MEMPHIS, Tenn.--(“Verso Paper”) today reported the combined results of the successor business, Verso Paper Holdings, LLC and the predecessor business, the Coated and Supercalendered Papers Division of International Paper Company, for the third quarter period ended September 30, 2006. Highlights for the third quarter of 2006 include:)--Verso Paper Holdings, LLC (
“The third quarter results of 2006 show improvement from the same period a year earlier”
On August 1, 2006, Verso Paper acquired the assets and certain of the liabilities of the Coated and Supercalendered Papers Division of International Paper located at the mills in Jay, Maine, Bucksport, Maine, Quinnesec, Michigan and Sartell, Minnesota, together with related other facilities and assets and certain administrative and sales and marketing functions (collectively, the “Acquisition”) pursuant to the terms of an Agreement of Purchase and Sale (the “Purchase and Sale Agreement”) entered into with International Paper Company on June 4, 2006. In connection with the Acquisition, Verso Paper issued $1,185 million of debt, consisting of a $285 million term loan B facility, $600 million of second-priority senior secured notes, and $300 million of senior subordinated notes. The Company also raised a $200 million revolving credit facility, which was undrawn at the closing of the Acquisition (and remains undrawn).
“The third quarter results of 2006 show improvement from the same period a year earlier,” said LH Puckett, President and CEO. “The third quarter is seasonally the most robust period of the year for the coated paper industry. Our results in the third quarter versus the second quarter were bolstered by improved volume, improved coated freesheet and pulp selling prices as well as our continued focus on efficiency improvements and cost discipline. Furthermore, our transition activities are on track and we are well underway as a stand-alone and focused company.”
|Two Months Ended||One Month Ended||Three Months Ended||Seven Months Ended||Nine Months Ended|
|September 30,||July 31,||September 30,||
|COSTS AND EXPENSES:|
|Cost of products sold||$226.7||$102.6||$330.8||$706.7||$915.4|
|Depreciation and amortization||$18.7||$9.7||$32.9||$72.7||$96.2|
|Selling, general, and administrative expenses||$5.2||$3.4||$16.6||$34.3||$51.1|
|Restructuring and other charges||$3.7||$0.0||$1.0||($0.3)||$6.6|
|INCOME BEFORE INCOME TAXES||$4.2||$8.3||$23.4||$17.8||$37.0|
|INCOME TAX EXPENSE||$0.1||$3.3||$9.2||$7.0||$14.2|
Net sales for the three months ended September 30, 2006 were $434.2 million compared to $435.4 million for the three months ended September 30, 2005, a decrease of 0.3%. The decrease was the result of a 0.2% decrease in average price for the three months ended September 30, 2006, compared to the price for the three months ended September 30, 2005 which was partially driven by mix.
Cost of sales for the three months ended September 30, 2006 was $389.0 million, which included a $4.6 million inventory fair value adjustment, compared to $390.6 million for the three months ended September 30, 2005, a decrease of 0.4%. Excluding the fair value of inventory adjustment, cost of sales decreased 1.6%. An increase in input prices for wood, pulp, energy and raw materials during the third quarter of 2006 was offset by improvements in productivity and material usages which were influenced by our focus on cost reductions and efficiency improvements. Our gross margin, excluding depreciation expense, for the three months ended September 30, 2006 was 17.0%, compared to 17.8% for the same period in 2005. Excluding the fair value of inventory adjustment, the gross margin for the nine months ended September 30, 2006 was 18.0%.
Reconciliation of Net Income to Adjusted EBITDA
Certain covenants contained in the credit agreement governing our Senior Secured Credit Facilities and the indentures governing the Second-Priority Senior Secured Notes (i) require the maintenance of a senior secured debt to Adjusted EBITDA ratio and (ii) restrict our ability to take certain actions such as incurring additional debt or making acquisitions if we are unable to meet defined Adjusted EBITDA to Fixed Charges, senior secured debt to Adjusted EBITDA and consolidated debt to Adjusted EBITDA ratios. The most restrictive of these covenants, the covenants to incur additional indebtedness and the ability to make future acquisitions, require an Adjusted EBITDA to Fixed Charges ratio (measured on a trailing four-quarter basis) of 2.0 : 1.0. Failure to comply with these covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.
EBITDA consists of earnings before interest, taxes depreciation and amortization. EBITDA is a measure commonly used in our industry and we present EBITDA to enhance your understanding of our operating performance. We use EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other pro forma adjustments permitted in calculating covenant compliance in the indentures governing the notes to test the permissibility of certain types of transactions. We have included Adjusted EBITDA because we consider it to be an important supplemental measure of our operating performance. We also believe that Adjusted EBITDA is a useful liquidity measurement tool for assessing our ability to meet our future debt service, capital expenditures and working capital requirements. However, EBITDA and Adjusted EBITDA are not measurements of financial performance under U.S. GAAP, and our EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. You should not consider our EBITDA or Adjusted EBITDA as an alternative to operating or net income, determined in accordance with U.S. GAAP, as an indicator of our operating performance, or as an alternative to cash flows from operating activities, determined in accordance with U.S. GAAP, as an indicator of our cash flows or as a measure of liquidity.
|Predecessor||Combined Predecessor & Sucessor|
Three Months Ended
|Three Months Ended||
Twelve Months Ended
|December 31,||September 30,||September 30,||
|($ in millions)||2005||2005||2006||2006|
|Interest expense, net||14.8||3.8||20.3||30.9|
|Depreciation and amortization||129.4||32.9||28.5||124.7|
|Adjustments to EBITDA|
|Lease not assumed (1)||10.7||2.3||1.1||8.7|
|Change in machine use, net (2)||1.8||2.9||0.0||5.6|
|Restructuring, severance and other (3)||10.4||1.0||3.7||7.2|
|Non-cash compensation/benefits (4)||5.3||0.4||0.8||7.3|
|Incremental estimated standalone costs, net (5)||(3.4)||(0.9)||(4.1)||(8.1)|
|Other items, net (6)||1.8||0.0||5.3||15.7|
|Pro forma cash interest expense, net (7)||$106.7|
|Adjusted EBITDA to cash interest expense||2.08|
|(1)||Reflects the elimination of the historical rent expense incurred on the Sartell property lease that was not assumed by us.|
Represents the elimination or addition of expected earnings as a result of changes in the use of two of our paper machines at the Androscoggin mill prior to the Transactions.
Includes restructuring and severance as per our financial statements. Restructuring includes transition and other non-recurring costs associated with acquisition and carve out.
Represents amortization of certain one-time benefit payments and non-cash benefit payments. Also includes the elimination of historical non-cash stock compensation costs previously incurred by us under International Paper's compensation plan.
Represents incremental estimated costs for activities previously part of the corporate allocation (primarily information technology, human resources administration, finance, tax, treasury, sourcing and environmental, health and safety), as well as other incremental costs we anticipate incurring on a stand-alone basis subsequent to the Transactions.
Represents earnings adjustments for exceptional bad debt expenses, recoveries and other miscellaneous non-recurring items, including the fair value of inventory adjustment related to purchase accounting.
Pro forma for the Transactions. Cash interest expense represents gross interest expense related to the debt, excluding amortization of debt issuance costs.
To construct twelve months ended September 30, 2006 financials, amounts have been calculated by subtracting the data for the nine months ended September 30, 2005 from the data for the year ended December 31, 2005 and then adding the data for the nine months ended September 30, 2006.
Forward Looking Statements
Certain statements in this press release, including without limitation, statements made under the caption “Overview” are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, the management of Verso Paper Holdings, LLC (which may be referred to as “Verso,” “we,” “us,” “our” or the “Company”) may from time to time make oral forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “will” or “intend” and similar expressions. The forward-looking statements contained herein reflect our current views with respect to future events and are based on our currently available financial, economic and competitive data and on current business plans. Actual results could vary materially depending on risks and uncertainties that may affect the Company’s operations, markets, services, prices and other factors. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: economic factors such as an interruption in the supply of or increased pricing of raw materials due to natural disasters, competitive factors such as pricing actions by our competitors that could affect our operating margins, and regulatory factors such as changes in governmental regulations involving our products that lead to environmental and legal matters.
About Verso Paper
Based in Memphis, Tennessee, Verso Paper is one of the leading North American suppliers of coated papers, which are used primarily in media and marketing applications, including catalogs, magazines, commercial printing applications, such as high-end advertising brochures, annual reports and direct mail advertising. Verso has the leading North American market share in coated groundwood paper, which is used primarily for catalogs and magazines and is also one of North America’s largest producers of coated freesheet paper, which is used primarily for upscale catalogs and magazines, annual reports, and magazine covers. Additional information is available at www.versopaper.com.
Verso Paper will host a conference call on Wednesday, November 15, 2006 at 12 P.M. Eastern Time to discuss third quarter 2006 results. This release and the third quarter results will be made available on the Verso Paper website (www.versopaper.com).
Analysts and investors may participate in the live conference call by dialing 866-831-6267 (toll free domestic) or 617-213-8857 (international), access code 35884524. To register, please dial in 10 minutes before the conference call begins.
A replay of the call can be accessed at 888-286-8010 (toll free domestic) or 617-801-6888 (international), access code 57326406. The replay will be available starting at 2:00 PM (EST) on November 15, 2006, and will remain available until noon (EST) on November 29, 2006.