NewPage Holdings Inc. - FORM 10-Q - October 24, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
_____________________________
8540 Gander Creek Drive
Miamisburg, Ohio 45342
937.242.9629
_____________________________
Commission
File Number
 
Registrant
 
IRS Employer
Identification
Number
 
State of
Incorporation
0-54963
 
NEWPAGE HOLDINGS INC.
 
46-1505118
 
Delaware
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
o
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
x
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes o No x
There were 7,080,192 Common Shares, $0.001 per share par value, of NewPage Holdings Inc. outstanding as of October 15, 2014.



 
 

FORWARD-LOOKING STATEMENTS
This quarterly report contains “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other laws. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws. Forward-looking statements may include the words “may,” “plans,” “estimates,” “anticipates,” “believes,” “expects,” “intends” and similar expressions. Although we believe that these forward-looking statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected or assumed in our forward-looking statements. These factors, risks and uncertainties include, among others, the following:
•
the ability to close the pending transaction with Verso Paper Corp. on the agreed terms and within the anticipated time period, or at all, which is dependent, among other things, on the receipt of government approvals;
•
changes in the supply of, demand for, or prices of our products;
•
general economic and business conditions in the United States, Canada and elsewhere;
•
the ability of our customers to continue as a going concern, including our ability to collect accounts receivable according to customary business terms;
•
the impact of the announced transaction with Verso Paper Corp. on third-party relationships;
•
the activities of competitors, including those that may be engaged in unfair trade practices;
•
changes in significant operating expenses, including raw material and energy costs;
•
changes in currency exchange rates;
•
changes in the availability of capital;
•
changes in the regulatory environment, including requirements for enhanced environmental compliance; and
•
the other factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.
Given these risks and uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments or for any other reason, except as required by law.



 
1


INDEX
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
 
 
Item 6.



 
2


PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWPAGE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
SEPTEMBER 30, 2014 AND DECEMBER 31, 2013
Dollars in millions, except per share amounts
 
Sept. 30,
 
Dec. 31,
 
2014
 
2013
ASSETS
 
 
 
Cash and cash equivalents
$
9

 
$
83

Restricted cash (Note 1)
7

 
—

Accounts receivable, net
233

 
204

Inventories (Note 3)
514

 
520

Other current assets
13

 
25

Total current assets
776

 
832

Property, plant and equipment, net of accumulated depreciation of $303 as of September 30, 2014 and $173 as of December 31, 2013
1,127

 
1,208

Other assets
152

 
135

TOTAL ASSETS
$
2,055

 
$
2,175

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
169

 
$
168

Other current liabilities
166

 
177

Current maturities of long-term debt (Note 4)
44

 
—

Total current liabilities
379

 
345

Long-term debt (Note 4)
724

 
487

Other long-term obligations
271

 
308

Commitments and contingencies (Note 8)

 

EQUITY
 
 
 
Preferred stock, 100,000 shares authorized, $0.001 per share par value
—

 
—

Common stock, par value $0.001 (16,000,000 shares authorized with 7,104,079 shares issued and 7,080,192 outstanding on September 30, 2014, and with 7,093,924 shares issued and 7,087,239 outstanding on December 31, 2013)
—

 
—

Treasury stock, at cost (23,887 shares on September 30, 2014 and 6,685 shares on December 31, 2013)
(1
)
 
—

Additional paid-in capital
572

 
814

Accumulated deficit
(95
)
 
(2
)
Accumulated other comprehensive income (loss)
205

 
223

Total equity
681

 
1,035

TOTAL LIABILITIES AND EQUITY
$
2,055

 
$
2,175

See notes to condensed consolidated financial statements.




 
3


NEWPAGE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Dollars in millions, except per share amounts
 
Three Months
Ended Sept. 30,
 
Nine Months
Ended Sept. 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
796

 
$
780

 
$
2,286

 
$
2,256

Cost of sales
739

 
715

 
2,208

 
2,116

Selling, general and administrative expenses
28

 
34

 
80

 
109

Interest expense (Note 4)
21

 
11

 
91

 
35

Other (income) expense, net
—

 
(1
)
 
—

 
(1
)
Income (loss) before income taxes
8

 
21

 
(93
)
 
(3
)
Income tax (benefit)
—

 
—

 
—

 
—

Net income (loss)
$
8

 
$
21

 
$
(93
)
 
$
(3
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
1.15

 
$
2.91

 
$
(13.11
)
 
$
(0.43
)
Diluted
$
1.14

 
$
2.90

 
$
(13.11
)
 
$
(0.43
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
7,082,061

 
7,080,000

 
7,087,981

 
7,080,000

Diluted
7,152,006

 
7,109,937

 
7,087,981

 
7,080,000

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
—

 
$
—

 
$
34.35

 
$
—

See notes to condensed consolidated financial statements.



 
4


NEWPAGE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Dollars in millions
 
Three Months
Ended Sept. 30,
 
Nine Months
Ended Sept. 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
8

 
$
21

 
$
(93
)
 
$
(3
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Defined-benefit postretirement plans:
 
 
 
 
 
 
 
Change in net actuarial gains (losses)
(2
)
 
—

 
(17
)
 
(5
)
Cash-flow hedges:
 
 
 
 
 
 
 
Change in unrealized gains (losses)
(1
)
 
—

 
2

 
(1
)
Reclassification adjustment to net income (loss)
—

 
—

 
(3
)
 
—

Other comprehensive income (loss), net of tax
(3
)
 
—

 
(18
)
 
(6
)
Comprehensive income (loss)
$
5

 
$
21

 
$
(111
)
 
$
(9
)
See notes to condensed consolidated financial statements.



 
5


NEWPAGE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EQUITY (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2014
Dollars in millions
 
Common Stock
 
Treasury Stock
 
Add-
itional
Paid-in Capital
 
Accum-
ulated Deficit
 
Accum-
ulated
Other
Compre-
hensive
Income (Loss)
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2013
7,093,924

 
$
—

 
(6,685
)
 
$
—

 
$
814

 
$
(2
)
 
$
223

 
$
1,035

Net income (loss)
 
 
 
 
 
 
 
 
 
 
(93
)
 
 
 
(93
)
Common stock issued for restricted stock, net
10,155

 
—

 
(4,917
)
 
(1
)
 
1

 
 
 
 
 
—

Unclaimed and undistributed shares (Note 5)
 
 
 
 
(12,285
)
 
—

 
 
 
 
 
 
 
—

Common stock dividends (Note 1)
 
 
 
 
 
 
 
 
(243
)
 
 
 
 
 
(243
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
(18
)
 
(18
)
Balance at September 30, 2014
7,104,079

 
$
—

 
(23,887
)
 
$
(1
)
 
$
572

 
$
(95
)
 
$
205

 
$
681

See notes to condensed consolidated financial statements.




 
6


NEWPAGE HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
Dollars in millions
CASH FLOWS FROM OPERATING ACTIVITIES
Nine Months
Ended Sept. 30, 2014
 
Nine Months
Ended Sept. 30, 2013
Net income (loss)
$
(93
)
 
$
(3
)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
138

 
137

Non-cash interest expense
5

 
5

Non-cash loss on extinguishment/modification of debt (Note 4)
23

 
—

(Gain) loss on disposal of assets
2

 
1

Pension expense (income)
(8
)
 
2

Pension funding
(38
)
 
(36
)
Equity award expense (income) (Note 5)
(1
)
 
12

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(29
)
 
(13
)
Inventories
6

 
(78
)
Other operating assets
(3
)
 
(19
)
Accounts payable
1

 
(31
)
Accrued expenses and other obligations
(25
)
 
7

Net cash provided by (used for) operating activities
(22
)
 
(16
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
(53
)
 
(46
)
Proceeds from sales of assets
5

 
—

Proceeds from sale of investment shares
—

 
4

Restricted cash
(7
)
 
—

Net cash provided by (used for) investing activities
(55
)
 
(42
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Payment of financing costs
(28
)
 
(1
)
Proceeds from issuance of long-term debt
735

 
—

Repayments of long-term debt
(495
)
 
(4
)
Common stock cash dividends paid (Note 5)
(243
)
 
—

Acquisition of treasury stock
(1
)
 
—

Borrowings on revolving credit facility
529

 
370

Payments on revolving credit facility
(494
)
 
(346
)
Net cash provided by (used for) financing activities
3

 
19

Net increase (decrease) in cash and cash equivalents
(74
)
 
(39
)
Cash and cash equivalents at beginning of period
83

 
43

Cash and cash equivalents at end of period
$
9

 
$
4

See notes to condensed consolidated financial statements.



 
7


NEWPAGE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Dollars in millions, except per share amounts
1. ORGANIZATION AND BASIS OF PRESENTATION
NewPage Holdings Inc. (“NewPage Holdings”) is a holding company that owns all of the outstanding capital stock of NewPage Investment Company LLC (“NewPage Investment”), which is a holding company that owns all of the outstanding capital stock of NewPage Corporation (“NewPage”). NewPage and its subsidiaries are engaged in manufacturing, marketing and distributing printing papers used primarily for commercial printing, magazines, catalogs, textbooks and labels. Our products include coated, uncoated, supercalendered and specialty papers and market pulp. Our products are manufactured at multiple mills in the United States and are supported by multiple distribution and converting locations. We operate within one operating segment. The interim condensed consolidated financial statements include the accounts of NewPage Holdings and all entities it controls. All intercompany transactions and balances have been eliminated. Unless the context provides otherwise, the terms “we,” “our” and “us” refer to NewPage Holdings and its consolidated subsidiaries.
These interim condensed consolidated financial statements have not been audited. However, in the opinion of management, these financial statements include all normal recurring adjustments necessary for a fair statement in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in annual financial statements presented in accordance with U.S. GAAP have been condensed or omitted. The results of operations and cash flows for the interim periods presented are not necessarily indicative of the results to be expected for the full year. The December 31, 2013 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The accompanying financial statements should be read in conjunction with the annual financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2013.
Agreement and Plan of Merger
On January 3, 2014, NewPage Holdings, Verso Paper Corp., (“Verso”), and Verso Merger Sub Inc., a Delaware corporation and an indirect, wholly owned subsidiary of Verso (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into NewPage Holdings on the terms and subject to the conditions set forth in the Merger Agreement (the “Merger”), with NewPage Holdings surviving the Merger as an indirect, wholly owned subsidiary of Verso.
The Merger Agreement provides for a series of transactions pursuant to which equity holders of NewPage Holdings will receive (i) approximately $250 in cash as a special distribution ("Special Distribution"), approximately $243 of which was paid as a common stock dividend to the stockholders of record on February 14, 2014, with the remaining $7 paid into an escrow account (restricted cash) for the benefit of the holders of NewPage Holdings restricted stock units and stock options, from the proceeds of a new $750 bank borrowing that also refinanced NewPage Holdings' former $500 term loan facility; plus the cash actually received by NewPage Holdings in respect of any exercises of NewPage Holdings stock options between the date of the Merger Agreement and the closing of the Merger; (ii) $650 aggregate principal amount of new Verso 11.75% first lien notes (valued at face value) to be issued at closing; and (iii) shares of Verso common stock representing 20% (subject to potential upward adjustment to 25% under certain circumstances) of the sum of the outstanding shares of Verso common stock as of immediately prior to closing of the Merger and the shares, if any, underlying vested, in-the-money stock options as of the signing of the agreement.

On July 2, 2014, Verso launched exchange offers and consent solicitations with respect to its outstanding fixed-rate second lien notes and senior subordinated notes. On July 11, 2014, Verso's Registration Statement on Form S-4, as amended, with respect to the Verso common stock and Verso 11.75% first lien notes that form components of the merger consideration, became effective. Also on July 11, 2014, NewPage Holdings filed an Information Statement on Schedule 14C (the "Information Statement") with the SEC and commenced the mailing of the Information Statement to its stockholders on or about the same date. On July 16, 2014, NewPage Holdings received the written



 
8



consents signed by a sufficient number of holders of shares of NewPage common stock to adopt the Merger Agreement and approve the Merger and other transactions contemplated by the Merger Agreement (the “Company Stockholder Approval”). On July 24, 2014, Verso extended the deadline and amended the terms for the exchange offer and consent solicitation with respect to its outstanding senior subordinated notes. On July 29, 2014, Verso filed a post-effective amendment to the Form S-4, which was declared effective on July 31, 2014. On July 31, 2014, Verso announced that it received tenders from holders of its outstanding fixed-rate second lien notes and senior subordinated notes in excess of the minimum participation conditions for the exchange offers, and that it received the requisite consents for the proposed amendments to the indentures pursuant to which the outstanding fixed-rate second lien notes and senior subordinated notes were issued. Obtaining the Company Stockholder Approval, the consummation of the exchange offers and consent solicitations, and the Form S-4, as amended, becoming effective are conditions precedent to the closing of the Merger.

On February 28, 2014, Verso and NewPage Holdings filed Notification and Report Forms with the Antitrust Division of the Department of Justice (“DOJ”) and Federal Trade Commission. On March 31, 2014, the parties received a Request for Additional Information and Documentary Materials, referred to as a “second request,” from the DOJ regarding the Merger. The effect of the second request was to extend the waiting period imposed by the HSR Act until 30 days after each party has substantially complied with the second request, unless that period is terminated sooner by the DOJ or is extended by the agreement of the parties and the DOJ. The parties have responded to the second request and have stated that they will continue to work cooperatively with the DOJ in connection with this review.
2. FINANCIAL INSTRUMENTS
Derivative Financial Instruments
We periodically use derivative financial instruments as part of our overall strategy to manage exposure to market risks associated with natural gas price fluctuations. We do not hold or issue derivative financial instruments for trading purposes. We regularly monitor the credit-worthiness of the counterparties to our derivative instruments in order to manage our credit risk exposures under these agreements. Our risk of loss, if any, in the event of nonperformance by any counterparty under derivative financial instrument agreements is not considered material. These derivative instruments are measured at fair value and are classified as other assets or other liabilities on our Condensed Consolidated Balance Sheets depending on the fair value of the instrument.
For a derivative designated as a cash-flow hedge, the effective portion of the change in the fair value of the derivative is recorded in Accumulated other comprehensive income (loss) and is recognized in the Consolidated Statements of Operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash-flow hedges and derivative financial instruments not designated as hedges are recognized immediately in earnings.
Natural Gas
In order to hedge the future cost of natural gas consumed at our mills, we engage in financial hedging of future gas purchase prices. We hedge with natural gas swap agreements that are priced based on New York Mercantile Exchange (“NYMEX”) natural gas futures contracts. We measure the fair values of our natural gas contracts based on natural gas futures contracts priced on the NYMEX. As of September 30, 2014, we were party to natural gas swap agreements for notional amounts aggregating to 5,490,000 MMBTUs, or approximately $22 of planned natural gas purchases over the term of these agreements. These natural gas swap agreements expire through June 2016 and represent approximately 35% of our total planned natural gas consumption over the term of the agreements.



 
9


3. INVENTORIES
Inventories as of September 30, 2014 and December 31, 2013 consist of:
 
Sept. 30,
2014
 
Dec. 31,
2013
Finished and in-process goods
$
330

 
$
343

Raw materials
83

 
86

Stores and supplies
101

 
91

 
$
514

 
$
520

Approximately 80% and 82% of inventories at September 30, 2014 and December 31, 2013 are valued using the LIFO method. If inventories had been valued at current costs, they would have been valued at $489 at September 30, 2014 and December 31, 2013.
4. LONG-TERM DEBT
Long-term debt as of September 30, 2014 and December 31, 2013 is as follows:
 
Sept. 30,
2014
 
Dec. 31,
2013
Floating rate senior secured term loan (LIBOR plus 8.25%)
$
733

 
$
—

Floating rate senior secured exit term loan (LIBOR plus 6.50%)
—

 
487

Revolving credit facility
35

 
—

Total long-term debt, including current portion
768

 
487

Less: Current portion of long-term debt
44

 
—

Long-term debt
$
724

 
$
487

In connection with the debt refinancing on February 11, 2014, we recognized a loss on extinguishment/modification of debt totaling $34 recorded in interest expense. This amount includes the write-off of $4 of unamortized debt issuance cost on the former revolving credit facility and charges associated with the former term loan facility consisting of an $8 prepayment penalty, the write-off of $12 of unamortized debt issuance cost, the write-off of $7 of unamortized discount and $3 of fees paid in connection with the refinancing.
5. EQUITY
We sponsor a long-term incentive plan to provide for the granting of stock-based compensation to certain directors, officers and other key employees. Outstanding grants become exercisable over a four-year service period and have a term of 7 years from the grant date. The awards meet liability classification requirements as a result of planned tax withholdings in excess of minimum statutory levels. These awards are re-measured at fair value as of each balance sheet date with the cumulative effect of changes in fair value recognized in the period of change as an adjustment to compensation expense.
Upon payment of the Special Distribution (See Note 1), all outstanding stock options were modified to reduce the exercise price of each stock option by the amount of the per share Special Distribution ($34.35 per share) and each restricted stock unit received a dividend equivalent right, which entitles its holder to receive a cash payment equal to the per share Special Distribution, payable when the underlying unit vests.
The key weighted-average assumptions used in our September 30, 2014 fair value re-measurement of stock options outstanding under liability classification were: expected volatility of 36%; risk-free interest rate ranging from 1.01% to 1.07%; a weighted average expected life of options of 3.1 years; and dividend rate of 0.0%. The weighted-average fair value of the stock options outstanding as of September 30, 2014 was $18.77. As of September 30, 2014, we had unrecognized compensation expense of $3 related to non-vested options and $4 related to non-vested restricted stock



 
10



units, each of which is expected to be recognized over a weighted average period of 2 years. Total compensation expense (income) for all stock-based awards in the three months ended September 30, 2014 and 2013 was $1 and $4 and for the nine months ended September 30, 2014 and 2013 it was $(1) and $12.
On July 15, 2014, pursuant to the Chapter 11 Plan of Reorganization ("POR"), 12,285 unclaimed and undistributed shares of common stock became treasury shares in accordance with the POR.
6. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
A summary of the components of net periodic costs in the three months and nine months ended September 30, 2014 and 2013 is as follows:
Pension Plans
 
Three Months
Ended Sept. 30,
2014
 
Three Months
Ended Sept. 30,
2013
Service cost
$
2

 
$
3

Interest cost
16

 
15

Expected return on plan assets
(20
)
 
(18
)
Amortization of net actuarial (gains) losses
(1
)
 
—

Net periodic cost (income)
$
(3
)
 
$
—

 
Nine Months
Ended Sept. 30,
2014
 
Nine Months
Ended Sept. 30,
2013
Service cost
$
7

 
$
10

Interest cost
49

 
46

Expected return on plan assets
(59
)
 
(54
)
Amortization of net actuarial (gains) losses
(5
)
 
—

Net periodic cost (income)
$
(8
)
 
$
2

Other Postretirement Plans
 
Three Months
Ended Sept. 30,
2014
 
Three Months
Ended Sept. 30,
2013
Service cost
$
—

 
$
—

Interest cost
1

 
1

Net periodic cost (income)
$
1

 
$
1

 
Nine Months
Ended Sept. 30,
2014
 
Nine Months
Ended Sept. 30,
2013
Service cost
$
—

 
$
—

Interest cost
2

 
2

Net periodic cost (income)
$
2

 
$
2




 
11



7. INCOME TAXES
In the three months and nine months ended September 30, 2014 and 2013, we recorded a valuation allowance against our net deferred income tax benefit for federal income taxes and for certain states as it was currently more likely than not that we would not realize those benefits.
8. COMMITMENTS AND CONTINGENCIES
We are involved in various litigation and administrative proceedings that arise in the ordinary course of business. We believe the expected outcome of any matter, lawsuit or claim that is pending or threatened, or all of the combined, will not have a material adverse effect on our financial condition, results of operations or liquidity.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
Disclosure of Going Concern Uncertainties
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (ASU 2014-15). ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for us for the annual period ending December 31, 2016 and interim and annual periods thereafter. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Company Background
We compete in the global printing and writing paper business, producing coated papers, supercalendered papers, and other uncoated and specialty paper. We also sell our excess market pulp. Most of our sales represent coated paper shipments to North American customers. Coated paper is used primarily in media and marketing applications, such as high-end advertising brochures, direct mail advertising, coated labels, magazines, magazine covers and inserts, catalogs and textbooks. We operate paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota and Wisconsin.
Trends in Our Business
Demand for printing and writing papers in North America is influenced by multiple factors. Demand for particular grades of coated paper is partially driven by advertising spending which in turn is impacted by macroeconomic factors. Examples include spending on catalog and promotional materials by retailers and spending on print magazine advertising. Demand is also being negatively influenced by electronic media and the means by which consumers get information.
During the nine months ended September 30, 2014, North American demand for printing and writing papers declined 4% compared to the nine months ended September 30, 2013 as reported by the Pulp and Paper Products Council or PPPC. During the same period, our paper sales volume increased by approximately 3%. We took 34,000 tons of market-related downtime during the nine months ended September 30, 2014 and 59,000 tons of market-related downtime in the nine months ended September 30, 2013.



 
12


Results of Operations
The following tables set forth our historical results of operations in the three months and nine months ended September 30, 2014 and 2013. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto included in this quarterly report.
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
 
 
Three Months
Ended Sept. 30,
2014
 
Three Months
Ended Sept. 30,
2013
 
(in millions)
$
 
%
 
$
 
%
 
Net sales
796

 
100.0

 
780

 
100.0

 
Cost of sales
739

 
92.9

 
715

 
91.6

 
Selling, general and administrative expenses
28

 
3.5

 
34

 
4.4

 
Interest expense
21

 
2.6

 
11

 
1.5

 
Other (income) expense, net
—

 
—

 
(1
)
 
(0.1
)
 
Income (loss) before income taxes
8

 
1.0

 
21

 
2.6

 
Income tax (benefit)
—

 
—

 
—

 
—

 
Net income (loss)
8

 
1.0

 
21

 
2.6

 
Supplemental Information
 
 
 
 
 
 
 
 
Adjusted EBITDA(1) (see Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA below)
$
83

 
 
 
$
85

 
 
(1) Does not include pro forma effects of our project cost savings program used in certain covenants under our credit facilities.
Net sales in the three months ended September 30, 2014 were $796 million compared to $780 million in the three months ended September 30, 2013, an increase of $16 million or 2%. Net sales were primarily affected by higher sales volume of paper ($30 million) offset by lower paper prices ($13 million). Paper pricing is impacted by lower industry demand. Paper sales volume totaled 876,000 tons and 843,000 tons in the three months ended September 30, 2014 and 2013. Average paper prices were $884 per ton and $892 per ton in the three months ended September 30, 2014 and 2013. We did not take any market-related downtime during the three months ended September 30, 2014. We took 24,000 tons of market-related downtime during the three months ended September 30, 2013.
Cost of sales in the three months ended September 30, 2014 was $739 million compared to $715 million in the three months ended September 30, 2013, an increase of $24 million or 3%. The increase was a result of higher paper sales volume ($25 million), higher input costs ($21 million) and higher maintenance expense, partially offset by lower pension expense ($3 million) and other cost reduction initiatives. Maintenance expense at our mills totaled $62 million and $59 million in the three months ended September 30, 2014 and 2013. Gross margin was 7.1% and 8.4% in the three months ended September 30, 2014 and 2013.
Selling, general and administrative expenses decreased to $28 million in the three months ended September 30, 2014 from $34 million in the three months ended September 30, 2013, primarily as a result of $3 million lower non-cash stock compensation expense and $3 million lower employee-related costs.
Interest expense in the three months ended September 30, 2014 was $21 million compared to $11 million in the three months ended September 30, 2013. The increase resulted primarily from higher interest rates on the outstanding term loan facility and higher overall levels of outstanding debt.
Net income was $8 million in the three months ended September 30, 2014 compared to net income of $21 million in the three months ended September 30, 2013. The decrease was the result of higher input costs, higher interest expense and lower paper prices, partially offset by lower pension expense, lower non-cash stock compensation expense and other cost reduction initiatives.



 
13


Adjusted EBITDA (before pro forma effects of project cost savings program) was $83 million in the three months ended September 30, 2014 compared to $85 million in the three months ended September 30, 2013. See “Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA” for further information on the use of EBITDA and Adjusted EBITDA as measurement tools and a reconciliation to Net Income (Loss).
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
 
 
Nine Months
Ended Sept. 30,
2014
 
Nine Months
Ended Sept. 30,
2013
 
(in millions)
$
 
%
 
$
 
%
 
Net sales
2,286

 
100.0

 
2,256

 
100.0

 
Cost of sales
2,208

 
96.6

 
2,116

 
93.8

 
Selling, general and administrative expenses
80

 
3.5

 
109

 
4.9

 
Interest expense
91

 
4.0

 
35

 
1.6

 
Other (income) expense, net
—

 
—

 
(1
)
 
(0.1
)
 
Income (loss) before income taxes
(93
)
 
(4.1
)
 
(3
)
 
(0.2
)
 
Income tax (benefit)
—

 
—

 
—

 
—

 
Net income (loss)
(93
)
 
(4.1
)
 
(3
)
 
(0.2
)
 
Supplemental Information
 
 
 
 
 
 
 
 
Adjusted EBITDA(1) (see Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA below)
$
151

 
 
 
$
196

 
 
(1) Does not include pro forma effects of our project cost savings program used in certain covenants under our credit facilities.
Net sales in the nine months ended September 30, 2014 were $2,286 million compared to $2,256 million in the nine months ended September 30, 2013, an increase of $30 million or 1%. Net sales were primarily affected by higher sales volume of paper ($71 million) offset by lower paper prices ($38 million). Paper pricing is impacted by lower industry demand. Paper sales volume totaled 2,529,000 tons and 2,452,000 tons in the nine months ended September 30, 2014 and 2013. Average paper prices were $882 per ton and $890 per ton in the nine months ended September 30, 2014 and 2013. We took 34,000 tons and 59,000 tons of market-related downtime during the nine months ended September 30, 2014 and 2013.
Cost of sales in the nine months ended September 30, 2014 was $2,208 million compared to $2,116 million in the nine months ended September 30, 2013, an increase of $92 million or 4%. The increase was a result of higher paper sales volume ($60 million), significantly higher input costs ($70 million) driven by extreme weather-related factors through April 2014 and higher maintenance expense, partially offset by lower pension expense ($9 million) and other cost reduction initiatives. Weather impacted normal operations primarily through higher energy costs, increased transportation cost driven by availability of rail and truck modes and higher wood costs including increased use of purchased market pulp and pulp transferred between mills. Maintenance expense at our mills totaled $184 million and $176 million in the nine months ended September 30, 2014 and 2013. During the nine months ended September 30, 2013, we took actions to reduce personnel as part of our cost reduction initiatives and recognized a charge of $3 million for employee-related costs in cost of sales. Gross margin was 3.4% and 6.2% in the nine months ended September 30, 2014 and 2013.
Selling, general and administrative expenses decreased to $80 million in the nine months ended September 30, 2014 from $109 million in the nine months ended September 30, 2013, primarily as a result of $13 million lower non-cash stock compensation expense, $4 million lower consulting costs, including costs associated with merger activity and certain bankruptcy-related items no longer classified as reorganization items, $10 million lower employee-related costs and other cost reduction initiatives. During the nine months ended September 30, 2013, we recognized a charge of $1 million for employee-related costs in selling, general and administrative expense associated with our actions to reduce personnel as part of our cost reduction initiatives.



 
14


Interest expense in the nine months ended September 30, 2014 was $91 million compared to $35 million in the nine months ended September 30, 2013. The increase was primarily driven by the loss on the extinguishment/modification of debt ($34 million) as a result of the debt refinancing in February 2014 and from higher interest rates on the outstanding term loan facility and higher overall levels of outstanding debt.
Net loss was $93 million in the nine months ended September 30, 2014 compared to a net loss of $3 million in the nine months ended September 30, 2013. The increase in net loss was the result of charges associated with refinancing our debt, significantly higher input costs driven by extreme weather-related factors and lower paper prices, partially offset by lower non-cash stock compensation expense and other cost reduction initiatives.
Adjusted EBITDA (before pro forma effects of project cost savings program) was $151 million in the nine months ended September 30, 2014 compared to $196 million in the nine months ended September 30, 2013. See “Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA” for further information on the use of EBITDA and Adjusted EBITDA as measurement tools and a reconciliation to Net Income (Loss).
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization. EBITDA and Adjusted EBITDA (as described in the table below) are not measures of our performance under U.S. GAAP, are not intended to represent net income (loss), and should not be used as alternatives to net income (loss) as indicators of performance. EBITDA and Adjusted EBITDA are shown because they are bases upon which our management assesses performance and are primary components of certain covenants under our credit facilities. In addition, our management believes EBITDA and Adjusted EBITDA are useful to investors because they and similar measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies. The use of EBITDA and Adjusted EBITDA instead of net income (loss) has limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
•
EBITDA and Adjusted EBITDA do not reflect our current cash expenditure requirements, or future requirements, for capital expenditures or contractual commitments;
•
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•
EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
•
our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the methods of calculation.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business.



 
15


The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:
 
 
Three Months
Ended Sept. 30,
 
Nine Months
Ended Sept. 30,
 
(in millions)
2014
 
2013
 
2014
 
2013
 
Net income (loss)
$
8

 
$
21

 
$
(93
)
 
$
(3
)
 
Interest expense
21

 
11

 
91

 
35

 
Income tax (benefit)
—

 
—

 
—

 
—

 
Depreciation and amortization
46

 
46

 
138

 
137

 
EBITDA
75

 
78

 
136

 
169

 
Equity awards
1

 
4

 
(1
)
 
12

 
(Gain) loss on disposal of assets
1

 
—

 
2

 
1

 
Integration and related severance costs and other charges
—

 
2

 
—

 
10

 
Post-emergence bankruptcy-related items
—

 
1

 
1

 
4

 
Merger related costs
6

 
—

 
12

 
1

 
Other
—

 
—

 
1

 
(1
)
 
Adjusted EBITDA(1)
$
83

 
$
85

 
$
151

 
$
196

(1) Does not include pro forma effects of our project cost savings program used in certain covenants under our credit facilities.

Recently Issued Accounting Standards
Disclosure of Going Concern Uncertainties
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (ASU 2014-15). ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for us for the annual period ending December 31, 2016 and interim and annual periods thereafter. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.
Liquidity and Capital Resources
Available Liquidity
Our principal sources of liquidity include cash generated from operating activities and availability under our revolving credit facility. The amount of borrowings and letters of credit available to NewPage under the revolving credit facility is limited to the lesser of $350 million or an amount determined pursuant to a borrowing base, as defined in the revolving credit agreement ($384 million as of September 30, 2014).
As of September 30, 2014, we had $278 million available for borrowings under the revolving credit facility after reduction for $37 million in letters of credit and $35 million in outstanding borrowings under the revolving credit facility. During the nine months ended September 30, 2014, our average daily balance outstanding under our revolving credit facility was $44 million with a weighted-average interest rate of 2.71%.
Total liquidity at September 30, 2014, was $287 million, consisting of $278 million of availability under the revolving credit facility and $9 million of available cash and cash equivalents.
We have not experienced, and do not currently anticipate that we will experience, any limitations in our ability to access funds available under our revolving credit facility. In an effort to manage credit risk exposures under our debt and derivative instruments, we regularly monitor the credit-worthiness of the counterparties to these agreements. We



 
16


believe our cash flow from operations, available borrowings under our revolving credit facility and cash and cash equivalents will be adequate to meet our liquidity needs for the next twelve months.
Cash Flows
Cash provided by (used for) operating activities was $(22) million during the nine months ended September 30, 2014 compared to $(16) million during the nine months ended September 30, 2013, primarily the result of significantly higher input costs, driven by extreme weather related factors, higher cash interest and other cash charges associated with the February 2014 debt refinancing, partially offset by a reduction in cash requirements for bankruptcy-related items. Cash used for operating activities during the nine months ended September 30, 2013 includes $60 million in non-recurring bankruptcy-related payments. Investing activities during the nine months ended September 30, 2014 primarily includes $53 million for capital expenditures and $7 million paid in to an escrow account (restricted cash) in connection with the Special Distribution (see Note 1). Financing activities during the nine months ended September 30, 2014 primarily consisted of proceeds and repayment of debt and payment of financing fees associated with the debt refinancing, payment of common stock dividends as part of the Special Distribution (see Note 1) and borrowings and payments on the revolving credit facilities.
Capital Expenditures
Capital expenditures were $53 million and $46 million in the nine months ended September 30, 2014 and 2013. Approximately half of our capital expenditures in each period presented related to improvement projects, while the remaining related to maintaining the operational effectiveness of our equipment or compliance with environmental laws and regulations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As of September 30, 2014 and December 31, 2013, $785 million and $495 million of our debt consisted of borrowings with variable interest rates. If market interest rates increase, variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow or compliance with our debt covenants. Our debt outstanding as of September 30, 2014 and December 31, 2013 has a LIBOR floor of 1.25%. Based on our debt balance outstanding at September 30, 2014 and December 31, 2013, the potential annual increase in interest expense resulting from a 100 basis point increase in LIBOR above the floor would be $8 million and $5 million.

ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. In addition, a system of disclosure controls is maintained to ensure that information required to be disclosed is recorded, processed, summarized and reported in a timely manner to management responsible for the preparation and reporting of our financial information.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated our disclosure controls and procedures and internal control over financial reporting. This evaluation was conducted under the supervision and with the participation of management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”). Based on the evaluation of disclosure controls and procedures, our CEO and CFO have concluded that the disclosure controls and procedures were effective and that there were no changes in internal control over financial reporting that occurred during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



 
17



PART II OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number
 
Description
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document



 
18


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEWPAGE HOLDINGS INC.
/s/ George F. Martin
 
 
/s/ Jay A. Epstein
George F. Martin
 
 
Jay A. Epstein
President, Chief Executive Officer and Director
 
 
Senior Vice President, Chief Financial Officer
(Principal Executive Officer)
 
 
and Assistant Secretary
Date: October 24, 2014
 
 
(Principal Financial Officer)
 
 
 
Date: October 24, 2014



 
19

NewPage Holdings Inc. Reports

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