assumptions used by us for the periods shown:
Year Ended December 31,
Nine months ended September 30,
Three months ended December 31,
Year Ended December 31,
Weighted average assumptions used to determine benefit obligations as of end of period:
Discount rate
Weighted average assumptions used to determine net periodic pension cost for the period:
Discount rate
Expected long-term return on plan assets
Cash balance interest credit rate
We evaluate the actuarial assumptions annually as of December 31 (the measurement date), unless a significant event occurs during the year requiring a remeasurement (such as a plan amendment, settlement, or curtailment). We consider changes in these long-term factors based upon market conditions and the requirements of Accounting Standards Codification, or “ASC,” Topic 715, Compensation—Retirement Benefits . These assumptions are used to calculate benefit obligations as of December 31 of the current year and pension expense to be recorded for the following year. The discount rate assumption reflects the yield on a portfolio of high quality fixed-income instruments that have a similar duration to the plan’s liabilities. The expected long-term rate of return assumption reflects the average return expected on the assets invested to provide for the plan’s liabilities.
Actuarial valuations and assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. The following table highlights the sensitivity of our pension obligations and 2022 net periodic pension cost (income) to changes in these assumptions, assuming all other assumptions remain constant.
Impact on 2022 Net Periodic
Impact on Pension
Change in Assumption
Pension Cost (Income)
Benefit Obligation
0.25 percentage point decrease in discount rate
Decrease $3 million
Increase $39 million
0.25 percentage point increase in discount rate
Increase $3 million
Decrease $37 million
0.25 percentage point decrease in expected rate of return on assets
Increase $3 million
0.25 percentage point increase in expected rate of return on assets
Decrease $3 million
Contingent Liabilities
A liability is contingent if the outcome or amount is not presently known, but may become known in the future as a result of the occurrence of some uncertain future event. We estimate our contingent liabilities based on management’s estimates about the probability of outcomes and their ability to estimate the range of exposure. Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated. In addition, it must be probable that the loss will be confirmed by some future event. As part of the estimation process, management is required to make assumptions about matters that are by their nature highly uncertain.
The assessment of contingent liabilities, including legal contingencies, asset retirement obligations and environmental costs and obligations, involves the use of critical estimates, assumptions and judgments. Management’s estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures. However, there can be no assurance that future events will not differ from management’s assessments.
Income Taxes
We are subject to income taxes in the United States. Significant judgments and estimates are required in determining the consolidated income tax expense. The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. Under GAAP, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss and credit carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the enactment date occurs. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. In the event that the actual outcome of future tax consequences differs from our estimates and assumptions due to changes or future events, the resulting change to the provision for income taxes could have a material effect on our Consolidated Financial Statements.
The recoverability of deferred tax assets and the recognition and measurement of uncertain tax positions are subject to various assumptions and judgment by us. If actual results differ from the estimates made by us in establishing or maintaining valuation allowances against deferred tax assets, the resulting change in the valuation allowance would generally impact earnings or other comprehensive income depending on the nature of the respective deferred tax asset. Positive and negative evidence is considered in determining the need for a valuation allowance against deferred tax assets, which includes such evidence as historical earnings, projected future earnings, tax planning strategies and expected timing of reversal of existing temporary differences. Additionally, the positions taken with regard to tax contingencies may be subject to audit and review by tax authorities, which may result in future taxes, interest and penalties.
In determining the recoverability of deferred tax assets, we give consideration to all available positive and negative evidence including reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. We place the most weight to historical earnings and we consider three years of cumulative income or loss. In addition, we have reflected increases and decreases in our valuation allowance based on the overall weight of positive versus negative evidence on a jurisdiction by jurisdiction basis.
Recent Accounting Pronouncements
For a description of recently issued and adopted accounting pronouncements, including the respective dates of adoption and expected effects on our results of operations and financial condition, see Part II, Item 8, Note 3 of Notes to Consolidated Financial Statements, which is incorporated by reference in response to this item.
Results of Operations
The following table sets forth the historical results of operations of Verso for the periods presented. The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto included elsewhere in this annual report.
Year Ended December 31,
(Dollars in millions)
Net sales
Costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)
Depreciation and amortization
Selling, general and administrative expenses
Restructuring charges
Other operating (income) expense
Operating income (loss)
Interest expense
Other (income) expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
2021 Compared to 2020
Net sales. Net sales for the year ended December 31, 2021 declined by $81 million or 6% compared to the year ended December 31, 2020, attributable to favorable price/mix of $129 million, which was more than offset by a decrease in sales of $210 million, or 15%, primarily related to our sold Duluth, Androscoggin and Stevens Point mills and idled Wisconsin Rapids mill. Total company sales volume was down from 1,674 thousand tons during the year ended December 31, 2020, to 1,407 thousand tons during 2021, primarily attributable to our sold Duluth, Androscoggin and Stevens Point mills and idled Wisconsin Rapids mill.
Operating income (loss). Operating loss was $29 million for the year ended December 31, 2021, an improvement of $99 million when compared to operating loss of $128 million for the year ended December 31, 2020.
Our operating results for the year ended December 31, 2021 were positively impacted by:
• Favorable price/mix of $129 million driven by price increase realization across all grades, including pulp
• Improved operating income of $34 million resulting from the conversion to our current two mill system
• Lower net operating expenses of $78 million primarily driven by lower closed/idled mill spend, as well as lower wood cost, improved performance and cost reduction initiatives across our mill system
• Lower planned major maintenance costs of $7 million driven by reduced scope
• Lower Selling, general and administrative expenses of $1 million driven primarily by cost savings in connection with the sale of the two specialty mills in 2020, offset by higher incentive expense and Merger Agreement costs in 2021
Our operating results for the year ended December 31, 2021 were negatively impacted by:
• Lower sales volume resulting in a decrease of $6 million in net operating income
• Inflationary costs of $51 million driven by purchased pulp, latex, energy and freight
• Higher depreciation expense of $1 million due primarily to $84 million in accelerated depreciation at our Wisconsin Rapids Mill in 2021, partially offset by $65 million in accelerated depreciation associated with the closure of our
Duluth Mill in December 2020 and approximately $16 million of nonrecurring depreciation associated with these events
• Higher Restructuring charges of $11 million primarily associated with the permanent shutdown of our Duluth Mill in December 2020 and the No. 14 paper machine and certain other long-lived assets at our Wisconsin Rapids Mill in February 2021
• Lower other operating income of $81 million, primarily as a result of the $94 million gain on the sale of our Androscoggin and Stevens Point mills in 2020, partially offset by $6 million in insurance recoveries in 2021, associated with a 2019 insurance claim at our Quinnesec Mill
Other (income) expense. Other income for the year ended December 31, 2021 and 2020 includes income of $25 million and $20 million, respectively, associated primarily with the non-operating components of net periodic pension cost (income).
Income tax expense (benefit). Income tax benefit of $3 million for the year ended December 31, 2021 reflects estimated tax benefit for the period. Income tax benefit of $9 million for the year ended December 31, 2020 primarily reflects estimated tax benefit for the period, partially offset by $9 million of additional valuation allowance recognized against state tax credits. The year ended December 31, 2020 includes $7 million of income tax expense related to the year ended December 31, 2019. This resulted from recording an adjustment for the federal tax effect on deferred tax assets for state net operating losses and state tax credits established in 2019 without a federal tax effect.
2020 Compared to 2019
Net sales. Net sales for the year ended December 31, 2020 declined by $1,085 million or 44% compared to the prior year, as a result of significant declines in sales volume and unfavorable price/mix. Of the $1,085 million, or 44% net sales decline, $186 million, or 8%, was attributable to the closure of our Luke Mill in June 2019, $489 million, or 20%, was a result of the sale of our Androscoggin and Stevens Point mills in February 2020, and $146 million, or 6%, was attributable to the indefinite idling of our Duluth and Wisconsin Rapids mills in July 2020. Total company sales volume was down from 2,647 thousand tons during the year ended December 31, 2019, to 1,674 thousand tons during the year ended December 31, 2020. Of the 973 thousand ton volume decline, 185 thousand tons were attributable to the closure of our Luke Mill in June 2019, 479 thousand tons were a result of the sale of our Androscoggin and Stevens Point mills in February 2020, 170 thousand tons were attributable to the indefinite idling of our Duluth and Wisconsin Rapids mills in July 2020, and the additional decline resulted from lower customer demand driven by the COVID-19 pandemic.
Operating income (loss). Operating loss was $128 million for the year ended December 31, 2020 compared to operating loss of $37 million for the year ended December 31, 2019.
Operating results for the year ended December 31, 2020 were positively impacted by:
• Lower input costs of $20 million, driven by lower chemical, energy and purchased pulp costs, partially offset by higher fiber costs
• Lower freight costs of $9 million
• Lower depreciation expense of $30 million primarily due to $76 million in accelerated depreciation associated with the closure of our Luke Mill in June 2019, as well as the sale of our Androscoggin and Stevens Point mills in February 2020, partially offset by $65 million in accelerated depreciation associated with the closure of our Duluth Mill in December 2020
• Reduced planned major maintenance costs of $28 million, primarily driven by the cancellation of the annual outage at our Wisconsin Rapids Mill, costs incurred at our Androscoggin Mill in 2019 that did not recur in 2020 and timing of a biannual outage at our Quinnesec Mill
• Lower restructuring charges of $40 million primarily associated with the closure of our Luke Mill in June 2019, partially offset by the closure of our Duluth Mill in December 2020
• Lower Selling, general and administrative costs of $27 million primarily driven by cost reduction initiatives in connection with the sale of our Androscoggin and Stevens Point mills in February 2020 and lower equity compensation expense, partially offset by increased severance costs incurred due to our headcount reduction initiatives and costs associated with the proxy solicitation contest
• Higher other operating income of $93 million, primarily as a result of the $94 million gain on the sale of our Androscoggin and Stevens Point mills, partially offset by a $1 million loss on related pension settlement
Operating results for the year ended December 31, 2020 were negatively impacted by:
• Unfavorable price/mix of $123 million
• Lower sales volume resulting in a decrease of $131 million in net operating income, driven by the impact of the COVID-19 pandemic, the closure of our Luke Mill in June 2019, the sale of our Androscoggin and Stevens Point mills in February 2020 and the indefinite idling of our Duluth and Wisconsin Rapids mills in July 2020
• Higher net operating expenses of $84 million primarily driven by market downtime, costs incurred to idle our Duluth and Wisconsin Rapids mills, severance costs and an extension of the planned outage at our Quinnesec Mill, partially offset by cost reduction initiatives across our mill system, reduced corporate overhead and union ratification expense for signing bonuses and for the settlement of various work arrangement issues in 2019 that did not recur in 2020
Other (income) expense. Other income for the year ended December 31, 2020 and December 31, 2019 included income of $20 million and $18 million, respectively, associated with the non-operating components of net periodic pension cost (income).
Income tax expense (benefit). Income tax benefit was $9 million for the year ended December 31, 2020, which primarily reflects estimated tax benefit for the period, partially offset by $9 million of additional valuation allowance recognized against state tax credits. The year ended December 31, 2020 includes $7 million of income tax expense related to the year ended December 31, 2019. This resulted from recording an adjustment for the federal tax effect on deferred tax assets for state net operating losses and state tax credits established in 2019 without a federal tax effect. Income tax benefit for the year ended December 31, 2019 was primarily offset by the valuation allowance adjustment.
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
EBITDA consists of earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA reflects adjustments to EBITDA to eliminate the impact of certain items that we do not consider to be indicative of our ongoing performance. We use EBITDA and Adjusted EBITDA as a way of evaluating our performance relative to that of our peers and to assess compliance with our credit facilities. We believe that EBITDA and Adjusted EBITDA are non-GAAP operating performance measures commonly used in our industry that provide investors and analysts with measures of ongoing operating results, unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies.
We believe that the supplemental adjustments applied in calculating Adjusted EBITDA are reasonable and appropriate to provide additional information to investors.
Because EBITDA and Adjusted EBITDA are not measurements determined in accordance with GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. You should consider our EBITDA and Adjusted EBITDA in addition to, and not as a substitute for, or superior to, our operating or net income (loss), which are determined in accordance with GAAP.
The following table reconciles Net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:
Year Ended December 31,
(Dollars in millions)
Net income (loss)
Income tax expense (benefit)
Interest expense
Depreciation and amortization
EBITDA
Adjustments to EBITDA:
Restructuring charges (1)
Luke Mill post-closure costs (2)
Noncash equity award compensation (3)
Gain on Sale of Androscoggin/Stevens Point Mills (4)
Loss on Sale of Duluth Mill (5)
Duluth and Wisconsin Rapids mills idle/post-closure costs (6)
(Gain) loss on sale or disposal of assets (7)
Other severance costs (8)
Strategic initiatives costs (9)
Stockholders proxy solicitation costs (10)
Merger related costs (11)
Other items, net (12)
Adjusted EBITDA (13)
(1) For 2019, charges are associated with the closure of our Luke Mill in June 2019. For 2020, charges are associated with the closure of our Luke Mill and the closure of our Duluth Mill in December 2020. For 2021, charges are associated with the closure of our Luke Mill, the closure of our Duluth Mill and of the No. 14 paper machine and certain other long-lived assets at our Wisconsin Rapids Mill in February 2021.
(2) Costs recorded after the permanent shutdown of our Luke Mill that are not associated with product sales or restructuring activities, including costs relating to the ongoing environmental remediation and monitoring efforts.
(3) Amortization of noncash incentive compensation.
(4) Gain on the sale of outstanding membership interests in Verso Androscoggin, LLC in February 2020, which included our Androscoggin Mill and Stevens Point Mill.
(5) Loss on the sale of our Duluth Mill in May 2021.
(6) Idle/post-closure costs associated with our Duluth and Wisconsin Rapids mills that are not associated with product sales or restructuring activity.
(7) Realized (gain) loss on the sale or disposal of assets.
(8) Severance and related benefit costs not associated with restructuring activities.
(9) Professional fees and other charges associated with our strategic alternatives initiative, including certain costs incurred in 2019 related to the Pixelle Sale.
(10) Costs incurred in connection with the stockholders proxy solicitation contest.
(11) Professional fees and other charges associated with Merger related activity, including the Merger Agreement entered on December 19, 2021 with BillerudKorsnäs .
(12) For 2019 and 2020, other miscellaneous adjustments. For 2021, professional fees and other changes associated with strategic matters and other miscellaneous adjustments.
(13) Adjusted EBITDA for 2019 and 2020, includes $13 million of income and $1 million of expense, respectively, related to pension settlements (see Note 13 to our Consolidated Financial Statements).
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal cash requirements in both the short term and long term typically include ongoing operating costs for working capital needs, capital expenditures for maintenance and strategic investments in our mills, payment of dividends, and pension contributions. In the past year, we have also used cash for share purchases, including a tender offer, and to repurchase certain warrants associated with the pending Merger with BillerudKorsnäs. We believe our cash and cash equivalents at December 31, 2021, future cash generated from operations and, to the extent necessary, the availability under our ABL Facility (as defined below) will be sufficient to meet our principal cash requirements for at least the next twelve months. While changes in these ongoing operating costs can impact operating cash generation, we believe that our planning and strategies on pricing and cost control have resulted in our improved liquidity in recent years. We also utilize factoring of accounts receivable from time to time (for example, discounted accelerated payment programs sponsored by customers) as an alternative source of funds when cost is favorable to our ABL Facility or due to other considerations. Our ability to sustain our working capital position is subject to a number of risks that we discuss in “Part I, Item 1A, Risk Factors.” As of December 31, 2021, we had cash and cash equivalents of $172 million while the outstanding balance of our ABL Facility was zero, with $21 million issued in letters of credit and $103 million available for future borrowings.
Share Repurchases and Outstanding Authorization
On February 26, 2020, our Board of Directors authorized up to $250 million of net proceeds from the Pixelle Sale to be used to repurchase outstanding shares of our common stock. In conjunction with the declaration of the special cash dividend of $3.00 per share, for an aggregate of $101 million, on August 5, 2020, our Board of Directors reduced the total amount of the share repurchase authorization from $250 million to $150 million. In addition, on May 13, 2021, we commenced a modified Dutch auction tender offer to purchase for cash shares of our common stock for an aggregate purchase price of not more than $55 million. The tender offer expired on June 10, 2021. Through the tender offer, we accepted for payment approximately 3.0 million shares at a purchase price of $18.10 per share for an aggregate purchase price of approximately $56 million, including fees and expenses. The shares purchased through the tender offer were immediately retired.
During the years ended December 31, 2020 and 2021, we purchased approximately 2.2 million and 1.3 million shares, respectively, of our common stock through open market purchases, a modified Dutch auction tender offer and 10b5-1 programs under the share repurchase authorization at a weighted average cost of $13.39 and $15.97 per share, respectively.
As of December 31, 2021, $45 million of the $150 million share repurchase authorization remained.
Warrants
In December 2021, after our announcement of the pending Merger with BillerudKorsnäs, certain warrant holders notified us of their request for the company to repurchase their warrants. During December 2021, we decided to repurchase and retire 0.8 million warrants at an average price of $11.67, for total consideration of $10 million.
As of December 31, 2021, 1.0 million warrants remained outstanding. From January 1, 2022 through the date of this report, we decided to repurchase and retire an additional 0.3 million warrants at an average price of $11.63 for total considerations of $3 million.
Dividends
We initiated a $0.10 per share quarterly dividend starting in the second quarter of 2020. See Note 2 and Note 14 to our Consolidated Financial Statements for further information.
Our Board of Directors declared the following dividends in 2021:
Quarter
Date Declared
Date of Record
Date Paid
Amount
February 5
March 18
March 29
May 7
June 17
June 29
August 6
September 17
September 28
November 4
December 17
December 29
Pursuant to the terms of the Merger Agreement, we will not pay a cash dividend for the first quarter ending March 31, 2022. The Merger Agreement permits us 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 our past practice in terms of the timing of declaration and payment of such dividends.
Pension Plan Obligation
In 2022, we expect to make cash contributions to the pension plan of $21 million (see Note 13 to our Consolidated Financial Statements).
Other Material Cash Requirements
The following table reflects our payments in connection with contractual obligations as of :
Payments Due by Period
(Dollars in millions)
Total
Thereafter
Operating leases (1)
Finance leases
Purchase obligations (2)
Other long-term obligations (3)
Total
(1) The payments of $1 million for short-term leases are excluded from this table (see Note 9 to our Consolidated Financial Statements).
(2) Unconditional purchase obligations in the ordinary course of business for the purchase of certain raw materials, energy and services.
(3) Primarily consists of asset retirement obligations, employee related obligations and deferred compensation (see Note 11 to our Consolidated Financial Statements). Pension benefit obligation has been excluded from the table above (see Note 13 to our Consolidated Financial Statements).
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized in the following table.
Year Ended December 31,
(Dollars in millions)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Change in cash and cash equivalents and restricted cash
Operating Activities
Our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials including wood fiber, wood pulp, chemicals and energy, and other expenses such as maintenance and warehousing costs. In 2021, our net cash provided by operating activities of $180 million primarily reflects noncash depreciation and amortization of $154 million, noncash restructuring charges of $11 million and cash provided by working capital related changes of $65 million, partially offset by a net loss of $3 million, noncash pension income of $23 million and pension plan contributions of $25 million. The net cash provided from working capital related changes was primarily attributable to reductions in finished goods inventory levels.
In 2020, our net cash used in operating activities of $62 million primarily reflects a net loss of $101 million adjusted for noncash pension income of $16 million, pension plan contributions of $49 million, gain on Sale of Androscoggin/Stevens Point Mills of $94 million and deferred taxes of $9 million, partially offset by noncash depreciation and amortization of $153 million, $5 million of noncash restructuring charges related to the closure of our Duluth Mill, $5 million of equity award expense and cash provided by working capital related changes of $40 million. The net cash provided from working capital related changes was primarily attributable to collections on our accounts receivable and reductions in finished goods inventory levels, partially offset by payments that reduced our accounts payable and accrued liabilities.
In 2019, our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials including wood fiber, wood pulp, chemicals and energy, and other expenses such as maintenance and warehousing costs. In 2019, our net cash provided by operating activities of $125 million primarily reflects a net income of $70 million adjusted for noncash depreciation and amortization of $183 million, $20 million of noncash restructuring charges related to the closure of our Luke Mill and $12 million of equity award expense, partially offset by noncash pension income of $14 million, pension plan contributions of $42 million, deferred taxes of $91 million and cash used for working capital related changes of $16 million. The net cash used for working capital related changes was primarily attributable to payments that reduced our accounts payable and accrued liabilities, partially offset by collections on our accounts receivable.
Investing Activities
In 2021, our net cash used in investing activities of $42 million consisted primarily of $66 million of capital expenditures, partially offset by $10 million in deposits and net proceeds recognized from the sale of Luke Mill equipment, $6 million in proceeds from insurance recoveries and $6 million in net proceeds from the sale of our Duluth Mill.
In 2020, our net cash provided by investing activities of $303 million consisted primarily of $345 million in net proceeds from the sale of our Androscoggin and Stevens Point mills, partially offset by $48 million of capital expenditures.
In 2019, our net cash used in investing activities of $104 million consisted primarily of $105 million for capital expenditures.
Financing Activities
In 2021, our net cash used in financing activities of $103 million consisted primarily of $56 million in repurchases of our common stock, $12 million of cash dividends paid to stockholders, $10 million in repurchases of our warrants and $24 million in acquisition of treasury stock, consisting of $21 million of share repurchases and $3 million associated with the vesting of restricted stock units.
In 2020, our net cash used in financing activities of $146 million consisted primarily of $111 million of dividends paid to stockholders, $34 million in acquisition of treasury stock, as well as borrowings with offsetting payments on our ABL Facility.
In 2019, our net cash used in financing activities of $5 million consisted primarily of $3 million in acquisition of treasury stock, as well as borrowings with offsetting payments on our ABL Facility.
ABL Facility
Verso Paper maintains an asset-based revolving credit facility, or, as amended from time to time, our “ABL Facility.” On May 10, 2021, Verso Paper entered into the Third Amendment to the ABL Facility, or the “Third ABL Amendment” to the ABL Facility. As a result of the Third ABL Amendment, the ABL Facility provides for revolving commitments of $200 million, with a $75 million sublimit for letters of credit and a $20 million sublimit for swingline loans. The amount of borrowings and letters of credit available to Verso Paper pursuant to our ABL Facility is limited to the lesser of $200 million or an amount determined pursuant to a borrowing base ($124 million as of December 31, 2021). As of December 31, 2021, there were no borrowings outstanding under our ABL Facility, $21 million issued in letters of credit and $103 million available for future borrowings. Verso Paper may request one or more incremental revolving commitments in an aggregate principal amount up to the greater of (i) $75 million or (ii) the excess of the borrowing base over the revolving facility commitments of $200 million; however, the lenders are not obligated to increase the revolving commitments upon any such request. Availability under our ABL Facility is subject to customary borrowing conditions. Our ABL Facility will mature on February 6, 2024.
Outstanding borrowings under our ABL Facility bear interest at an annual rate equal to, at the option of Verso Paper, either (i) a 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 our ABL Facility. Verso Paper also is required to pay a commitment fee for the unused portion of our ABL Facility of 0.25% per year, based upon the average revolver usage under our ABL Facility. In addition, pursuant to the Third ABL Amendment, certain modifications were made to the existing ABL Facility in order to, among other things, provide for determination of a benchmark replacement interest rate when LIBOR is no longer available, subject to the terms, and upon the satisfaction of conditions, specified therein.
All obligations under our ABL Facility are unconditionally guaranteed by Verso Holding and certain of the subsidiaries of Verso Paper. The security interest with respect to our ABL Facility consists of a first-priority lien on certain assets of Verso Paper, Verso Holding and the other guarantor subsidiaries, including accounts receivable, inventory, certain deposit accounts, securities accounts and commodities accounts.
Our ABL Facility contains financial covenants requiring Verso, among other things, to maintain a minimum fixed charge coverage ratio if availability were to drop below prescribed thresholds. As of December 31, 2021, we were above the prescribed thresholds in our ABL Facility. Our ABL Facility also requires that certain payment conditions, as defined therein, are met in order for Verso to incur debt or liens, pay cash dividends, repurchase equity interest, prepay indebtedness, sell or dispose of assets and make investments in or merge with another company.
If Verso Paper were to violate any of the covenants under our ABL Facility and were unable to obtain a waiver, it would be considered a default after the expiration of any applicable grace period. If Verso Paper were in default under our ABL Facility, then the lenders thereunder may exercise remedies in accordance with the terms thereof. In addition, if Verso Paper were in default under our ABL Facility, no additional borrowings under our ABL Facility would be available until the default was waived or cured. Our ABL Facility provides for customary events of default, including a cross-event of default provision with respect to any other existing debt instrument having an aggregate principal amount that exceeds $25 million.
As of December 31, 2021, we were in compliance with the financial covenants in our ABL Facility .
