UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2019
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-33776
RESOLUTE FOREST PRODUCTS INC.
(Exact name of registrant as specified in its charter)
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Delaware | 98-0526415 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
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111 Robert-Bourassa Boulevard | Suite 5000 | Montreal | Quebec | Canada | H3C 2M1 |
(Address of principal executive offices) (Zip Code) |
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(Registrant’s telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.001 per share | RFP | New York Stock Exchange |
Toronto Stock Exchange
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(Title of class) | (Trading Symbol)
| (Name of exchange on which registered)
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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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☐ | | Accelerated Filer | ☒ | | Non-accelerated Filer | ☐ | | Smaller Reporting Company | ☐ | | Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of JulyOctober 31, 2019, there were 89,293,752 shares of Resolute Forest Products Inc. common stock, $0.001 par value, outstanding.
RESOLUTE FOREST PRODUCTS INC.
TABLE OF CONTENTS
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| Page Number |
PART I. FINANCIAL INFORMATION | | |
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Item 1. Financial Statements: | | |
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PART II. OTHER INFORMATION | | |
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Item 5. Other Information | | |
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PART I. | FINANCIAL INFORMATION |
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ITEM 1. | FINANCIAL STATEMENTS |
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions of U.S. dollars, except per share amounts)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Sales | $ | 755 |
| | $ | 976 |
| | $ | 1,550 |
| | $ | 1,850 |
| | $ | 705 |
| | $ | 974 |
| | $ | 2,255 |
| | $ | 2,824 |
| |
Costs and expenses: | | | | | | | | | | | | | | | | | | |
Cost of sales, excluding depreciation, amortization and distribution costs | | 536 |
| | 639 |
| | 1,090 |
| | 1,253 |
| | | 558 |
| | 628 |
| | 1,648 |
| | 1,881 |
| |
Depreciation and amortization | | 42 |
| | 54 |
| | 82 |
| | 107 |
| | | 42 |
| | 54 |
| | 124 |
| | 161 |
| |
Distribution costs | | 101 |
| | 123 |
| | 201 |
| | 239 |
| | | 94 |
| | 117 |
| | 295 |
| | 356 |
| |
Selling, general and administrative expenses | | 36 |
| | 42 |
| | 73 |
| | 85 |
| | | 30 |
| | 40 |
| | 103 |
| | 125 |
| |
Closure costs, impairment and other related charges | | — |
| | 1 |
| | — |
| | 1 |
| | | — |
| | — |
| | — |
| | 1 |
| |
Net gain on disposition of assets | | — |
| | (4 | ) | | — |
| | (4 | ) | | | (1 | ) | | — |
| | (1 | ) | | (4 | ) | |
Operating income | | 40 |
| | 121 |
| | | 104 |
| | 169 |
| | |
Operating (loss) income | | | (18 | ) | | 135 |
| | | 86 |
| | 304 |
| |
Interest expense | | (7 | ) | | (11 | ) | | (16 | ) | | (24 | ) | | | (8 | ) | | (12 | ) | | (24 | ) | | (36 | ) | |
Non-operating pension and other postretirement benefit credits | | 12 |
| | 12 |
| | 24 |
| | 25 |
| | | 12 |
| | 13 |
| | 36 |
| | 38 |
| |
Other expense, net | | (1 | ) | | (3 | ) | | (5 | ) | | (10 | ) | | |
Income before income taxes | | 44 |
| | 119 |
| |
| | 107 |
| | 160 |
| | |
Other (expense) income, net | | | (17 | ) | | 14 |
| | (22 | ) | | 4 |
| |
(Loss) income before income taxes | | | (31 | ) | | 150 |
| |
| | 76 |
| | 310 |
| |
Income tax provision | | (19 | ) | | (47 | ) | | (40 | ) | | (78 | ) | | | (12 | ) | | (33 | ) | | (52 | ) | | (111 | ) | |
Net income including noncontrolling interests | | 25 |
| | 72 |
| | 67 |
| | 82 |
| | |
Net (loss) income including noncontrolling interests | | | (43 | ) | | 117 |
| | 24 |
| | 199 |
| |
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
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Net income attributable to Resolute Forest Products Inc. | $ | 25 |
| | $ | 72 |
| | | $ | 67 |
| | $ | 82 |
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Net income per share attributable to Resolute Forest Products Inc. common shareholders: | | | | | | | | | | |
Net (loss) income attributable to Resolute Forest Products Inc. | | $ | (43 | ) | | $ | 117 |
| | | $ | 24 |
| | $ | 199 |
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Net (loss) income per share attributable to Resolute Forest Products Inc. common shareholders: | | | | | | | | | | |
Basic | $ | 0.27 |
| | $ | 0.79 |
| | $ | 0.73 |
| | $ | 0.90 |
| | $ | (0.47 | ) | | $ | 1.28 |
| | $ | 0.26 |
| | $ | 2.18 |
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Diluted | | 0.27 |
| | 0.77 |
| | 0.71 |
| | 0.88 |
| | | (0.47 | ) | | 1.25 |
| | 0.26 |
| | 2.14 |
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Weighted-average number of Resolute Forest Products Inc. common shares outstanding: | | | | | | | | | | | | | | | | | | |
Basic | | 92.4 |
| | 91.3 |
| | 92.4 |
| | 91.2 |
| | | 90.9 |
| | 91.3 |
| | 91.9 |
| | 91.3 |
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Diluted | | 93.6 |
| | 93.2 |
| | 93.8 |
| | 93.1 |
| | | 90.9 |
| | 93.4 |
| | 93.0 |
| | 93.2 |
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See accompanying notes to unaudited interim Consolidated Financial Statements.
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in millions of U.S. dollars)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net income including noncontrolling interests | $ | 25 |
| | $ | 72 |
| | $ | 67 |
| | $ | 82 |
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Other comprehensive (loss) income: | | | | | | | | | | |
Net (loss) income including noncontrolling interests | | $ | (43 | ) | | $ | 117 |
| | $ | 24 |
| | $ | 199 |
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Other comprehensive income: | | | | | | | | | | |
Unamortized prior service credits | | | | | | | | | | | | | | | | | | |
Change in unamortized prior service credits | | (4 | ) | | (4 | ) | | (7 | ) | | (8 | ) | | | (2 | ) | | (9 | ) | | (9 | ) | | (17 | ) | |
Income tax provision | | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| |
Change in unamortized prior service credits, net of tax | | (4 | ) | | (4 | ) | | (7 | ) | | (8 | ) | | | (2 | ) | | (9 | ) | | (9 | ) | | (17 | ) | |
Unamortized actuarial losses | | | | | | | | | | | | | | | | | | |
Change in unamortized actuarial losses | | 3 |
| | 9 |
| | 11 |
| | 18 |
| | | 6 |
| | 11 |
| | 17 |
| | 29 |
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Income tax provision | | — |
| | (2 | ) | | (2 | ) | | (4 | ) | | | (2 | ) | | (2 | ) | | (4 | ) | | (6 | ) | |
Change in unamortized actuarial losses, net of tax | | 3 |
| | 7 |
| | 9 |
| | 14 |
| | | 4 |
| | 9 |
| | 13 |
| | 23 |
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Other comprehensive (loss) income, net of tax | | (1 | ) | | 3 |
| | 2 |
| | 6 |
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Comprehensive income including noncontrolling interests | | 24 |
| | 75 |
| | 69 |
| | 88 |
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Other comprehensive income, net of tax | | | 2 |
| | — |
| | 4 |
| | 6 |
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Comprehensive (loss) income including noncontrolling interests | | | (41 | ) | | 117 |
| | 28 |
| | 205 |
| |
Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
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Comprehensive income attributable to Resolute Forest Products Inc. | $ | 24 |
| | $ | 75 |
| | $ | 69 |
| | $ | 88 |
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Comprehensive (loss) income attributable to Resolute Forest Products Inc. | | $ | (41 | ) | | $ | 117 |
| | $ | 28 |
| | $ | 205 |
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See accompanying notes to unaudited interim Consolidated Financial Statements.
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions of U.S. dollars, except per share amount)
| | | June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 |
Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | $ | 98 |
| | $ | 304 |
| | $ | 69 |
| | $ | 304 |
| |
Accounts receivable, net: | | | | | | | | | | |
Trade | | 333 |
| | 347 |
| | | 314 |
| | 347 |
| |
Other | | 67 |
| | 102 |
| | | 63 |
| | 102 |
| |
Inventories, net | | 530 |
| | 508 |
| | | 522 |
| | 508 |
| |
Other current assets | | 42 |
| | 43 |
| | | 40 |
| | 43 |
| |
Total current assets | | 1,070 |
| | 1,304 |
| | | 1,008 |
| | 1,304 |
| |
Fixed assets, less accumulated depreciation of $1,579 and $1,498 as of June 30, 2019 and December 31, 2018, respectively | | 1,479 |
| | 1,515 |
| | |
Amortizable intangible assets, less accumulated amortization of $25 and $24 as of June 30, 2019 and December 31, 2018, respectively | | 50 |
| | 50 |
| | |
Fixed assets, less accumulated depreciation of $1,611 and $1,498 as of September 30, 2019 and December 31, 2018, respectively | | | 1,477 |
| | 1,515 |
| |
Amortizable intangible assets, less accumulated amortization of $26 and $24 as of September 30, 2019 and December 31, 2018, respectively | | | 49 |
| | 50 |
| |
Deferred income tax assets | | 869 |
| | 876 |
| | | 846 |
| | 876 |
| |
Operating lease right-of-use assets | | 63 |
| | — |
| | | 63 |
| | — |
| |
Other assets | | 221 |
| | 190 |
| | | 228 |
| | 190 |
| |
Total assets | $ | 3,752 |
| | $ | 3,935 |
| | $ | 3,671 |
| | $ | 3,935 |
| |
Liabilities and equity | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 376 |
| | $ | 427 |
| | $ | 396 |
| | $ | 427 |
| |
Current portion of long-term debt | | 1 |
| | 223 |
| | | 1 |
| | 223 |
| |
Current portion of operating lease liabilities | | 8 |
| | — |
| | | 8 |
| | — |
| |
Total current liabilities | | 385 |
| | 650 |
| | | 405 |
| | 650 |
| |
Long-term debt, net of current portion | | 422 |
| | 422 |
| | | 423 |
| | 422 |
| |
Pension and other postretirement benefit obligations | | 1,231 |
| | 1,257 |
| | | 1,179 |
| | 1,257 |
| |
Operating lease liabilities, net of current portion | | 59 |
| | — |
| | | 58 |
| | — |
| |
Other liabilities | | 55 |
| | 71 |
| | | 54 |
| | 71 |
| |
Total liabilities | | 2,152 |
| | 2,400 |
| | | 2,119 |
| | 2,400 |
| |
Commitments and contingencies | |
| |
| | |
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Equity: | | | | | | | | | | |
Resolute Forest Products Inc. shareholders’ equity: | | | | | | | | | | |
Common stock, $0.001 par value. 119.1 shares issued and 90.4 shares outstanding as of June 30, 2019; 118.8 shares issued and 90.8 shares outstanding as of December 31, 2018 | | — |
| | — |
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Common stock, $0.001 par value. 119.1 shares issued and 89.3 shares outstanding as of September 30, 2019; 118.8 shares issued and 90.8 shares outstanding as of December 31, 2018 | | | — |
| | — |
| |
Additional paid-in capital | | 3,803 |
| | 3,802 |
| | | 3,803 |
| | 3,802 |
| |
Deficit | | (1,131 | ) | | (1,198 | ) | | | (1,174 | ) | | (1,198 | ) | |
Accumulated other comprehensive loss | | (948 | ) | | (950 | ) | | | (946 | ) | | (950 | ) | |
Treasury stock at cost, 28.7 shares and 28.0 shares as of June 30, 2019 and December 31, 2018, respectively | | (125 | ) | | (120 | ) | | |
Treasury stock at cost, 29.8 shares and 28.0 shares as of September 30, 2019 and December 31, 2018, respectively | | | (132 | ) | | (120 | ) | |
Total Resolute Forest Products Inc. shareholders’ equity | | 1,599 |
| | 1,534 |
| | | 1,551 |
| | 1,534 |
| |
Noncontrolling interests | | 1 |
| | 1 |
| | | 1 |
| | 1 |
| |
Total equity | | 1,600 |
| | 1,535 |
| | | 1,552 |
| | 1,535 |
| |
Total liabilities and equity | $ | 3,752 |
| | $ | 3,935 |
| | $ | 3,671 |
| | $ | 3,935 |
| |
See accompanying notes to unaudited interim Consolidated Financial Statements.
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited, in millions of U.S. dollars)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| Resolute Forest Products Inc. Shareholders’ Equity | | | | | | |
| Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interests | Total Equity |
Balance as of March 31, 2019 | $ | — |
| | $ | 3,802 |
| | $ | (1,156 | ) | | $ | (947 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,580 |
| |
Share-based compensation, net of withholding taxes | | — |
| | | 1 |
| | | — |
| | | — |
| | | — |
| | | — |
| | | 1 |
| |
Net income | | — |
| | | — |
| | | 25 |
| | | — |
| | | — |
| | | — |
| | | 25 |
| |
Purchases of treasury stock (0.7 shares) (Note 11) | | — |
| | | — |
| | | — |
| | | — |
| | | (5 | ) | | | — |
| | | (5 | ) | |
Other comprehensive loss, net of tax | | — |
| | | — |
| | | — |
| | | (1 | ) | | | — |
| | | — |
| | | (1 | ) | |
Balance as of June 30, 2019 | $ | — |
| | $ | 3,803 |
| | $ | (1,131 | ) | | $ | (948 | ) | | $ | (125 | ) | | $ | 1 |
| | $ | 1,600 |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Resolute Forest Products Inc. Shareholders’ Equity | | | | | | |
| Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interests | Total Equity |
Balance as of June 30, 2019 | $ | — |
| | $ | 3,803 |
| | $ | (1,131 | ) | | $ | (948 | ) | | $ | (125 | ) | | $ | 1 |
| | $ | 1,600 |
| |
Net loss | | — |
| | | — |
| | | (43 | ) | | | — |
| | | — |
| | | — |
| | | (43 | ) | |
Purchases of treasury stock (1.1 shares) (Note 11) | | — |
| | | — |
| | | — |
| | | — |
| | | (7 | ) | | | — |
| | | (7 | ) | |
Other comprehensive income, net of tax | | — |
| | | — |
| | | — |
| | | 2 |
| | | — |
| | | — |
| | | 2 |
| |
Balance as of September 30, 2019 | $ | — |
| | $ | 3,803 |
| | $ | (1,174 | ) | | $ | (946 | ) | | $ | (132 | ) | | $ | 1 |
| | $ | 1,552 |
| |
| | | Six Months Ended June 30, 2019 | Nine Months Ended September 30, 2019 |
| Resolute Forest Products Inc. Shareholders’ Equity | | | | | | Resolute Forest Products Inc. Shareholders’ Equity | | | | | |
| Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interests | Total Equity | Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interests | Total Equity |
Balance as of December 31, 2018 | $ | — |
| | $ | 3,802 |
| | $ | (1,198 | ) | | $ | (950 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,535 |
| | $ | — |
| | $ | 3,802 |
| | $ | (1,198 | ) | | $ | (950 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,535 |
| |
Share-based compensation, net of withholding taxes | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| |
Net income | | — |
| | — |
| | 67 |
| | — |
| | — |
| | — |
| | 67 |
| | | — |
| | — |
| | 24 |
| | — |
| | — |
| | — |
| | 24 |
| |
Purchases of treasury stock (0.7 shares) (Note 11) | | — |
| | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | | |
Purchases of treasury stock (1.8 shares) (Note 11) | | | — |
| | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) | |
Stock unit awards vested (0.3 shares), net of shares forfeited for employee withholding taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
| | | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
Balance as of June 30, 2019 | $ | — |
| | $ | 3,803 |
| | $ | (1,131 | ) | | $ | (948 | ) | | $ | (125 | ) | | $ | 1 |
| | $ | 1,600 |
| | |
Balance as of September 30, 2019 | | $ | — |
| | $ | 3,803 |
| | $ | (1,174 | ) | | $ | (946 | ) | | $ | (132 | ) | | $ | 1 |
| | $ | 1,552 |
| |
| | | Three Months Ended June 30, 2018 | Three Months Ended September 30, 2018 |
| Resolute Forest Products Inc. Shareholders’ Equity | | | | | | Resolute Forest Products Inc. Shareholders’ Equity | | | | | |
| Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non- controlling Interests | Total Equity | Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non- controlling Interests | Total Equity |
Balance as of March 31, 2018 | $ | — |
| | $ | 3,796 |
| | $ | (1,284 | ) | | $ | (777 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,616 |
| | |
Balance as of June 30, 2018 | | $ | — |
| | $ | 3,797 |
| | $ | (1,212 | ) | | $ | (774 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,692 |
| |
Share-based compensation, net of withholding taxes | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| |
Net income | | — |
| | — |
| | 72 |
| | — |
| | — |
| | — |
| | 72 |
| | | — |
| | — |
| | 117 |
| | — |
| | — |
| | — |
| | 117 |
| |
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Balance as of June 30, 2018 | $ | — |
| | $ | 3,797 |
| | $ | (1,212 | ) | | $ | (774 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,692 |
| | |
Balance as of September 30, 2018 | | $ | — |
| | $ | 3,798 |
| | $ | (1,095 | ) | | $ | (774 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,810 |
| |
| | | Six Months Ended June 30, 2018 | Nine Months Ended September 30, 2018 |
| Resolute Forest Products Inc. Shareholders’ Equity | | | | | | Resolute Forest Products Inc. Shareholders’ Equity | | | | | |
| Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non- controlling Interests | Total Equity | Common Stock | Additional Paid-In Capital | Deficit | Accumulated Other Comprehensive Loss | Treasury Stock | Non- controlling Interests | Total Equity |
Balance as of December 31, 2017 | $ | — |
| | $ | 3,793 |
| | $ | (1,294 | ) | | $ | (780 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,600 |
| | $ | — |
| | $ | 3,793 |
| | $ | (1,294 | ) | | $ | (780 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,600 |
| |
Share-based compensation, net of withholding taxes | | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
| |
Net income | | — |
| | — |
| | 82 |
| | — |
| | — |
| | — |
| | 82 |
| | | — |
| | — |
| | 199 |
| | — |
| | — |
| | — |
| | 199 |
| |
Stock unit awards vested (0.1 shares), net of shares forfeited for employee withholding taxes | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
| | | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
| |
Balance as of June 30, 2018 | $ | — |
| | $ | 3,797 |
| | $ | (1,212 | ) | | $ | (774 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,692 |
| | |
Balance as of September 30, 2018 | | $ | — |
| | $ | 3,798 |
| | $ | (1,095 | ) | | $ | (774 | ) | | $ | (120 | ) | | $ | 1 |
| | $ | 1,810 |
| |
See accompanying notes to unaudited interim Consolidated Financial Statements.
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions of U.S. dollars)
| | | Six Months Ended June 30, | Nine Months Ended September 30, |
| 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Cash flows from operating activities: | | | | | | | | | | |
Net income including noncontrolling interests | $ | 67 |
| | $ | 82 |
| | $ | 24 |
| | $ | 199 |
| |
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: | | | | | | | | | | |
Share-based compensation | | 3 |
| | 5 |
| | | 4 |
| | 6 |
| |
Depreciation and amortization | | 82 |
| | 107 |
| | | 124 |
| | 161 |
| |
Reversal of inventory write-downs related to closures | | — |
| | (1 | ) | | | — |
| | (1 | ) | |
Deferred income taxes | | 40 |
| | 75 |
| | | 52 |
| | 106 |
| |
Net pension contributions and other postretirement benefit payments | | (57 | ) | | (70 | ) | | | (96 | ) | | (112 | ) | |
Net gain on disposition of assets | | — |
| | (4 | ) | | | (1 | ) | | (4 | ) | |
(Gain) loss on translation of foreign currency denominated deferred income taxes | | (35 | ) | | 44 |
| | | (26 | ) | | 28 |
| |
Loss (gain) on translation of foreign currency denominated pension and other postretirement benefit obligations | | 37 |
| | (36 | ) | | | 27 |
| | (23 | ) | |
Net planned major maintenance amortization (payments) | | 7 |
| | (3 | ) | | | 16 |
| | (7 | ) | |
Changes in working capital: | | | | | | | | | | |
Accounts receivable | | 38 |
| | 17 |
| | | 60 |
| | (6 | ) | |
Inventories | | (21 | ) | | (20 | ) | | | (14 | ) | | (53 | ) | |
Other current assets | | (3 | ) | | (1 | ) | | | (11 | ) | | (13 | ) | |
Accounts payable and accrued liabilities | | (64 | ) | | 18 |
| | | (41 | ) | | 61 |
| |
Other, net | | 1 |
| | 7 |
| | | 2 |
| | 9 |
| |
Net cash provided by operating activities | | 95 |
| | 220 |
| | | 120 |
| | 351 |
| |
Cash flows from investing activities: | | | | | | | | | | |
Cash invested in fixed assets | | (45 | ) | | (53 | ) | | | (82 | ) | | (94 | ) | |
Disposition of assets | | 2 |
| | 2 |
| | | 2 |
| | 2 |
| |
Decrease (increase) in countervailing duty cash deposits on supercalendered paper | | 1 |
| | (11 | ) | | |
Decrease in countervailing duty cash deposits on supercalendered paper, net | | | 1 |
| | 13 |
| |
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber | | (33 | ) | | (41 | ) | | | (46 | ) | | (62 | ) | |
Decrease (increase) in countervailing duty cash deposits on uncoated groundwood paper | | 6 |
| | (6 | ) | | | 6 |
| | (6 | ) | |
Net cash used in investing activities | | (69 | ) | | (109 | ) | | | (119 | ) | | (147 | ) | |
Cash flows from financing activities: | | | | | | | | | | |
Net repayments under revolving credit facilities | | — |
| | (114 | ) | | | — |
| | (144 | ) | |
Payments of debt | | (225 | ) | | — |
| | | (225 | ) | | — |
| |
Purchases of treasury stock | | (5 | ) | | — |
| | | (12 | ) | | — |
| |
Payments of financing and credit facility fees | | (2 | ) | | (1 | ) | | | (2 | ) | | (1 | ) | |
Cash used in financing activities | | (232 | ) | | (115 | ) | | | (239 | ) | | (145 | ) | |
Effect of exchange rate changes on cash and cash equivalents, and restricted cash | | 1 |
| | (2 | ) | | | 1 |
| | (1 | ) | |
Net decrease in cash and cash equivalents, and restricted cash | | (205 | ) | | (6 | ) | | |
Net (decrease) increase in cash and cash equivalents, and restricted cash | | | (237 | ) | | 58 |
| |
Cash and cash equivalents, and restricted cash: | | | | | | | | | | |
Beginning of period | | 345 |
| | 49 |
| | | 345 |
| | 49 |
| |
End of period | $ | 140 |
| | $ | 43 |
| | $ | 108 |
| | $ | 107 |
| |
Cash and cash equivalents, and restricted cash at period end: | | | | | | | | | | |
Cash and cash equivalents | $ | 98 |
| | $ | 6 |
| | $ | 69 |
| | $ | 72 |
| |
Restricted cash (included in “Other current assets” and “Other assets”) | | 42 |
| | 37 |
| | | 39 |
| | 35 |
| |
See accompanying notes to unaudited interim Consolidated Financial Statements.
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
Note 1. Organization and Basis of Presentation
Nature of operations
Resolute Forest Products Inc. (with its subsidiaries, either individually or collectively, unless otherwise indicated, referred to as “Resolute Forest Products,” “we,” “our,” “us,” “Parent,” or the “Company”) is incorporated in Delaware. We are a global leader in the forest products industry with a diverse range of products, including market pulp, tissue, wood products, newsprint and specialty papers, which are marketed in close to 70 countries. We own or operate some 40 facilities, as well as power generation assets, in the United States and Canada.
Financial statements
Our interim consolidated financial statements and accompanying notes (or the “Consolidated Financial Statements”) are unaudited and have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (or the “SEC”) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required by U.S. generally accepted accounting principles may be condensed or omitted. In our opinion, all adjustments (consisting of normal recurring adjustments) necessary for the fair statement of the unaudited interim Consolidated Financial Statements have been made. All amounts are expressed in U.S. dollars, unless otherwise indicated. The results for the interim period ended JuneSeptember 30, 2019, are not necessarily indicative of the results to be expected for the full year. These unaudited interim Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019. Certain prior period amounts in the accompanying notes to our footnotesConsolidated Financial Statements have been reclassified to conform to the 2019 presentation.
New accounting pronouncement adopted in 2019
ASU 2016-02 “Leases”
Effective January 1, 2019, we adopted Accounting Standards Update (or “ASU”) 2016-02, “Leases,” issued by the Financial Accounting Standards Board, and the series of related accounting standard updates that followed (collectively, “Topic 842”), through a cumulative-effect adjustment as of that date.
The effect of this ASU on our Consolidated Balance Sheet as of January 1, 2019, was as follows:
|
| | | | | | | | | | | | |
(Unaudited, in millions) | Before ASU | Effect of Change | As Adjusted |
Amortizable intangible assets, net | $ | 50 |
| | $ | 1 |
| | $ | 51 |
| |
Operating lease right-of-use assets | | — |
| | | 65 |
| | | 65 |
| |
Current portion of operating lease liabilities | | — |
| | | 7 |
| | | 7 |
| |
Operating lease liabilities, net of current portion | | — |
| | | 60 |
| | | 60 |
| |
Other liabilities | | 71 |
| | | (1 | ) | | | 70 |
| |
On adoption, we elected to apply the package of practical expedients that allows us not to reassess whether expired or existing contracts contain leases, the classification of these leases, and whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. Furthermore, we elected to use hindsight in determining the lease term and assessing impairment of the operating lease right-of-use assets. As a result of the implementation of Topic 842, our leases accounting policy was updated as follows:
We determine if a contract contains a lease at inception. Leases are classified as either operating leases or finance leases. Operating leases are included in “Operating lease right-of-use assets,” “Current portion of operating lease liabilities,” and “Operating lease liabilities, net of current portion,” whereas finance leases are included in “Fixed assets, net,” “Current portion of long-term debt,” and “Long-term debt, net of current portion” in our Consolidated Balance Sheets. Leases with a term of less than 12 months are not recorded in our Consolidated Balance Sheets, and are expensed over the term of the lease in our Consolidated Statements of Operations.
Operating lease right-of-use assets represent our right to use an underlying asset for the term of the lease, and the related liabilities represent our obligation to make the lease payments arising from the lease. Operating lease right-of-use assets and the related liabilities are recognized at the lease commencement date based on the present value of the lease payments over the term
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
of the lease. Renewal and termination options are included in our lease terms when it is reasonably certain that they will be exercised. In determining the present value of lease payments, we use the implicit rate when readily determinable, or our estimated incremental borrowing rate, which is based on information available at the lease commencement date. Lease payments are expensed in our Consolidated Statements of Operations on a straight-line basis over the term of the lease.
For buildings, we account for the lease and non-lease components as a single lease component. For all other contracts, we account for the lease and non-lease components separately.
Note 2. Accumulated Other Comprehensive Loss
The change in our accumulated other comprehensive loss by component (net of tax) for the sixnine months ended JuneSeptember 30, 2019, was as follows:
| | (Unaudited, in millions) | Unamortized Prior Service Credits | Unamortized Actuarial Losses | Foreign Currency Translation | Total | Unamortized Prior Service Credits | Unamortized Actuarial Losses | Foreign Currency Translation | Total |
Balance as of December 31, 2018 | $ | 28 |
| | $ | (971 | ) | | $ | (7 | ) | | $ | (950 | ) | | $ | 28 |
| | $ | (971 | ) | | $ | (7 | ) | | $ | (950 | ) | |
Other comprehensive loss before reclassifications | | — |
| | (3 | ) | | — |
| | (3 | ) | | | — |
| | (3 | ) | | — |
| | (3 | ) | |
Amounts reclassified from accumulated other comprehensive loss (1) | | (7 | ) | | 12 |
| | — |
| | 5 |
| | | (9 | ) | | 16 |
| | — |
| | 7 |
| |
Net current period other comprehensive (loss) income | | (7 | ) | | 9 |
| | — |
| | 2 |
| | | (9 | ) | | 13 |
| | — |
| | 4 |
| |
Balance as of June 30, 2019 | $ | 21 |
| | $ | (962 | ) | | $ | (7 | ) | | $ | (948 | ) | | |
Balance as of September 30, 2019 | | $ | 19 |
| | $ | (958 | ) | | $ | (7 | ) | | $ | (946 | ) | |
| |
(1) | See the table below for details about these reclassifications. |
The reclassifications out of accumulated other comprehensive loss for the sixnine months ended JuneSeptember 30, 2019, were comprised of the following:
| | (Unaudited, in millions) | Amounts Reclassified From Accumulated Other Comprehensive Loss | Affected Line in the Consolidated Statements of Operations | Amounts Reclassified From Accumulated Other Comprehensive Loss | Affected Line in the Consolidated Statements of Operations |
Unamortized Prior Service Credits | | | | | | |
Amortization of prior service credits | $ | (6 | ) | | Non-operating pension and other postretirement benefit credits (1) | $ | (8 | ) | | Non-operating pension and other postretirement benefit credits (1) |
Curtailment gain | | (1 | ) | | Non-operating pension and other postretirement benefit credits (1) | | (1 | ) | | Non-operating pension and other postretirement benefit credits (1) |
| | — |
| | Income tax provision | | — |
| | Income tax provision |
| $ | (7 | ) | | Net of tax | $ | (9 | ) | | Net of tax |
Unamortized Actuarial Losses | | | | | | |
Amortization of actuarial losses | $ | 15 |
| | Non-operating pension and other postretirement benefit credits (1) | $ | 21 |
| | Non-operating pension and other postretirement benefit credits (1) |
| | (3 | ) | | Income tax provision | | (5 | ) | | Income tax provision |
| $ | 12 |
| | Net of tax | $ | 16 |
| | Net of tax |
Total Reclassifications | $ | 5 |
| | Net of tax | $ | 7 |
| | Net of tax |
| |
(1) | These items are included in the computation of net periodic benefit costcredit related to our pension and other postretirement benefit (or “OPEB”) plans summarized in Note 8, “Employee Benefit Plans.” |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
Note 3. Net (Loss) Income Per Share
The reconciliation of the basic and diluted net (loss) income per share for the three and sixnine months ended JuneSeptember 30, 2019 and 2018, was as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions, except per share amounts) | 2019 | | | 2018 | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | 2019 | | | 2018 | | |
Numerator: | | | | | | | | | | | | | | | | | | |
Net income attributable to Resolute Forest Products Inc. | $ | 25 |
| | $ | 72 |
| | $ | 67 |
| | $ | 82 |
| | |
Net (loss) income attributable to Resolute Forest Products Inc. | | $ | (43 | ) | | $ | 117 |
| | $ | 24 |
| | $ | 199 |
| |
Denominator: | | | | | | | | | | | | | | | | | | |
Basic weighted-average number of Resolute Forest Products Inc. common shares outstanding | | 92.4 |
| | 91.3 |
| | 92.4 |
| | 91.2 |
| | | 90.9 |
| | 91.3 |
| | 91.9 |
| | 91.3 |
| |
Dilutive impact of nonvested stock unit awards (1) | | 1.2 |
| | 1.9 |
| | 1.4 |
| | 1.9 |
| | | — |
| | 2.1 |
| | 1.1 |
| | 1.9 |
| |
Diluted weighted-average number of Resolute Forest Products Inc. common shares outstanding | | 93.6 |
| | 93.2 |
| | 93.8 |
| | 93.1 |
| | | 90.9 |
| | 93.4 |
| | 93.0 |
| | 93.2 |
| |
Net income per share attributable to Resolute Forest Products Inc. common shareholders: | | | | | | | | | | |
Net (loss) income per share attributable to Resolute Forest Products Inc. common shareholders: | | | | | | | | | | |
Basic | $ | 0.27 |
| | $ | 0.79 |
| | $ | 0.73 |
| | $ | 0.90 |
| | $ | (0.47 | ) | | $ | 1.28 |
| | $ | 0.26 |
| | $ | 2.18 |
| |
Diluted | | 0.27 |
| | 0.77 |
| | 0.71 |
| | 0.88 |
| | | (0.47 | ) | | 1.25 |
| | 0.26 |
| | 2.14 |
| |
| |
(1)
| When we refer to stock unit awards we mean equity-classified restricted stock units, deferred stock units and performance stock units. |
The weighted-average number of outstanding stock options and nonvested equity-classified restricted stock units, deferred stock units and performance stock units (collectively, “stock unit awards”) that were excluded from the calculation of diluted net (loss) income per share, as their impact would have been antidilutive, was 1.0 million and 1.3 million for the threenine months ended JuneSeptember 30, 2019 and 2018, respectively, and 1.0 million and 1.3 million for the six months ended June 30, 2019 and 2018, respectively.was as follows:
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 |
| | 2018 |
| | | 2019 |
| | 2018 |
| |
Stock options | 1.0 |
| | 0.9 |
| | | 1.0 |
| | 1.3 |
| |
Stock unit awards | 2.1 |
| | — |
| | | — |
| | — |
| |
Note 4. Inventories, Net
Inventories, net as of JuneSeptember 30, 2019 and December 31, 2018, were comprised of the following:
| | (Unaudited, in millions) | June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 |
Raw materials | $ | 102 |
| | $ | 106 |
| | $ | 117 |
| | $ | 106 |
| |
Work in process | | 41 |
| | 39 |
| | | 39 |
| | 39 |
| |
Finished goods | | 194 |
| | 180 |
| | | 170 |
| | 180 |
| |
Mill stores and other supplies | | 193 |
| | 183 |
| | | 196 |
| | 183 |
| |
| $ | 530 |
| | $ | 508 |
| | $ | 522 |
| | $ | 508 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
Note 5. Operating leases
We have operating leases for buildings, machinery, chemical equipment, rail cars, and office equipment with remaining terms from less than one year to 24 years. These leases may include renewal options for up to 13 years.
The components of lease expense for the three and sixnine months ended JuneSeptember 30, 2019, were as follows:
| | (Unaudited, in millions) | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
Operating lease cost | $ | 3 |
| | $ | 6 |
| | $ | 3 |
| | $ | 9 |
| |
Variable lease cost (1) | | 4 |
| | 10 |
| | | 5 |
| | 15 |
| |
| |
(1) | Variable lease cost is determined by the consumption of the underlying asset. |
Supplemental information related to operating leases was as follows:
|
| | | | |
(Unaudited) | JuneSeptember 30, 2019 |
Weighted-average remaining operating lease term (in years) | | 11.411.2 |
| |
Weighted-average operating lease discount rate | | 4.7 | % | |
| | (Unaudited, in millions) | Six Months Ended June 30, 2019 | Nine Months Ended September 30, 2019 |
Operating cash flow payments for operating lease liabilities | $ | 5 |
| | $ | 8 |
| |
Operating lease right-of-use assets obtained in exchange for operating lease liabilities | | 2 |
| | | 4 |
| |
The maturities of operating lease liabilities as of JuneSeptember 30, 2019, were as follows:
| | (Unaudited, in millions) | Operating Leases | Operating Leases |
Years ending December 31, | | | | | | |
2019 | $ | 5 |
| | $ | 3 |
| |
2020 | | 11 |
| | | 11 |
| |
2021 | | 9 |
| | | 10 |
| |
2022 | | 9 |
| | | 9 |
| |
2023 | | 7 |
| | | 7 |
| |
2024 and thereafter | | 46 |
| | | 45 |
| |
Total lease payments | | 87 |
| | | 85 |
| |
Less: imputed interest | | (20 | ) | | | (19 | ) | |
Total operating lease liabilities | $ | 67 |
| | $ | 66 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
Note 6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities as of JuneSeptember 30, 2019 and December 31, 2018, were comprised of the following:
| | (Unaudited, in millions) | June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 |
Trade accounts payable | $ | 270 |
| | $ | 299 |
| | $ | 269 |
| | $ | 299 |
| |
Accrued compensation | | 49 |
| | 66 |
| | | 49 |
| | 66 |
| |
Accrued interest | | 3 |
| | 5 |
| | | 9 |
| | 5 |
| |
Pension and other postretirement benefit obligations | | 17 |
| | 17 |
| | | 17 |
| | 17 |
| |
Accrued provision for former Fibrek Inc. dissenting shareholders | | 11 |
| | — |
| | |
Accrued provision related to Fibrek Inc. dissenting shareholder litigation (Note 10) | | | 33 |
| | — |
| |
Income and other taxes payable | | 4 |
| | 4 |
| | | 3 |
| | 4 |
| |
Deposits | | 10 |
| | 20 |
| | | 4 |
| | 20 |
| |
Other | | 12 |
| | 16 |
| | | 12 |
| | 16 |
| |
| $ | 376 |
| | $ | 427 |
| | $ | 396 |
| | $ | 427 |
| |
Note 7. Long-Term Debt
Overview
Long-term debt, including current portion, as of JuneSeptember 30, 2019 and December 31, 2018, was comprised of the following:
| | (Unaudited, in millions) | June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 |
5.875% senior unsecured notes due 2023: | | | | | | | | | | |
Principal amount | $ | 375 |
| | $ | 600 |
| | $ | 375 |
| | $ | 600 |
| |
Deferred financing costs | | (3 | ) | | (5 | ) | | | (3 | ) | | (5 | ) | |
Unamortized discount | | (2 | ) | | (3 | ) | | | (1 | ) | | (3 | ) | |
Total 5.875% senior unsecured notes due 2023 | | 370 |
| | 592 |
| | | 371 |
| | 592 |
| |
Term loan due 2025 | | 46 |
| | 46 |
| | | 46 |
| | 46 |
| |
Finance lease obligation | | 7 |
| | 7 |
| | | 7 |
| | 7 |
| |
Total debt | | 423 |
| | 645 |
| | | 424 |
| | 645 |
| |
Less: Current portion of 5.875% senior unsecured notes due 2023 | | — |
| | (222 | ) | | | — |
| | (222 | ) | |
Less: Current portion of finance lease obligation | | (1 | ) | | (1 | ) | | | (1 | ) | | (1 | ) | |
Long-term debt, net of current portion | $ | 422 |
| | $ | 422 |
| | $ | 423 |
| | $ | 422 |
| |
2023 Notes
We issued $600 million in aggregate principal amount of 5.875% senior unsecured notes due 2023 (or the “2023 Notes”) on May 8, 2013. Upon their issuance, the notes were recorded at their fair value of $594 million, which reflected a discount of $6 million that is being amortized to “Interest expense” in our Consolidated Statements of Operations using the interest method over the term of the notes, resulting in an effective interest rate of 6%. Interest on the notes is payable semi-annually beginning November 15, 2013, until their maturity date of May 15, 2023. In connection with the issuance of the notes, we incurred financing costs of $9 million, which were deferred and recorded as a reduction of the notes. Deferred financing costs are amortized to “Interest expense” in our Consolidated Statements of Operations using the interest method over the term of the notes.
On January 3, 2019 (or the “closing date”), we repurchased $225 million in aggregate principal amount of the 2023 Notes, pursuant to a notes purchase agreement entered into on December 21, 2018, with certain noteholders, at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the closing date. The aggregate principal amount and related deferred financing costs and unamortized discount were included in “Current portion of long-term debt” in our Consolidated Balance Sheet as of December 31, 2018. As a result of the repurchase, we recorded a net loss on
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
extinguishment of debt of $3 million in “Other expense,(expense) income, net” in our Consolidated Statement of Operations for the sixnine months ended JuneSeptember 30, 2019.
The fair value of the 2023 Notes (Level 1) was $379$375 million and $598 million as of JuneSeptember 30, 2019 and December 31, 2018, respectively.
Senior Secured Credit Facility
On September 7, 2016, we entered into a senior secured credit facility for up to $185 million. This senior secured credit facility provided a term loan of $46 million with a maturity date of September 7, 2025, and a revolving credit facility of up to $139 million with a maturity date of September 7, 2022. As of September 30, 2019, we had $139 million of availability under the revolving credit facility, which was undrawn. The fair value of the term loan (Level 2) approximated its carrying value as of both September 30, 2019 and December 31, 2018.
On October 28, 2019, we entered into an amended and restated senior secured credit facility (or the “Senior Secured Credit Facility”) for up to $360 million, replacing our existing $185 million.million senior secured credit facility. The Senior Secured Credit Facility provides a term loan facility of $46up to $180 million with a delayed draw period of up to three years, and the choice of maturities of six to ten years from the date of drawing (or the “Term Loan Facility”), and a six-year revolving credit facility of up to $180 million with a maturity date of September 7,October 28, 2025 (or the “Term Loan”), and a revolving credit facility of up to $139 million with a maturity date of September 7, 2022 (or the “Revolving Credit Facility”). As of June 30,There is also an uncommitted option to increase the Senior Secured Credit Facility by up to an additional $360 million, subject to certain terms and conditions. On October 28, 2019, we had $139repaid our $46 million term loan by borrowing under the Revolving Credit Facility.
The obligations under the Senior Secured Credit Facility are guaranteed by certain material U.S. subsidiaries of availabilitythe Company and are secured by a first priority mortgage on the real property of our Calhoun (Tennessee) facility and a first priority security interest on the fixtures and equipment located therein.
Interest rates under the Senior Secured Credit Facility are based, at the Company’s election, on either a floating rate based on the London Interbank Offered Rate (or the “LIBOR”), or a base rate, in each case plus a spread over the index. The Senior Secured Credit Facility also contains provisions for an expedited amendment procedure for replacing LIBOR if LIBOR quotes are no longer available. The base rate is the highest of (i) the prime rate; (ii) the federal funds rate plus 0.5%; and (iii) the one-month LIBOR plus 1%. The applicable spread over the index fluctuates quarterly based upon (a) the Company’s capitalization ratio, which is defined as the ratio of the Company’s funded indebtedness to the sum of the Company’s funded indebtedness and its adjusted net worth; and (b) in the case of the loans under the Term Loan Facility, the maturity date of such loans. For loans under the Term Loan Facility, the applicable spread ranges from 0.5% to 1.5% for base rate loans, and from 1.5% to 2.5% for LIBOR loans. For loans under the Revolving Credit Facility, the applicable spread ranges from 0.5% to 1.0% for base rate loans, and from 1.5% to 2.0% for LIBOR loans. The Senior Secured Credit Facility was issued by a syndicate of lenders within the farm credit system and is eligible for patronage refunds. Patronage refunds are distributions of profits from lenders in the farm credit system, which was undrawn. The fair valueare cooperatives that are required to distribute profits to their members. Patronage distributions, which are made in either cash or stock, are received in the year after they were earned. Future refunds are dependent on future farm credit lender profits, made at the discretion of each farm credit lender.
In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we are required to pay a fee in respect of unutilized commitments based on the average daily utilization for the prior fiscal quarter ranging from 0.275% to 0.325% per annum under the Revolving Credit Facility and ranging from 0.25% to 0.40% for the Term Loan (Level 2) approximatedFacility during the delay draw period.
The outstanding principal balance of any term loan made under the Term Loan Facility is subject to annual payments of 5% of the initial principal amount of such term loan commencing on the fifth anniversary of each term loan’s draw date with the balance due six to ten years after the draw date based on the chosen maturity of each term loan. Loans under the Revolving Credit Facility and the Term Loan Facility may be prepaid from time to time at our discretion without premium or penalty but subject to breakage costs, if any, in the case of LIBOR loans. Amounts repaid on the Term Loan Facility may not be subsequently re-borrowed. Principal amounts under the Revolving Credit Facility may be drawn, repaid, and redrawn until October 27, 2025.
Pursuant to the Senior Secured Credit Facility, we are also required to maintain (i) a capitalization ratio not greater than 45% at all times; (ii) a collateral coverage ratio of not less than 1.8:1.0; and (iii) a springing consolidated fixed charge coverage ratio of 1.0:1.0, which is triggered only when adjusted availability under the ABL Credit Facility (as discussed and defined below) falls below the greater of $45 million or 10% of the maximum available borrowing amount under the ABL Credit Facility for two
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Notes to Unaudited Interim Consolidated Financial Statements
consecutive business days. The consolidated fixed charge coverage ratio is the ratio of (a) consolidated EBITDA less certain capital expenditures and less cash taxes paid, to (b) consolidated fixed charges, as determined under the Senior Secured Credit Facility.
In addition, the Senior Secured Credit Facility contains certain covenants applicable to the Company and its carrying value assubsidiaries, including, among others: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence and repayment of both June 30, 2019indebtedness; (iii) restrictions on the existence or incurrence of liens; (iv) restrictions on the Company and December 31, 2018.certain of its subsidiaries making certain restricted payments; (v) restrictions on making certain investments; (vi) restrictions on certain mergers, consolidations, and asset dispositions; (vii) restrictions on transactions with affiliates; and (viii) restrictions on modifications to material indebtedness. The Senior Secured Credit Facility includes customary representations, warranties and events of default subject to customary grace periods and notice requirements.
ABL Credit Facility
On May 14, 2019, we entered into an amendment to the credit agreement dated May 22, 2015, for a senior secured asset-based revolving credit facility (or the “ABL Credit Facility”). The amended credit agreement provides for an extension of the maturity date to May 14, 2024, with an aggregate lender commitment of up to $500 million at any time outstanding, subject to borrowing base availability based on specified advance rates, eligibility criteria and customary reserves.
The aggregate lender commitment under the facility includes a $60 million swingline sub-facility and a $200 million letter of credit sub-facility, and we may convert up to $50 million of the commitments under the facility to a first-in last-out facility (or “FILO Facility”), subject to the consent of each converting lender. The ABL Credit Facility also provides for an uncommitted ability to increase the revolving credit facility by up to $500 million, subject to certain terms and conditions set forth in the agreement.
Revolving loan (and letter of credit) availability under the facility is subject to a borrowing base, which at any time is equal to the sum of (i) 85% of eligible accounts receivable (or 90% with respect to certain insured or letter of credit backed accounts or with accounts owed by investment grade obligors), plus (ii) the lesser of (A) 70% of the lesser of the cost or market value of eligible inventory or (B) 85% of the net orderly liquidation value of eligible inventory, plus (iii) 100% of the value of eligible cash and 95% of the value of permitted investments held in deposit accounts controlled solely by the administrative and collateral agent (or the “agent”). The credit agreement includes reserves that reduce the borrowing base, including: (i) a reserve commencing March 16, 2023 for the outstanding principal amount due under the 2023 Notes; and (ii) a reserve for the outstanding principal amount due under the Senior Secured Credit Facility, commencing 60 days before its maturity. The borrowing base is subject to other customary reserves and eligibility criteria, in the exercise of the agent’s reasonable discretion.
The obligations under the credit agreement are guaranteed by certain material subsidiaries of the Company and are secured by first priority liens on and security interests in accounts receivable, inventory and related assets.
Loans under the credit agreement bear interest at a rate equal to a base rate, the London Interbank Offered Rate (or the “LIBOR,”), or the Canadian Dollar Offered Rate (or the “CDOR”), in each case plus an applicable margin. The applicable margin is between 0.00% and 0.50% with respect to base rate loans and between 1.00% and 1.50% with respect to LIBOR and CDOR loans, in each case based on availability under the credit facility and a leverage ratio.
In addition to paying interest on outstanding principal under the ABL Credit Facility, we are required to pay a fee in respect of unutilized commitments under the ABL Credit Facility equal to 0.30% per annum when average daily utilization under the ABL Credit Facility for the prior fiscal quarter is less than 35% of the total revolving commitments, and 0.25% per annum when average daily utilization under the ABL Credit Facility for the prior fiscal quarter is greater than or equal to 35% of the total revolving commitments, as well as a fee in respect of outstanding letters of credit (equal to the applicable margin in respect of LIBOR and CDOR loans plus a fronting fee of 0.125% and certain administrative fees).
Loans under the ABL Credit Facility may be repaid from time to time at our discretion without premium or penalty, with the exception of breakage costs for LIBOR and CDOR loans, if any. However, no loans under the FILO Facility can be repaid unless all other loans under the credit agreement are repaid first. We are required to repay outstanding loans that exceed the maximum availability then in effect.
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Notes to Unaudited Interim Consolidated Financial Statements
The credit agreement contains customary covenants for asset-based credit agreements of this type, including, among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence and repayment of indebtedness by the Company and its subsidiaries; (iii) restrictions on the existence or incurrence of liens by the Company and its subsidiaries; (iv) restrictions on the Company and certain of its subsidiaries making certain restricted
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Notes to Unaudited Interim Consolidated Financial Statements
payments; (v) restrictions on the Company and certain of its subsidiaries making certain investments; (vi) restrictions on certain mergers, consolidations and asset dispositions; (vii) restrictions on transactions with affiliates; (viii) restrictions on amendments or modifications to the Canadian pension and benefit plans; (ix) restrictions on modifications to material indebtedness; and (x) a springing requirement for the Company to maintain a minimum consolidated fixed charge coverage ratio, as determined under the credit agreement, of 1.0:1.0, anytime availability under the facility falls below the greater of $45 million or 10% of the maximum available borrowing amount for two consecutive business days. Subject to customary grace periods and notice requirements, the credit agreement also contains certain customary events of default.
As of JuneSeptember 30, 2019, we had $353$358 million of availability under the ABL Credit Facility, which was undrawn except for $51$52 million of ordinary course letters of credit outstanding.
Finance lease obligation
We have a finance lease obligation for a warehouse with a maturity date of December 1, 2027, which can be renewed for 20 years at our option. Minimum monthly payments are determined by an escalatory price clause.
Note 8. Employee Benefit Plans
Pension and other postretirement benefit plans
The components of net periodic benefit costcredit relating to our pension and OPEB plans for the three and sixnine months ended JuneSeptember 30, 2019 and 2018, were as follows:
Pension Plans:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Interest cost | $ | 45 |
| | $ | 48 |
| | $ | 90 |
| | $ | 96 |
| | $ | 45 |
| | $ | 46 |
| | $ | 135 |
| | $ | 142 |
| |
Expected return on plan assets | | (61 | ) | | (67 | ) | | (124 | ) | | (134 | ) | | | (63 | ) | | (65 | ) | | (187 | ) | | (199 | ) | |
Amortization of actuarial losses | | 9 |
| | 10 |
| | 18 |
| | 20 |
| | | 8 |
| | 9 |
| | 26 |
| | 29 |
| |
Amortization of prior service credits | | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | | 1 |
| | — |
| | — |
| | (1 | ) | |
Non-operating pension credits | | (8 | ) | | (9 | ) | | (17 | ) | | (19 | ) | | | (9 | ) | | (10 | ) | | (26 | ) | | (29 | ) | |
Service cost | | 3 |
| | 4 |
| | 7 |
| | 9 |
| | | 4 |
| | 5 |
| | 11 |
| | 14 |
| |
Net periodic benefit credits before special events | | (5 | ) | | (5 | ) | | (10 | ) | | (10 | ) | | | (5 | ) | | (5 | ) | | (15 | ) | | (15 | ) | |
Curtailment and settlement (gain) loss | | (1 | ) | | 1 |
| | (1 | ) | | 1 |
| | | — |
| | — |
| | (1 | ) | | 1 |
| |
| $ | (6 | ) | | $ | (4 | ) | | $ | (11 | ) | | $ | (9 | ) | | $ | (5 | ) | | $ | (5 | ) | | $ | (16 | ) | | $ | (14 | ) | |
OPEB Plans:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | | 2019 | | | 2018 | | |
Interest cost | $ | 2 |
| | $ | 1 |
| | | $ | 4 |
| | $ | 4 |
| |
Amortization of actuarial gains | | (2 | ) | | | — |
| | | | (5 | ) | | | (3 | ) | |
Amortization of prior service credits | | (3 | ) | | | (4 | ) | | | | (8 | ) | | | (11 | ) | |
Non-operating other postretirement benefit credits | | (3 | ) | | | (3 | ) | | | | (9 | ) | | | (10 | ) | |
Service cost | | — |
| | | — |
| | | | — |
| | | 1 |
| |
| $ | (3 | ) | | $ | (3 | ) | | | $ | (9 | ) | | $ | (9 | ) | |
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Notes to Unaudited Interim Consolidated Financial Statements
OPEB Plans:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | | 2019 | | | 2018 | | |
Interest cost | $ | 1 |
| | $ | 2 |
| | | $ | 2 |
| | $ | 3 |
| |
Amortization of actuarial gains | | (2 | ) | | | (2 | ) | | | | (3 | ) | | | (3 | ) | |
Amortization of prior service credits | | (2 | ) | | | (4 | ) | | | | (5 | ) | | | (7 | ) | |
Non-operating other postretirement benefit credits | | (3 | ) | | | (4 | ) | | | | (6 | ) | | | (7 | ) | |
Service cost | | — |
| | | 1 |
| | | | — |
| | | 1 |
| |
| $ | (3 | ) | | $ | (3 | ) | | | $ | (6 | ) | | $ | (6 | ) | |
Defined contribution plans
Our expense for the defined contribution plans totaled $4$5 million and $5 million for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $9$14 million and $1015 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively.
Note 9. Income Taxes
The income tax provision attributable to (loss) income before income taxes differs from the amounts computed by applying the U.S. federal statutory income tax rate of 21% for the three and sixnine months ended JuneSeptember 30, 2019 and 2018, as a result of the following:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Income before income taxes | $ | 44 |
| | $ | 119 |
| | $ | 107 |
| | $ | 160 |
| | |
(Loss) income before income taxes | | $ | (31 | ) | | $ | 150 |
| | $ | 76 |
| | $ | 310 |
| |
Income tax provision: | | | | | | | | | | | | | | | | | | |
Expected income tax provision | | (9 | ) | | (25 | ) | | (22 | ) | | (34 | ) | | |
Expected income tax benefit (provision) | | | 6 |
| | (31 | ) | | (16 | ) | | (65 | ) | |
Changes resulting from: | | | | | | | | | | | | | | | | | | |
Valuation allowance (1) | | (4 | ) | | 13 |
| | (11 | ) | | 8 |
| | | (7 | ) | | 32 |
| | (18 | ) | | 40 |
| |
Foreign exchange | | 1 |
| | (7 | ) | | 4 |
| | (14 | ) | | | (3 | ) | | 2 |
| | 1 |
| | (12 | ) | |
U.S. tax on non-U.S. earnings (2) | | (5 | ) | | (18 | ) | | (5 | ) | | (25 | ) | | | (6 | ) | | (28 | ) | | (11 | ) | | (53 | ) | |
State income taxes, net of federal income tax benefit | | 1 |
| | — |
| | 2 |
| | 2 |
| | | 3 |
| | (1 | ) | | 5 |
| | 1 |
| |
Foreign tax rate differences | | (4 | ) | | (7 | ) | | (9 | ) | | (12 | ) | | | (1 | ) | | (7 | ) | | (10 | ) | | (19 | ) | |
Other, net | | 1 |
| | (3 | ) | | 1 |
| | (3 | ) | | | (4 | ) | | — |
| | (3 | ) | | (3 | ) | |
| $ | (19 | ) | | $ | (47 | ) | | $ | (40 | ) | | $ | (78 | ) | | $ | (12 | ) | | $ | (33 | ) | | $ | (52 | ) | | $ | (111 | ) | |
| |
(1) | Relates to our U.S. operations.operations where we recognize a valuation allowance against virtually all of our net deferred income tax assets. |
| |
(2) | Reduces income tax benefits on U.S. losses for the three and sixnine months ended JuneSeptember 30, 2019 and 2018. |
Note 10. Commitments and Contingencies
Legal matters
We become involved in various legal proceedings, claims and governmental inquiries, investigations, and other disputes in the normal course of business, including matters related to contracts, commercial and trade disputes, taxes, environmental issues, activist damages, employment and workers’ compensation claims, grievances, human rights complaints, pension and benefit plans and obligations, health and safety, product safety and liability, asbestos exposure, financial reporting and disclosure obligations, corporate governance, First Nations claims, antitrust, governmental regulations, and other matters. Although the final outcome is subject to many variables and cannot be predicted with any degree of certainty, we regularly assess the status of the matters and establish provisions (including legal costs expected to be incurred) when we believe an adverse outcome is
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Notes to Unaudited Interim Consolidated Financial Statements
probable, and the amount can be reasonably estimated. Except as described below and for claims that cannot be assessed due to their preliminary nature, we believe that the ultimate disposition of these matters outstanding or pending as of JuneSeptember 30, 2019, will not have a material adverse effect on our Consolidated Financial Statements.
Asbestos-related lawsuits
We are involved in a number of asbestos-related lawsuits filed primarily in U.S. state courts, including certain cases involving multiple defendants. These lawsuits principally allege direct or indirect personal injury or death resulting from exposure to asbestos-containing premises. While we dispute the plaintiffs’ allegations and intend to vigorously defend these claims, the ultimate resolution of these matters cannot be determined at this time. These lawsuits frequently involve claims for unspecified compensatory and punitive damages, and we are unable to reasonably estimate a range of possible losses. However, unfavorable rulings, judgments or settlement terms could materially impact our Consolidated Financial Statements. Certain
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Notes to Unaudited Interim Consolidated Financial Statements
cases, including cases that were scheduled in March 2019, were settled without any material impact in our Consolidated Statements of Operations for the three and sixnine months ended JuneSeptember 30, 2019.
Countervailing duty and anti-dumping investigations on softwood lumber
On November 25, 2016, countervailing duty and anti-dumping petitions were filed with the U.S. Department of Commerce (or “Commerce”) and the U.S. International Trade Commission (or “ITC”) by certain U.S. softwood lumber products producers and forest landowners, requesting that the U.S. government impose countervailing and anti-dumping duties on Canadian-origin softwood lumber products exported to the U.S. One of our subsidiaries was identified in the petitions as being a Canadian exporting producer of softwood lumber products to the U.S. and was selected as a mandatory respondent to be investigated by Commerce in both the countervailing duty and anti-dumping investigations.
On April 24, 2017, Commerce announced its preliminary determination in the countervailing duty investigation and, as a result, after April 28, 2017, we were required to pay cash deposits to the U.S. Customs and Border Protection agency (or “U.S. Customs”) at a rate of 12.82% for estimated countervailing duties on our U.S. imports of softwood lumber products produced at our Canadian sawmills. The preliminary rate remained in effect until August 26, 2017. Commerce changed the rate in its final affirmative determination on November 2, 2017, but the new rate did not take effect until December 28, 2017, following the ITC’s final affirmative determination and the publication by Commerce of a countervailing duty order. Since that date, we have been required to resume paying cash deposits to the U.S. Customs at a rate of 14.7% for our U.S. imports of Canadian-produced softwood lumber products U.S. imports from our Canadian sawmills.products. This rate will continue until Commerce sets a duty rate in an administrative review, or a new rate may be set through a remand determination by a North American Free Trade Agreement binational panel (or “NAFTAPanel”) binational panel on appeal. Through JuneSeptember 30, 2019, our cash deposits totaled $106$117 million and, based on the 14.7% rate and our current operating parameters, could be as high as $60 million per year.
On June 26, 2017, Commerce announced its preliminary determination in the anti-dumping investigation and, as a result, after June 30, 2017, we were required to pay cash deposits to the U.S. Customs at a rate of 4.59% for estimated anti-dumping duties on our U.S. imports of softwood lumber products produced at our Canadian sawmills. On November 2, 2017, Commerce announced its final affirmative determination in the anti-dumping investigation and, as a result, since November 8, 2017, we have been required to pay cash deposits to the U.S. Customs, at a rate of 3.2% for our U.S. imports of Canadian-produced softwood lumber products U.S. imports from our Canadian sawmills.products. This rate will apply until Commerce sets a duty rate in an administrative review, or a new rate may be set through a remand determination by a NAFTA binational panelPanel on appeal. Through JuneSeptember 30, 2019, our cash deposits totaled $30$32 million and, based on the 3.2% rate and our current operating parameters, could be as high as $15 million per year.
On April 1, 2019, Commerce published a notice initiating the administrative reviews of the countervailing duty and anti-dumping orders on softwood lumber products from Canada. We were selected as a mandatory respondent in these administrative reviews and we are in the process of responding to Commerce with the information requested.
On September 4, 2019, a Panel issued an interim decision upholding the affirmative final injury determinations of the ITC in both investigations of softwood lumber products from Canada. The Panel remanded the ITC to reconsider several findings and ordered the ITC to submit its redetermination on remand within 90 days from the date of the Panel interim decision.
We are not presently able to determine the ultimate resolution of these matters, but we believe it is not probable that we will ultimately be assessed with significant duties, if any, on our U.S. imports of Canadian-produced softwood lumber products. Accordingly, no0 contingent loss was recorded in respect of these petitions in our Consolidated Statements of Operations, and our cash deposits were recorded in “Other assets” in our Consolidated Balance Sheets.
Fibrek acquisition
Effective July 31, 2012, we completed the final step of the transaction pursuant to which we acquired the remaining 25.4% of the outstanding Fibrek Inc. (or “Fibrek”) shares, following the approval of Fibrek’s shareholders on July 23, 2012, and the
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Notes to Unaudited Interim Consolidated Financial Statements
issuance of a final order ofby the Quebec Superior Court in Canada (or “Quebec Superior Court”) approving the arrangement on July 27, 2012. Certain former shareholders of Fibrek exercised (or purported to exercise) rights of dissent in respect of the transaction, asking for a judicial determination of the fair value of their claim under the Canada Business Corporations Act. No consideration has to date been paid toOn September 26, 2019, the former Fibrek shareholders who exercised (or purported to exercise) rights of dissent. Any such consideration will only be paid out upon settlement or judicial determination ofQuebec Superior Court rendered a decision fixing the fair value of their claimsthe shares of the dissenting shareholders at Cdn $1.99 per share, or Cdn $31 million in aggregate, plus interest and will be paid entirely in cash. Accordingly, we cannot presently determine the amount that ultimately will be paid to former holders of Fibrek shares in connection with the proceedings, but we have accruedan additional indemnity, for a total currently estimated at Cdn $14$44 million ($1133 million, based on the exchange rate in effect on JuneSeptember 30, 2019) payable in cash. Of this amount, Cdn $19 million ($14 million) was payable immediately and paid on October 2, 2019. We are appealing the decision, therefore the payment of any additional consideration and its timing will depend on the outcome of the appeal. As previously reported,
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Notes to Unaudited Interim Consolidated Financial Statements
we had accrued Cdn $14 million ($10 million, based on the exchange rate in effect on September 30, 2019) for the payment of the dissenting shareholders’ claims. We have accrued an additional Cdn $30 million ($23 million, based on the exchange rate in effect on September 30, 2019) for the estimated eventual payment of those claims. The hearing in this matter occurred in 2019 and we are awaitingany amounts following the decisionoutcome of the court.appeal, and as a result recorded $23 million in “Other (expense) income, net” in our Consolidated Statements of Operations for the three and nine months ended September 30, 2019.
Partial wind-ups of pension plans
On June 12, 2012, we filed a motion for directives with the Quebec Superior Court, the court with jurisdiction in the creditor protection proceedings under the Companies’ Creditors Arrangement Act (Canada) (or the “CCAA Creditor Protection Proceedings”), seeking an order to prevent pension regulators in each of Quebec, New Brunswick, and Newfoundland and Labrador from declaring partial wind-ups of pension plans relating to employees of former operations in New Brunswick, and Newfoundland and Labrador, or a declaration that any claim for accelerated reimbursements of deficits arising from a partial wind-up is a barred claim under the CCAA Creditor Protection Proceedings. We contend, among other things, that any such declaration, if issued, would be inconsistent with the Quebec Superior Court’s sanction order confirming the CCAA debtors’ CCAA Plan of Reorganization and Compromise, as amended, and the terms of our emergence from the CCAA Creditor Protection Proceedings. A partial wind-up would likely shorten the period in which any deficit within those plans, which could reach up to Cdn $150 million ($115 million, based on the exchange rate in effect on JuneSeptember 30, 2019), would have to be funded if we do not obtain the relief sought. The hearing in this matter could occur in 2019 or 2020.
Environmental matters
We are subject to a variety of federal or national, state, provincial, and local environmental laws and regulations in the jurisdictions in which we operate. We believe our operations are in material compliance with current applicable environmental laws and regulations. Environmental regulations promulgated in the future could require substantial additional expenditures for compliance and could have a material impact on us, in particular, and the industry in general.
We may be a “potentially responsible party” with respect to a hazardous waste site that is being addressed pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (commonly known as Superfund). We believe we will not be liable for any significant amounts at this site.
We have environmental liabilities of $8 million recorded as of both JuneSeptember 30, 2019 and December 31, 2018, primarily related to environmental remediation related to closed sites. The amount of these liabilities represents management’s estimate of the ultimate settlement based on an assessment of relevant factors and assumptions and could be affected by changes in facts or assumptions not currently known to management for which the outcome cannot be reasonably estimated at this time. These liabilities are included in “Accounts payable and accrued liabilities” or “Other liabilities” in our Consolidated Balance Sheets.
We also have asset retirement obligations of $26 million and $23 million recorded as of Juneboth September 30, 2019 and December 31, 2018, respectively, primarily consisting of liabilities associated with landfills, sludge basins and the dismantling of retired assets. These liabilities are included in “Accounts payable and accrued liabilities” or “Other liabilities” in our Consolidated Balance Sheets.
Note 11. Share Capital
During the three and sixnine months ended JuneSeptember 30, 2019, we repurchased 720,0001.1 million and 1.8 million shares, respectively, at a cost of $5$7 million and $12 million, respectively, under our $150 million share repurchase program, which was launched in 2012. We did not repurchase any shares during the three and sixnine months ended JuneSeptember 30, 2018. There remains $19$12 million under the program.
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Notes to Unaudited Interim Consolidated Financial Statements
Note 12. Segment Information
We manage our business based on the products we manufacture. Accordingly, our reportable segments correspond to our principal product lines: market pulp, tissue, wood products, newsprint, and specialty papers.
None of the income or loss items following “Operating (loss) income” in our Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management. For the same reason, closure costs, impairment and other related charges, inventory write-downs related to closures, start-up costs, gains and losses on disposition of assets, as well as other discretionary charges or credits are not allocated to our segments. We allocate depreciation and amortization expense to our segments, although the related fixed assets and amortizable intangible assets are not allocated to segment assets. Additionally, all selling, general and administrative expenses are allocated to our segments, with the exception of certain discretionary charges and credits, which we present under “corporate and other.”
Information about certain segment data for the three and sixnine months ended JuneSeptember 30, 2019 and 2018, was as follows:
| | (Unaudited, in millions) | Market Pulp (1) | Tissue (2) | Wood Products (3) | Newsprint | Specialty Papers | Segment Total | Corporate and Other | Total | Market Pulp (1) | Tissue (2) | Wood Products (3) | Newsprint | Specialty Papers | Segment Total | Corporate and Other | Total |
Sales | Sales | | | | | | | | | | | | | | | | Sales | | | | | | | | | | | | | | | |
Second quarter | | | | | | | | | | | | | | | | |
Third quarter | | Third quarter | | | | | | | | | | | | | | | |
2019 | $ | 189 |
| | $ | 43 |
| | $ | 168 |
| | $ | 209 |
| | $ | 146 |
| | $ | 755 |
| | $ | — |
| | $ | 755 |
| | $ | 201 |
| | $ | 43 |
| | $ | 146 |
| | $ | 180 |
| | $ | 135 |
| | $ | 705 |
| | $ | — |
| | $ | 705 |
| |
2018 | | 264 |
| | 35 |
| | 254 |
| | 230 |
| | 193 |
| | 976 |
| | — |
| | 976 |
| | | 288 |
| | 38 |
| | 203 |
| | 232 |
| | 213 |
| | 974 |
| | — |
| | 974 |
| |
First six months | | | | | | | | | | | | | | | | |
First nine months | | First nine months | | | | | | | | | | | | | | | |
2019 | | 420 |
| | 82 |
| | 329 |
| | 421 |
| | 298 |
| | 1,550 |
| | — |
| | 1,550 |
| | | 621 |
| | 125 |
| | 475 |
| | 601 |
| | 433 |
| | 2,255 |
| | — |
| | 2,255 |
| |
2018 | | 521 |
| | 57 |
| | 463 |
| | 428 |
| | 381 |
| | 1,850 |
| | — |
| | 1,850 |
| | | 809 |
| | 95 |
| | 666 |
| | 660 |
| | 594 |
| | 2,824 |
| | — |
| | 2,824 |
| |
Depreciation and amortization | Depreciation and amortization | | | | | | | | | | | | | | Depreciation and amortization | | | | | | | | | | | | | |
Second quarter | | | | | | | | | | | | | | | | |
Third quarter | | Third quarter | | | | | | | | | | | | | | | |
2019 | $ | 5 |
| | $ | 4 |
| | $ | 9 |
| | $ | 8 |
| | $ | 11 |
| | $ | 37 |
| | $ | 5 |
| | $ | 42 |
| | $ | 7 |
| | $ | 4 |
| | $ | 8 |
| | $ | 7 |
| | $ | 11 |
| | $ | 37 |
| | $ | 5 |
| | $ | 42 |
| |
2018 | | 8 |
| | 5 |
| | 7 |
| | 17 |
| | 12 |
| | 49 |
| | 5 |
| | 54 |
| | | 7 |
| | 5 |
| | 8 |
| | 16 |
| | 12 |
| | 48 |
| | 6 |
| | 54 |
| |
First six months | | | |
First nine months | | First nine months | | |
2019 | | 10 |
| | 9 |
| | 17 |
| | 15 |
| | 21 |
| | 72 |
| | 10 |
| | 82 |
| | | 17 |
| | 13 |
| | 25 |
| | 22 |
| | 32 |
| | 109 |
| | 15 |
| | 124 |
| |
2018 | | 15 |
| | 6 |
| | 15 |
| | 33 |
| | 24 |
| | 93 |
| | 14 |
| | 107 |
| | | 22 |
| | 11 |
| | 23 |
| | 49 |
| | 36 |
| | 141 |
| | 20 |
| | 161 |
| |
Operating income (loss) | | | | | | | | | | | | | | | | |
Second quarter | | | | | | | | | | | | | | | | |
Operating (loss) income | | Operating (loss) income | | | | | | | | | | | | | | | |
Third quarter | | Third quarter | | | | | | | | | | | | | | | |
2019 | $ | 27 |
| | $ | (4 | ) | | $ | (3 | ) | | $ | 17 |
| | $ | 15 |
| | $ | 52 |
| | $ | (12 | ) | | $ | 40 |
| | $ | (12 | ) | | $ | (3 | ) | | $ | (4 | ) | | $ | 4 |
| | $ | 4 |
| | $ | (11 | ) | | $ | (7 | ) | | $ | (18 | ) | |
2018 | | 41 |
| | (10 | ) | | 79 |
| | 18 |
| | 4 |
| | 132 |
| | (11 | ) | | 121 |
| | | 57 |
| | (10 | ) | | 45 |
| | 32 |
| | 26 |
| | 150 |
| | (15 | ) | | 135 |
| |
First six months | | | | | | | | | | | | | | | | |
First nine months | | First nine months | | | | | | | | | | | | | | | |
2019 | | 69 |
| | (12 | ) | | 3 |
| | 45 |
| | 30 |
| | 135 |
| | (31 | ) | | 104 |
| | | 57 |
| | (15 | ) | | (1 | ) | | 49 |
| | 34 |
| | 124 |
| | (38 | ) | | 86 |
| |
2018 | | 74 |
| | (11 | ) | | 132 |
| | 14 |
| | (3 | ) | | 206 |
| | (37 | ) | | 169 |
| | | 131 |
| | (21 | ) | | 177 |
| | 46 |
| | 23 |
| | 356 |
| | (52 | ) | | 304 |
| |
| |
(1) | Inter-segment sales of $11$8 million and $9$10 million for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $22$30 million and $19$29 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, which are transacted at cost, were excluded from market pulp sales. Effective July 1, 2019, these sales were transacted either at the lowest market price of the previous month or cost. Previously these sales were transacted at cost. This change has no material impact on the segment presentation. |
| |
(2) | The operating results of our Calhoun (Tennessee) tissue operations, previously recorded under “corporate and other,” have been recorded in our tissue segment since April 1, 2018. |
| |
(3) | Wood products sales to our joint ventures, which are transacted at arm’s length negotiated prices, were $6 million and $8$7 million for the three months ended JuneSeptember 30, 2019 and 2018, respectively, and $11$17 million and $16$23 million for the sixnine months ended JuneSeptember 30, 2019 and 2018, respectively. |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
Note 13. Condensed Consolidating Financial Information
The following information is presented in accordance with Rule 3-10 of Regulation S-X and the public information requirements of Rule 144 promulgated pursuant to the Securities Act of 1933, as amended, in connection with Resolute Forest Products Inc.’s 2023 Notes that are fully and unconditionally guaranteed, on a joint and several basis, by all of our 100% owned material U.S. subsidiaries (or the “Guarantor Subsidiaries”). The 2023 Notes are not guaranteed by our foreign subsidiaries (or the “Non-guarantor Subsidiaries”).
The following condensed consolidating financial information sets forth the Statements of Operations and Comprehensive (Loss) Income (Loss) for the three and sixnine months ended JuneSeptember 30, 2019 and 2018, the Balance Sheets as of JuneSeptember 30, 2019 and December 31, 2018, and the Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2019 and 2018 for the Parent, the Guarantor Subsidiaries on a combined basis, and the Non-guarantor Subsidiaries also on a combined basis. The condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries and Non-guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-guarantor Subsidiaries, using the equity method of accounting. The principal consolidating adjustments are entries to eliminate the investments in subsidiaries and intercompany balances and transactions.
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
For the Three Months Ended June 30, 2019 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Sales | $ | — |
| | $ | 613 |
| | $ | 569 |
| | $ | (427 | ) | | $ | 755 |
| |
Costs and expenses: | | | | | | | | | | | | | | | |
Cost of sales, excluding depreciation, amortization and distribution costs | | — |
| | | 599 |
| | | 371 |
| | | (434 | ) | | | 536 |
| |
Depreciation and amortization | | — |
| | | 9 |
| | | 33 |
| | | — |
| | | 42 |
| |
Distribution costs | | — |
| | | 23 |
| | | 76 |
| | | 2 |
| | | 101 |
| |
Selling, general and administrative expenses | | 4 |
| | | 15 |
| | | 17 |
| | | — |
| | | 36 |
| |
Operating (loss) income | | (4 | ) | | | (33 | ) | | | 72 |
| | | 5 |
| | | 40 |
| |
Interest expense | | (17 | ) | | | — |
| | | (2 | ) | | | 12 |
| | | (7 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | | 2 |
| | | 10 |
| | | — |
| | | 12 |
| |
Other income (expense), net | | — |
| | | 15 |
| | | (4 | ) | | | (12 | ) | | | (1 | ) | |
Equity in income of subsidiaries | | 46 |
| | | 7 |
| | | — |
| | | (53 | ) | | | — |
| |
Income (loss) before income taxes | | 25 |
| | | (9 | ) | | | 76 |
| | | (48 | ) | | | 44 |
| |
Income tax provision | | — |
| | | — |
| | | (18 | ) | | | (1 | ) | | | (19 | ) | |
Net income (loss) including noncontrolling interests | | 25 |
| | | (9 | ) | | | 58 |
| | | (49 | ) | | | 25 |
| |
Net income attributable to noncontrolling interests | | — |
| | | — |
| | | — |
| | | — |
| | | — |
| |
Net income (loss) attributable to Resolute Forest Products Inc. | $ | 25 |
| | $ | (9 | ) | | $ | 58 |
| | $ | (49 | ) | | $ | 25 |
| |
Comprehensive income (loss) attributable to Resolute Forest Products Inc. | $ | 24 |
| | $ | (12 | ) | | $ | 60 |
| | $ | (48 | ) | | $ | 24 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
| | CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | |
For the Six Months Ended June 30, 2019 | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME | | CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME |
For the Three Months Ended September 30, 2019 | | For the Three Months Ended September 30, 2019 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Sales | $ | — |
| | $ | 1,285 |
| | $ | 1,166 |
| | $ | (901 | ) | | $ | 1,550 |
| | $ | — |
| | $ | 556 |
| | $ | 526 |
| | $ | (377 | ) | | $ | 705 |
| |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales, excluding depreciation, amortization and distribution costs | | — |
| | 1,247 |
| | 742 |
| | (899 | ) | | 1,090 |
| | | — |
| | 562 |
| | 378 |
| | (382 | ) | | 558 |
| |
Depreciation and amortization | | — |
| | 19 |
| | 63 |
| | — |
| | 82 |
| | | — |
| | 10 |
| | 32 |
| | — |
| | 42 |
| |
Distribution costs | | — |
| | 49 |
| | 155 |
| | (3 | ) | | 201 |
| | | — |
| | 23 |
| | 69 |
| | 2 |
| | 94 |
| |
Selling, general and administrative expenses | | 10 |
| | 24 |
| | 39 |
| | — |
| | 73 |
| | | 2 |
| | 10 |
| | 18 |
| | — |
| | 30 |
| |
Net gain on disposition of assets | | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
Operating (loss) income | | (10 | ) | | (54 | ) | | 167 |
| | 1 |
| | 104 |
| | | (2 | ) | | (49 | ) | | 30 |
| | 3 |
| | (18 | ) | |
Interest expense | | (34 | ) | | (2 | ) | | (6 | ) | | 26 |
| | (16 | ) | | | (15 | ) | | (1 | ) | | (3 | ) | | 11 |
| | (8 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | 5 |
| | 19 |
| | — |
| | 24 |
| | | — |
| | 4 |
| | 8 |
| | — |
| | 12 |
| |
Other (expense) income, net | | (3 | ) | | 32 |
| | (8 | ) | | (26 | ) | | (5 | ) | | |
Equity in income of subsidiaries | | 114 |
| | 18 |
| | — |
| | (132 | ) | | — |
| | |
Income (loss) before income taxes | | 67 |
| | (1 | ) | | 172 |
| | (131 | ) | | 107 |
| | |
Other income (expense), net | | | — |
| | 10 |
| | (16 | ) | | (11 | ) | | (17 | ) | |
Equity in loss of subsidiaries | | | (26 | ) | | (14 | ) | | — |
| | 40 |
| | — |
| |
(Loss) income before income taxes | | | (43 | ) | | (50 | ) | | 19 |
| | 43 |
| | (31 | ) | |
Income tax provision | | — |
| | — |
| | (40 | ) | | — |
| | (40 | ) | | | — |
| | — |
| | (11 | ) | | (1 | ) | | (12 | ) | |
Net income (loss) including noncontrolling interests | | 67 |
| | (1 | ) | | 132 |
| | (131 | ) | | 67 |
| | |
Net (loss) income including noncontrolling interests | | | (43 | ) | | (50 | ) | | 8 |
| | 42 |
| | (43 | ) | |
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income (loss) attributable to Resolute Forest Products Inc. | $ | 67 |
| | $ | (1 | ) | | $ | 132 |
| | $ | (131 | ) | | $ | 67 |
| | |
Comprehensive income (loss) attributable to Resolute Forest Products Inc. | $ | 69 |
| | $ | (6 | ) | | $ | 139 |
| | $ | (133 | ) | | $ | 69 |
| | |
Net (loss) income attributable to Resolute Forest Products Inc. | | $ | (43 | ) | | $ | (50 | ) | | $ | 8 |
| | $ | 42 |
| | $ | (43 | ) | |
Comprehensive (loss) income attributable to Resolute Forest Products Inc. | | $ | (41 | ) | | $ | (53 | ) | | $ | 13 |
| | $ | 40 |
| | $ | (41 | ) | |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
| | CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME | |
For the Three Months Ended June 30, 2018 | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | | CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
For the Nine Months Ended September 30, 2019 | | For the Nine Months Ended September 30, 2019 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Sales | $ | — |
| | $ | 731 |
| | $ | 674 |
| | $ | (429 | ) | | $ | 976 |
| | $ | — |
| | $ | 1,841 |
| | $ | 1,692 |
| | $ | (1,278 | ) | | $ | 2,255 |
| |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | |
Cost of sales, excluding depreciation, amortization and distribution costs | | — |
| | 666 |
| | 396 |
| | (423 | ) | | 639 |
| | | — |
| | 1,809 |
| | 1,120 |
| | (1,281 | ) | | 1,648 |
| |
Depreciation and amortization | | — |
| | 21 |
| | 33 |
| | — |
| | 54 |
| | | — |
| | 29 |
| | 95 |
| | — |
| | 124 |
| |
Distribution costs | | — |
| | 38 |
| | 85 |
| | — |
| | 123 |
| | | — |
| | 72 |
| | 224 |
| | (1 | ) | | 295 |
| |
Selling, general and administrative expenses | | 7 |
| | 14 |
| | 21 |
| | — |
| | 42 |
| | | 12 |
| | 34 |
| | 57 |
| | — |
| | 103 |
| |
Closure costs, impairment and other related charges | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | |
Net gain on disposition of assets | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) | | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
Operating (loss) income | | (7 | ) | | (8 | ) | | 142 |
| | (6 | ) | | 121 |
| | | (12 | ) | | (103 | ) | | 197 |
| | 4 |
| | 86 |
| |
Interest expense | | (24 | ) | | (1 | ) | | (3 | ) | | 17 |
| | (11 | ) | | | (49 | ) | | (3 | ) | | (9 | ) | | 37 |
| | (24 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | 3 |
| | 9 |
| | — |
| | 12 |
| | | — |
| | 9 |
| | 27 |
| | — |
| | 36 |
| |
Other income (expense), net | | — |
| | 19 |
| | (5 | ) | | (17 | ) | | (3 | ) | | |
Other (expense) income, net | | | (3 | ) | | 42 |
| | (24 | ) | | (37 | ) | | (22 | ) | |
Equity in income of subsidiaries | | 103 |
| | 28 |
| | — |
| | (131 | ) | | — |
| | | 88 |
| | 4 |
| | — |
| | (92 | ) | | — |
| |
Income before income taxes | | 72 |
| | 41 |
| | 143 |
| | (137 | ) | | 119 |
| | |
Income (loss) before income taxes | | | 24 |
| | (51 | ) | | 191 |
| | (88 | ) | | 76 |
| |
Income tax provision | | — |
| | — |
| | (48 | ) | | 1 |
| | (47 | ) | | | — |
| | — |
| | (51 | ) | | (1 | ) | | (52 | ) | |
Net income including noncontrolling interests | | 72 |
| | 41 |
| | 95 |
| | (136 | ) | | 72 |
| | |
Net income (loss) including noncontrolling interests | | | 24 |
| | (51 | ) | | 140 |
| | (89 | ) | | 24 |
| |
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income attributable to Resolute Forest Products Inc. | $ | 72 |
| | $ | 41 |
| | $ | 95 |
| | $ | (136 | ) | | $ | 72 |
| | |
Comprehensive income attributable to Resolute Forest Products Inc. | $ | 75 |
| | $ | 39 |
| | $ | 100 |
| | $ | (139 | ) | | $ | 75 |
| | |
Net income (loss) attributable to Resolute Forest Products Inc. | | $ | 24 |
| | $ | (51 | ) | | $ | 140 |
| | $ | (89 | ) | | $ | 24 |
| |
Comprehensive income (loss) attributable to Resolute Forest Products Inc. | | $ | 28 |
| | $ | (59 | ) | | $ | 152 |
| | $ | (93 | ) | | $ | 28 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME |
For the Six Months Ended June 30, 2018 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Sales | $ | — |
| | $ | 1,540 |
| | $ | 1,266 |
| | $ | (956 | ) | | $ | 1,850 |
| |
Costs and expenses: | | | | | | | | | | | | | | | |
Cost of sales, excluding depreciation, amortization and distribution costs | | — |
| | | 1,437 |
| | | 762 |
| | | (946 | ) | | | 1,253 |
| |
Depreciation and amortization | | — |
| | | 41 |
| | | 66 |
| | | — |
| | | 107 |
| |
Distribution costs | | — |
| | | 77 |
| | | 164 |
| | | (2 | ) | | | 239 |
| |
Selling, general and administrative expenses | | 12 |
| | | 31 |
| | | 42 |
| | | — |
| | | 85 |
| |
Closure costs, impairment and other related charges | | — |
| | | — |
| | | 1 |
| | | — |
| | | 1 |
| |
Net gain on disposition of assets | | — |
| | | — |
| | | (4 | ) | | | — |
| | | (4 | ) | |
Operating (loss) income | | (12 | ) | | | (46 | ) | | | 235 |
| | | (8 | ) | | | 169 |
| |
Interest expense | | (47 | ) | | | (4 | ) | | | (6 | ) | | | 33 |
| | | (24 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | | 7 |
| | | 18 |
| | | — |
| | | 25 |
| |
Other income (expense), net | | — |
| | | 33 |
| | | (10 | ) | | | (33 | ) | | | (10 | ) | |
Equity in income of subsidiaries | | 141 |
| | | 49 |
| | | — |
| | | (190 | ) | | | — |
| |
Income before income taxes | | 82 |
| | | 39 |
| | | 237 |
| | | (198 | ) | | | 160 |
| |
Income tax provision | | — |
| | | — |
| | | (80 | ) | | | 2 |
| | | (78 | ) | |
Net income including noncontrolling interests | | 82 |
| | | 39 |
| | | 157 |
| | | (196 | ) | | | 82 |
| |
Net income attributable to noncontrolling interests | | — |
| | | — |
| | | — |
| | | — |
| | | — |
| |
Net income attributable to Resolute Forest Products Inc. | $ | 82 |
| | $ | 39 |
| | $ | 157 |
| | $ | (196 | ) | | $ | 82 |
| |
Comprehensive income attributable to Resolute Forest Products Inc. | $ | 88 |
| | $ | 34 |
| | $ | 168 |
| | $ | (202 | ) | | $ | 88 |
| |
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME |
For the Three Months Ended September 30, 2018 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Sales | $ | — |
| | $ | 808 |
| | $ | 609 |
| | $ | (443 | ) | | $ | 974 |
| |
Costs and expenses: | | | | | | | | | | | | | | | |
Cost of sales, excluding depreciation, amortization and distribution costs | | — |
| | | 708 |
| | | 366 |
| | | (446 | ) | | | 628 |
| |
Depreciation and amortization | | — |
| | | 20 |
| | | 34 |
| | | — |
| | | 54 |
| |
Distribution costs | | — |
| | | 42 |
| | | 75 |
| | | — |
| | | 117 |
| |
Selling, general and administrative expenses | | 6 |
| | | 17 |
| | | 17 |
| | | — |
| | | 40 |
| |
Operating (loss) income | | (6 | ) | | | 21 |
| | | 117 |
| | | 3 |
| | | 135 |
| |
Interest expense | | (20 | ) | | | (2 | ) | | | (3 | ) | | | 13 |
| | | (12 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | | 4 |
| | | 9 |
| | | — |
| | | 13 |
| |
Other income, net | | — |
| | | 14 |
| | | 13 |
| | | (13 | ) | | | 14 |
| |
Equity in income of subsidiaries | | 143 |
| | | 7 |
| | | — |
| | | (150 | ) | | | — |
| |
Income before income taxes | | 117 |
| | | 44 |
| | | 136 |
| | | (147 | ) | | | 150 |
| |
Income tax provision | | — |
| | | — |
| | | (32 | ) | | | (1 | ) | | | (33 | ) | |
Net income including noncontrolling interests | | 117 |
| | | 44 |
| | | 104 |
| | | (148 | ) | | | 117 |
| |
Net income attributable to noncontrolling interests | | — |
| | | — |
| | | — |
| | | — |
| | | — |
| |
Net income attributable to Resolute Forest Products Inc. | $ | 117 |
| | $ | 44 |
| | $ | 104 |
| | $ | (148 | ) | | $ | 117 |
| |
Comprehensive income attributable to Resolute Forest Products Inc. | $ | 117 |
| | $ | 38 |
| | $ | 110 |
| | $ | (148 | ) | | $ | 117 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME |
For the Nine Months Ended September 30, 2018 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Sales | $ | — |
| | $ | 2,348 |
| | $ | 1,875 |
| | $ | (1,399 | ) | | $ | 2,824 |
| |
Costs and expenses: | | | | | | | | | | | | | | | |
Cost of sales, excluding depreciation, amortization and distribution costs | | — |
| | | 2,145 |
| | | 1,128 |
| | | (1,392 | ) | | | 1,881 |
| |
Depreciation and amortization | | — |
| | | 61 |
| | | 100 |
| | | — |
| | | 161 |
| |
Distribution costs | | — |
| | | 119 |
| | | 239 |
| | | (2 | ) | | | 356 |
| |
Selling, general and administrative expenses | | 18 |
| | | 48 |
| | | 59 |
| | | — |
| | | 125 |
| |
Closure costs, impairment and other related charges | | — |
| | | — |
| | | 1 |
| | | — |
| | | 1 |
| |
Net gain on disposition of assets | | — |
| | | — |
| | | (4 | ) | | | — |
| | | (4 | ) | |
Operating (loss) income | | (18 | ) | | | (25 | ) | | | 352 |
| | | (5 | ) | | | 304 |
| |
Interest expense | | (67 | ) | | | (6 | ) | | | (9 | ) | | | 46 |
| | | (36 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | | 11 |
| | | 27 |
| | | — |
| | | 38 |
| |
Other income, net | | — |
| | | 47 |
| | | 3 |
| | | (46 | ) | | | 4 |
| |
Equity in income of subsidiaries | | 284 |
| | | 56 |
| | | — |
| | | (340 | ) | | | — |
| |
Income before income taxes | | 199 |
| | | 83 |
| | | 373 |
| | | (345 | ) | | | 310 |
| |
Income tax provision | | — |
| | | — |
| | | (112 | ) | | | 1 |
| | | (111 | ) | |
Net income including noncontrolling interests | | 199 |
| | | 83 |
| | | 261 |
| | | (344 | ) | | | 199 |
| |
Net income attributable to noncontrolling interests | | — |
| | | — |
| | | — |
| | | — |
| | | — |
| |
Net income attributable to Resolute Forest Products Inc. | $ | 199 |
| | $ | 83 |
| | $ | 261 |
| | $ | (344 | ) | | $ | 199 |
| |
Comprehensive income attributable to Resolute Forest Products Inc. | $ | 205 |
| | $ | 72 |
| | $ | 278 |
| | $ | (350 | ) | | $ | 205 |
| |
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEET |
As of June 30, 2019 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Assets | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 91 |
| | $ | 7 |
| | $ | — |
| | $ | 98 |
| |
Accounts receivable, net | | — |
| | | 270 |
| | | 130 |
| | | — |
| | | 400 |
| |
Accounts receivable from affiliates | | — |
| | | 248 |
| | | 748 |
| | | (996 | ) | | | — |
| |
Inventories, net | | — |
| | | 214 |
| | | 328 |
| | | (12 | ) | | | 530 |
| |
Advance and interest receivable from parent | | — |
| | | 66 |
| | | — |
| | | (66 | ) | | | — |
| |
Interest receivable from affiliate | | — |
| | | 4 |
| | | — |
| | | (4 | ) | | | — |
| |
Other current assets | | — |
| | | 16 |
| | | 26 |
| | | — |
| | | 42 |
| |
Total current assets | | — |
| | | 909 |
| | | 1,239 |
| | | (1,078 | ) | | | 1,070 |
| |
Fixed assets, net | | — |
| | | 525 |
| | | 954 |
| | | — |
| | | 1,479 |
| |
Amortizable intangible assets, net | | — |
| | | 3 |
| | | 47 |
| | | — |
| | | 50 |
| |
Deferred income tax assets | | — |
| | | 1 |
| | | 865 |
| | | 3 |
| | | 869 |
| |
Operating lease right-of-use assets | | — |
| | | 29 |
| | | 34 |
| | | — |
| | | 63 |
| |
Notes receivable from parent | | — |
| | | 1,264 |
| | | — |
| | | (1,264 | ) | | | — |
| |
Note receivable from affiliate | | — |
| | | 111 |
| | | — |
| | | (111 | ) | | | — |
| |
Investments in consolidated subsidiaries and affiliates | | 3,875 |
| | | 2,083 |
| | | — |
| | | (5,958 | ) | | | — |
| |
Other assets | | — |
| | | 158 |
| | | 63 |
| | | — |
| | | 221 |
| |
Total assets | $ | 3,875 |
| | $ | 5,083 |
| | $ | 3,202 |
| | $ | (8,408 | ) | | $ | 3,752 |
| |
Liabilities and equity | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 10 |
| | $ | 122 |
| | $ | 244 |
| | $ | — |
| | $ | 376 |
| |
Current portion of long-term debt | | — |
| | | 1 |
| | | — |
| | | — |
| | | 1 |
| |
Current portion of operating lease liabilities | | — |
| | | 4 |
| | | 4 |
| | | — |
| | | 8 |
| |
Accounts payable to affiliates | | 257 |
| | | 784 |
| | | — |
| | | (1,041 | ) | | | — |
| |
Advance and interest payable to subsidiaries | | 66 |
| | | — |
| | | — |
| | | (66 | ) | | | — |
| |
Interest payable to affiliate | | — |
| | | — |
| | | 4 |
| | | (4 | ) | | | — |
| |
Total current liabilities | | 333 |
| | | 911 |
| | | 252 |
| | | (1,111 | ) | | | 385 |
| |
Long-term debt, net of current portion | | 370 |
| | | 52 |
| | | — |
| | | — |
| | | 422 |
| |
Notes payable to subsidiaries | | 1,264 |
| | | — |
| | | — |
| | | (1,264 | ) | | | — |
| |
Note payable to affiliate | | — |
| | | — |
| | | 111 |
| | | (111 | ) | | | — |
| |
Pension and other postretirement benefit obligations | | — |
| | | 330 |
| | | 901 |
| | | — |
| | | 1,231 |
| |
Operating lease liabilities, net of current portion | | — |
| | | 26 |
| | | 33 |
| | | — |
| | | 59 |
| |
Other liabilities | | — |
| | | 22 |
| | | 33 |
| | | — |
| | | 55 |
| |
Total liabilities | | 1,967 |
| | | 1,341 |
| | | 1,330 |
| | | (2,486 | ) | | | 2,152 |
| |
Total equity | | 1,908 |
| | | 3,742 |
| | | 1,872 |
| | | (5,922 | ) | | | 1,600 |
| |
Total liabilities and equity | $ | 3,875 |
| | $ | 5,083 |
| | $ | 3,202 |
| | $ | (8,408 | ) | | $ | 3,752 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEET |
As of September 30, 2019 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Assets | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 64 |
| | $ | 5 |
| | $ | — |
| | $ | 69 |
| |
Accounts receivable, net | | 1 |
| | | 243 |
| | | 133 |
| | | — |
| | | 377 |
| |
Accounts receivable from affiliates | | — |
| | | 256 |
| | | 757 |
| | | (1,013 | ) | | | — |
| |
Inventories, net | | — |
| | | 192 |
| | | 339 |
| | | (9 | ) | | | 522 |
| |
Advance and interest receivable from parent | | — |
| | | 67 |
| | | — |
| | | (67 | ) | | | — |
| |
Interest receivable from affiliate | | — |
| | | 1 |
| | | — |
| | | (1 | ) | | | — |
| |
Other current assets | | — |
| | | 20 |
| | | 20 |
| | | — |
| | | 40 |
| |
Total current assets | | 1 |
| | | 843 |
| | | 1,254 |
| | | (1,090 | ) | | | 1,008 |
| |
Fixed assets, net | | — |
| | | 523 |
| | | 954 |
| | | — |
| | | 1,477 |
| |
Amortizable intangible assets, net | | — |
| | | 3 |
| | | 46 |
| | | — |
| | | 49 |
| |
Deferred income tax assets | | — |
| | | 1 |
| | | 843 |
| | | 2 |
| | | 846 |
| |
Operating lease right-of-use assets | | — |
| | | 28 |
| | | 35 |
| | | — |
| | | 63 |
| |
Notes receivable from parent | | — |
| | | 1,280 |
| | | — |
| | | (1,280 | ) | | | — |
| |
Note receivable from affiliate | | — |
| | | 110 |
| | | — |
| | | (110 | ) | | | — |
| |
Investments in consolidated subsidiaries and affiliates | | 3,851 |
| | | 2,069 |
| | | — |
| | | (5,920 | ) | | | — |
| |
Other assets | | — |
| | | 172 |
| | | 56 |
| | | — |
| | | 228 |
| |
Total assets | $ | 3,852 |
| | $ | 5,029 |
| | $ | 3,188 |
| | $ | (8,398 | ) | | $ | 3,671 |
| |
Liabilities and equity | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 13 |
| | $ | 119 |
| | $ | 264 |
| | $ | — |
| | $ | 396 |
| |
Current portion of long-term debt | | — |
| | | 1 |
| | | — |
| | | — |
| | | 1 |
| |
Current portion of operating lease liabilities | | — |
| | | 4 |
| | | 4 |
| | | — |
| | | 8 |
| |
Accounts payable to affiliates | | 261 |
| | | 797 |
| | | — |
| | | (1,058 | ) | | | — |
| |
Advance and interest payable to subsidiaries | | 67 |
| | | — |
| | | — |
| | | (67 | ) | | | — |
| |
Interest payable to affiliate | | — |
| | | — |
| | | 1 |
| | | (1 | ) | | | — |
| |
Total current liabilities | | 341 |
| | | 921 |
| | | 269 |
| | | (1,126 | ) | | | 405 |
| |
Long-term debt, net of current portion | | 371 |
| | | 52 |
| | | — |
| | | — |
| | | 423 |
| |
Notes payable to subsidiaries | | 1,280 |
| | | — |
| | | — |
| | | (1,280 | ) | | | — |
| |
Note payable to affiliate | | — |
| | | — |
| | | 110 |
| | | (110 | ) | | | — |
| |
Pension and other postretirement benefit obligations | | — |
| | | 318 |
| | | 861 |
| | | — |
| | | 1,179 |
| |
Operating lease liabilities, net of current portion | | — |
| | | 26 |
| | | 32 |
| | | — |
| | | 58 |
| |
Other liabilities | | — |
| | | 23 |
| | | 31 |
| | | — |
| | | 54 |
| |
Total liabilities | | 1,992 |
| | | 1,340 |
| | | 1,303 |
| | | (2,516 | ) | | | 2,119 |
| |
Total equity | | 1,860 |
| | | 3,689 |
| | | 1,885 |
| | | (5,882 | ) | | | 1,552 |
| |
Total liabilities and equity | $ | 3,852 |
| | $ | 5,029 |
| | $ | 3,188 |
| | $ | (8,398 | ) | | $ | 3,671 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | | |
CONDENSED CONSOLIDATING BALANCE SHEET |
As of December 31, 2018 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Assets | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 301 |
| | $ | 3 |
| | $ | — |
| | $ | 304 |
| |
Accounts receivable, net | | — |
| | | 301 |
| | | 148 |
| | | — |
| | | 449 |
| |
Accounts receivable from affiliates | | — |
| | | 588 |
| | | 1,071 |
| | | (1,659 | ) | | | — |
| |
Inventories, net | | — |
| | | 194 |
| | | 327 |
| | | (13 | ) | | | 508 |
| |
Note, advance and interest receivable from parent | | — |
| | | 422 |
| | | — |
| | | (422 | ) | | | — |
| |
Interest receivable from affiliate | | — |
| | | 4 |
| | | — |
| | | (4 | ) | | | — |
| |
Other current assets | | — |
| | | 15 |
| | | 28 |
| | | — |
| | | 43 |
| |
Total current assets | | — |
| | | 1,825 |
| | | 1,577 |
| | | (2,098 | ) | | | 1,304 |
| |
Fixed assets, net | | — |
| | | 523 |
| | | 992 |
| | | — |
| | | 1,515 |
| |
Amortizable intangible assets, net | | — |
| | | 2 |
| | | 48 |
| | | — |
| | | 50 |
| |
Deferred income tax assets | | — |
| | | 1 |
| | | 872 |
| | | 3 |
| | | 876 |
| |
Notes receivable from parent | | — |
| | | 657 |
| | | — |
| | | (657 | ) | | | — |
| |
Note receivable from affiliate | | — |
| | | 107 |
| | | — |
| | | (107 | ) | | | — |
| |
Investments in consolidated subsidiaries and affiliates | | 4,119 |
| | | 2,205 |
| | | — |
| | | (6,324 | ) | | | — |
| |
Other assets | | — |
| | | 126 |
| | | 64 |
| | | — |
| | | 190 |
| |
Total assets | $ | 4,119 |
| | $ | 5,446 |
| | $ | 3,553 |
| | $ | (9,183 | ) | | $ | 3,935 |
| |
Liabilities and equity | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 7 |
| | $ | 170 |
| | $ | 250 |
| | $ | — |
| | $ | 427 |
| |
Current portion of long-term debt | | 222 |
| | | 1 |
| | | — |
| | | — |
| | | 223 |
| |
Accounts payable to affiliates | | 592 |
| | | 1,112 |
| | | — |
| | | (1,704 | ) | | | — |
| |
Note, advance and interest payable to subsidiaries | | 422 |
| | | — |
| | | — |
| | | (422 | ) | | | — |
| |
Interest payable to affiliate | | — |
| | | — |
| | | 4 |
| | | (4 | ) | | | — |
| |
Total current liabilities | | 1,243 |
| | | 1,283 |
| | | 254 |
| | | (2,130 | ) | | | 650 |
| |
Long-term debt, net of current portion | | 370 |
| | | 52 |
| | | — |
| | | — |
| | | 422 |
| |
Notes payable to subsidiaries | | 657 |
| | | — |
| | | — |
| | | (657 | ) | | | — |
| |
Note payable to affiliate | | — |
| | | — |
| | | 107 |
| | | (107 | ) | | | — |
| |
Pension and other postretirement benefit obligations | | — |
| | | 342 |
| | | 915 |
| | | — |
| | | 1,257 |
| |
Other liabilities | | 6 |
| | | 21 |
| | | 44 |
| | | — |
| | | 71 |
| |
Total liabilities | | 2,276 |
| | | 1,698 |
| | | 1,320 |
| | | (2,894 | ) | | | 2,400 |
| |
Total equity | | 1,843 |
| | | 3,748 |
| | | 2,233 |
| | | (6,289 | ) | | | 1,535 |
| |
Total liabilities and equity | $ | 4,119 |
| | $ | 5,446 |
| | $ | 3,553 |
| | $ | (9,183 | ) | | $ | 3,935 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
| | CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS | For the Six Months Ended June 30, 2019 | |
For the Nine Months Ended September 30, 2019 | | For the Nine Months Ended September 30, 2019 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Net cash provided by operating activities | $ | — |
| | $ | 64 |
| | $ | 31 |
| | $ | — |
| | $ | 95 |
| | $ | — |
| | $ | 64 |
| | $ | 56 |
| | $ | — |
| | $ | 120 |
| |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | |
Cash invested in fixed assets | | — |
| | (19 | ) | | (26 | ) | | — |
| | (45 | ) | | | — |
| | (26 | ) | | (56 | ) | | — |
| | (82 | ) | |
Disposition of assets | | — |
| | 2 |
| | — |
| | — |
| | 2 |
| | | — |
| | 2 |
| | — |
| | — |
| | 2 |
| |
Decrease in countervailing duty cash deposits on supercalendered paper | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| |
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber | | — |
| | (33 | ) | | — |
| | — |
| | (33 | ) | | | — |
| | (46 | ) | | — |
| | — |
| | (46 | ) | |
Decrease in countervailing duty cash deposits on uncoated groundwood paper | | — |
| | 6 |
| | — |
| | — |
| | 6 |
| | | — |
| | 6 |
| | — |
| | — |
| | 6 |
| |
Increase in notes receivable from and advance to parent | | — |
| | (230 | ) | | — |
| | 230 |
| | — |
| | |
Increase in notes receivable from parent | | | — |
| | (237 | ) | | — |
| | 237 |
| | — |
| |
Net cash used in investing activities | | — |
| | (273 | ) | | (26 | ) | | 230 |
| | (69 | ) | | | — |
| | (300 | ) | | (56 | ) | | 237 |
| | (119 | ) | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | |
Payments of debt | | (225 | ) | | — |
| | — |
| | — |
| | (225 | ) | | | (225 | ) | | — |
| | — |
| | — |
| | (225 | ) | |
Purchases of treasury stock | | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) | | | (12 | ) | | — |
| | — |
| | — |
| | (12 | ) | |
Payments of financing and credit facility fees | | — |
| | (1 | ) | | (1 | ) | | — |
| | (2 | ) | | | — |
| | (1 | ) | | (1 | ) | | — |
| | (2 | ) | |
Increase in notes payable to and advance from subsidiaries | | 230 |
| | — |
| | — |
| | (230 | ) | | — |
| | |
Increase in notes payable to subsidiary | | | 237 |
| | — |
| | — |
| | (237 | ) | | — |
| |
Net cash used in financing activities | | — |
| | (1 | ) | | (1 | ) | | (230 | ) | | (232 | ) | | | — |
| | (1 | ) | | (1 | ) | | (237 | ) | | (239 | ) | |
Effect of exchange rate changes on cash and cash equivalents, and restricted cash | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
Net (decrease) increase in cash and cash equivalents, and restricted cash | | — |
| | (210 | ) | | 5 |
| | — |
| | (205 | ) | | |
Net decrease in cash and cash equivalents, and restricted cash | | | — |
| | (237 | ) | | — |
| | — |
| | (237 | ) | |
Cash and cash equivalents, and restricted cash: | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period | | — |
| | 306 |
| | 39 |
| | — |
| | 345 |
| | | — |
| | 306 |
| | 39 |
| | — |
| | 345 |
| |
End of period | $ | — |
| | $ | 96 |
| | $ | 44 |
| | $ | — |
| | $ | 140 |
| | $ | — |
| | $ | 69 |
| | $ | 39 |
| | $ | — |
| | $ | 108 |
| |
Cash and cash equivalents, and restricted cash at period end: | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 91 |
| | $ | 7 |
| | $ | — |
| | $ | 98 |
| | $ | — |
| | $ | 64 |
| | $ | 5 |
| | $ | — |
| | $ | 69 |
| |
Restricted cash | | — |
| | 5 |
| | 37 |
| | — |
| | 42 |
| | | — |
| | 5 |
| | 34 |
| | — |
| | 39 |
| |
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
| | CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS | For the Six Months Ended June 30, 2018 | |
For the Nine Months Ended September 30, 2018 | | For the Nine Months Ended September 30, 2018 |
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated |
Net cash provided by operating activities | $ | — |
| | $ | 187 |
| | $ | 33 |
| | $ | — |
| | $ | 220 |
| | $ | — |
| | $ | 291 |
| | $ | 60 |
| | $ | — |
| | $ | 351 |
| |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | |
Cash invested in fixed assets | | — |
| | (16 | ) | | (37 | ) | | — |
| | (53 | ) | | | — |
| | (31 | ) | | (63 | ) | | — |
| | (94 | ) | |
Disposition of assets | | — |
| | — |
| | 2 |
| | — |
| | 2 |
| | | — |
| | — |
| | 2 |
| | — |
| | 2 |
| |
Increase in countervailing duty cash deposits on supercalendered paper | | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) | | |
Decrease in countervailing duty cash deposits on supercalendered paper, net | | | — |
| | 13 |
| | — |
| | — |
| | 13 |
| |
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber | | — |
| | (41 | ) | | — |
| | — |
| | (41 | ) | | | — |
| | (62 | ) | | — |
| | — |
| | (62 | ) | |
Increase in countervailing duty cash deposits on uncoated groundwood paper | | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) | | | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) | |
Advance to parent | | — |
| | (1 | ) | | — |
| | 1 |
| | — |
| | | — |
| | (1 | ) | | — |
| | 1 |
| | — |
| |
Decrease in notes receivable from affiliate | | | — |
| | 1 |
| | — |
| | (1 | ) | | — |
| |
Net cash used in investing activities | | — |
| | (75 | ) | | (35 | ) | | 1 |
| | (109 | ) | | | — |
| | (86 | ) | | (61 | ) | | — |
| | (147 | ) | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | |
Net repayments under revolving credit facilities | | — |
| | (114 | ) | | — |
| | — |
| | (114 | ) | | | — |
| | (144 | ) | | — |
| | — |
| | (144 | ) | |
Payments of financing and credit facility fees | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | |
Advance from subsidiary | | 1 |
| | — |
| | — |
| | (1 | ) | | — |
| | | 1 |
| | — |
| | — |
| | (1 | ) | | — |
| |
Decrease in notes payable to affiliate | | | — |
| | — |
| | (1 | ) | | 1 |
| | — |
| |
Net cash used in financing activities | | — |
| | (114 | ) | | — |
| | (1 | ) | | (115 | ) | | | — |
| | (144 | ) | | (1 | ) | | — |
| | (145 | ) | |
Effect of exchange rate changes on cash and cash equivalents, and restricted cash | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | |
Net decrease in cash and cash equivalents, and restricted cash | | — |
| | (2 | ) | | (4 | ) | | — |
| | (6 | ) | | |
Net increase (decrease) in cash and cash equivalents, and restricted cash | | | — |
| | 61 |
| | (3 | ) | | — |
| | 58 |
| |
Cash and cash equivalents, and restricted cash: | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period | | — |
| | 3 |
| | 46 |
| | — |
| | 49 |
| | | — |
| | 3 |
| | 46 |
| | — |
| | 49 |
| |
End of period | $ | — |
| | $ | 1 |
| | $ | 42 |
| | $ | — |
| | $ | 43 |
| | $ | — |
| | $ | 64 |
| | $ | 43 |
| | $ | — |
| | $ | 107 |
| |
Cash and cash equivalents, and restricted cash at period end: | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 1 |
| | $ | 5 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 64 |
| | $ | 8 |
| | $ | — |
| | $ | 72 |
| |
Restricted cash | | — |
| | — |
| | 37 |
| | — |
| | 37 |
| | | — |
| | — |
| | 35 |
| | — |
| | 35 |
| |
Note 14. Subsequent Event
The following significant event occurred subsequent to September 30, 2019:
On October 28, 2019, we entered into an amended and restated Senior Secured Credit Facility for up $360 million, replacing our existing $185 million senior secured credit facility, as further discussed in Note 7. Long-Term Debt – Senior Secured Credit Facility.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following management’s discussion and analysis is intended to help the reader understand Resolute Forest Products, our results of operations, cash flows and financial condition. The discussion is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes (or the “Consolidated Financial Statements”) contained in Item 1 – Financial Statements of this Quarterly Report on Form 10-Q (or “Form 10-Q”).
When we refer to “Resolute Forest Products,” “we,” “our,” “us” or the “Company,” we mean Resolute Forest Products Inc. with its subsidiaries, either individually or collectively, unless otherwise indicated.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION AND USE OF THIRD-PARTY DATA
Statements in this Form 10-Q that are not reported financial results or other historical information of Resolute Forest Products are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. They include, for example, statements relating to our: efforts and initiatives to reduce costs and increase revenues and profitability; business and operating outlook; future pension obligations; assessment of market conditions; growth strategies and prospects, and the growth potential of the Company and the industry in which we operate; liquidity; future cash flows, including as a result of the changes to our pension funding obligations; and strategies for achieving our goals generally. Forward-looking statements may be identified by the use of forward-looking terminology such as the words “should,” “would,” “could,” “will,” “may,” “expect,” “believe,” “anticipate,” “attempt,” “project,” and other terms with similar meaning indicating possible future events or potential impact on our business or Resolute Forest Products’ shareholders.
The reader is cautioned not to place undue reliance on these forward-looking statements, which are not guarantees of future performance. These statements are based on management’s current assumptions, beliefs, and expectations, all of which involve a number of business risks and uncertainties that could cause actual results to differ materially. The potential risks and uncertainties that could cause our actual future financial condition, results of operations, and performance to differ materially from those expressed or implied in this Form 10-Q include, but are not limited to, the impact of: developments in non-print media, and the effectiveness of our responses to these developments; intense competition in the forest products industry; any inability to offer products certified to globally recognized forestry management and chain of custody standards; any inability to successfully implement our strategies to increase our earnings power; the possible failure to successfully integrate acquired businesses with ours or to realize the anticipated benefits of acquisitions, such as our entry into tissue production and sales, or divestitures or other strategic transactions or projects; uncertainty or changes in political or economic conditions in the United States, Canada or other countries in which we sell our products; global economic conditions; the highly cyclical nature of the forest products industry; any difficulties in obtaining timber or wood fiber at favorable prices, or at all; changes in the cost of purchased energy and other raw materials; physical and financial risks associated with global, regional, and local weather conditions, and climate change; any disruption in operations or increased labor costs due to labor disputes; difficulties in our employee relations or retention; disruptions to our supply chain, operations, or the delivery of our products; disruptions to our information technology systems including cybersecurity incidents; risks related to the operation and transition of legacy system applications; negative publicity, even if unjustified; currency fluctuations; any increase in the level of required contributions to our pension plans, including as a result of any increase in the amount by which they are underfunded; our ability to maintain adequate capital resources to provide for all of our substantial capital requirements; the terms of our outstanding indebtedness, which could restrict our current and future operations; losses that are not covered by insurance; any additional closure costs and long-lived asset impairment or accelerated depreciation charges; any need to record additional valuation allowances against our recorded deferred income tax assets; our exports from one country to another country becoming or remaining subject to duties, cash deposit requirements, border taxes, quotas, or other trade remedies or restrictions; countervailing and anti-dumping duties on imports to the U.S. of substantially all of our softwood lumber products produced at our Canadian sawmills; any failure to comply with laws or regulations generally; any additional environmental or health and safety liabilities; any violation of trade laws, export controls, or other laws relating to our international sales and operations; adverse outcomes of legal proceedings, claims and governmental inquiries, investigations, and other disputes in which we are involved; the actions of holders of a significant percentage of our common stock; and the potential risks and uncertainties set forth under Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission, or the “SEC”, on March 1, 2019 (or the “2018 Annual Report”).
All forward-looking statements in this Form 10-Q are expressly qualified by the cautionary statements contained or referred to in this section and in our other filings with the SEC and the Canadian securities regulatory authorities. We disclaim any obligation to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.
Market and industry data
The information on industry and general economic conditions in this Form 10-Q was derived from third-party sources and trade publications we believe to be widely accepted and accurate. We have not independently verified the information and cannot assure you of its accuracy.
OVERVIEW
Resolute Forest Products is a global leader in the forest products industry with a diverse range of products, including market pulp, tissue, wood products, newsprint and specialty papers, which are marketed in close to 70 countries. The Company owns or operates some 40 facilities, as well as power generation assets, in the U.S. and Canada. Our facilities are strategically located, providing us with the operational flexibility to develop the right products at the right sites, in favorable geographic locations, for a diversified customer base. We are the largest Canadian producer of wood products east of the Canadian Rockies, a leading global producer of newsprint and a competitive pulp producer in North America. By capacity, we are the number one producer of newsprint in the world and the largest producer of uncoated mechanical papers in North America. We are also an emerging tissue producer.
We report our activities in five business segments: market pulp, tissue, wood products, newsprint, and specialty papers. We believe an integrated approach across these segments maximizes value creation for our Company and stakeholders.
We are guided by our vision and values, focusing on safety, sustainability, profitability, accountability, and teamwork. We believe we can be distinguished by the following competitive strengths:
Competitive cost structure combined with diversified and integrated asset base
| |
– | large-scale efficient and cost-effective operations;operations, including significant internal energy production from cogeneration and hydroelectric facilities, which support our value proposition; |
| |
– | accesscontrol over fiber transformation chain from stump to renewableend product for the majority of our offering; |
| |
– | nearly 100% of our products sourced from high-quality virgin fiber; |
| |
– | significant internal energy production from cogeneration and hydroelectric facilities; |
| |
– | raw materialsharvesting rights for our paper, pulp and cogeneration facilitiesthe majority of fiber needs in Canada, our pellet plant at Thunder Bay (Ontario), as well as our value-added and engineered wood facilities in Quebec provided primarily by our sawmills; |
| |
– | strategically located mills, including economical access to international markets; |
| |
– | competitive selling, general and administrative expenses (or “SG&A”) to sales ratio;
|
| |
– | ability to optimize staffing across our various operations;Canada; and |
| |
– | significant tax assets that help defer cash taxes and provide synergies in the execution of our growth and diversification strategy.sophisticated logistics capabilities to meet demanding customer expectations. |
| |
• | Strong balance sheet – our low debt, which has favorable pricing and flexibility, combined with strong liquidity levels, provide us with the ability to execute our strategy, particularly the continued transformation to a more profitable and sustainable company for the long term. We have significant tax assets to defer cash income taxes and provide synergies to execute this strategy. Customers benefit from a financially stable and reliable business partner in a challenging industry. |
Seasoned management team
| |
– | deep industry expertise, with influential leaders in forestry, operations, environmental risk management and public policy; |
| |
•– | Seasoned management team – our senior management team has many yearsculture of experienceaccountability, encouraging transparency and straightforwardness; and
|
| |
– | core identity tied to renewable resources we harvest in the pulp, tissue, wood products, and paper industries. In addition, we have an integrated leadership system focused on increasing our organizational capability by optimizing organizational structure, clarifying each employee’s role and accountabilities, improving the link between compensation and individual performance, and improving our succession planning process.a truly sustainable manner. |
Our Business
For information relating to our products, strategy and highlights, sustainable development and performance, and power generation assets, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Our Business” in our 2018 Annual Report.
SecondThird Quarter Overview
Five-year extension of ABL Credit FacilityFibrek acquisition
On May 14,September 26, 2019, we entered intothe Quebec Superior Court in Canada rendered a decision fixing the fair value of the shares of the dissenting Fibrek Inc. (or “Fibrek”) shareholders at Cdn $1.99 per share, or Cdn $31 million in aggregate, plus interest and an amendment to the credit agreement dated May 22, 2015,additional indemnity, for a senior secured asset-based revolving credit facility (ortotal currently estimated at Cdn $44 million ($33 million, based on the “ABL Credit Facility”). The amended credit agreement providesexchange rate in effect on September 30, 2019) payable in cash. We are appealing the decision. As previously reported, we had accrued Cdn $14 million ($10 million, based on the exchange rate in effect on September 30, 2019) for an extensionthe payment of the maturity date to May 14, 2024, withdissenting shareholders’ claims. We have accrued an aggregate lender commitmentadditional Cdn $30 million ($23 million, based on the exchange rate in effect on September 30, 2019) for the estimated eventual payment of $500any amounts following the outcome of the appeal, and as a result recorded $23 million at any time outstanding, representing a voluntary reductionin “Other (expense) income, net” in our Consolidated Statements of $100 million.Operations for the three months ended September 30, 2019.
Share repurchase program
During the secondthird quarter of 2019, we repurchased 0.71.1 million shares, at a cost of $5$7 million, under our share repurchase program.
Three months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Our operating incomeloss was $40$18 million in the quarter, compared to $121operating income of $135 million in the secondthird quarter of 2018. Excluding special items, we generatedincurred an operating loss of $19 million, compared to operating income of $40 million, compared to $118$135 million in the year-ago period. Special items are described below.
Our net incomeloss in the quarter was $25$43 million, or $0.27$0.47 per diluted share, compared to $72net income of $117 million, or $0.77$1.25 per diluted share, in the year-ago period. Our net incomeloss in the quarter, excluding special items, was $11$34 million, or $0.12$0.37 per diluted share, compared to $66net income of $96 million, or $0.71$1.03 per diluted share, in the year-ago period.
| | Three Months Ended June 30, 2019 | Operating Income (Loss) | Net Income (Loss) | EPS | | | |
Three Months Ended September 30, 2019 | Operating Loss | Net Loss | EPS | | |
(Unaudited, in millions, except per share amounts) | Operating Income (Loss) | Net Income (Loss) | EPS | | |
GAAP, as reported | $ | (18 | ) | | $ | (43 | ) | | $ | (0.47 | ) | |
Adjustments for special items: | | | | | | | | | | | | | | |
Foreign exchange loss | | — |
| | 6 |
| | 0.06 |
| | |
Foreign exchange gain | | | — |
| | (1 | ) | | (0.01 | ) | |
Net gain on disposition of assets | | | (1 | ) | | (1 | ) | | (0.01 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | (12 | ) | | (0.13 | ) | | | — |
| | (12 | ) | | (0.13 | ) | |
Other income, net | | — |
| | (5 | ) | | (0.05 | ) | | |
Other expense, net (1) | | | — |
| | 18 |
| | 0.20 |
| |
Income tax effect of special items | | — |
| | (3 | ) | | (0.03 | ) | | | — |
| | 5 |
| | 0.05 |
| |
Adjusted for special items (1) | $ | 40 |
| | $ | 11 |
| | $ | 0.12 |
| | |
Adjusted for special items (2) | | $ | (19 | ) | | $ | (34 | ) | | $ | (0.37 | ) | |
|
| | | | | | | | | | | | |
Three Months Ended June 30, 2018 | Operating Income (Loss) | Net Income (Loss) | EPS | | |
(Unaudited, in millions, except per share amounts) |
GAAP, as reported | $ | 121 |
| | $ | 72 |
| | $ | 0.77 |
| |
Adjustments for special items: | | | | | | | | | |
Foreign exchange loss | | — |
| | | 1 |
| | | 0.01 |
| |
Closure costs, impairment and other related charges | | 1 |
| | | 1 |
| | | 0.01 |
| |
Net gain on disposition of assets | | (4 | ) | | | (4 | ) | | | (0.04 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | | (12 | ) | | | (0.13 | ) | |
Other expense, net | | — |
| | | 2 |
| | | 0.02 |
| |
Income tax effect of special items | | — |
| | | 6 |
| | | 0.07 |
| |
Adjusted for special items (1) | $ | 118 |
| | $ | 66 |
| | $ | 0.71 |
| |
|
| | | | | | | | | | | | |
Three Months Ended September 30, 2018 | Operating Income | Net Income | EPS | | |
(Unaudited, in millions, except per share amounts) |
GAAP, as reported | $ | 135 |
| | $ | 117 |
| | $ | 1.25 |
| |
Adjustments for special items: | | | | | | | | | |
Non-operating pension and other postretirement benefit credits | | — |
| | | (13 | ) | | | (0.14 | ) | |
Other income, net (1) | | — |
| | | (14 | ) | | | (0.15 | ) | |
Income tax effect of special items | | — |
| | | 6 |
| | | 0.07 |
| |
Adjusted for special items (2) | $ | 135 |
| | $ | 96 |
| | $ | 1.03 |
| |
| |
(1) | Excludes foreign exchange gains and losses. |
| |
(2) | Operating income (loss), net income (loss) and net income (loss) per share (or “EPS”), in each case as adjusted for special items, are not financial measures recognized under U.S. generally accepted accounting principles (or “GAAP”). We calculate operating income (loss), as adjusted for special items, as operating income (loss) from our Consolidated Statements of Operations, adjusted for items such as closure costs, impairment and other related charges, inventory write-downs related to closures, start-up costs, gains and losses on disposition of assets, and other charges or credits that are excluded from our segment’s performance from GAAP operating income (loss). We calculate net income (loss), as adjusted for special items, as net income (loss) from our Consolidated Statements of Operations, adjusted for the same special items applied to operating income (loss), in addition to foreign exchange gains and losses, non- |
that are excluded from our segment’s performance from GAAP operating income (loss). We calculate net income (loss), as adjusted for special items, as net income (loss) from our Consolidated Statements of Operations, adjusted for the same special items applied to operating income (loss), in addition to foreign exchange gains and losses, non-operating pension and other postretirement benefit (or “OPEB”) costs and credits, other income and expense, net, and the income tax effect of the special items. EPS, as adjusted for special items, is calculated as net income (loss), as adjusted for special items, per diluted share. We believe that using these non-GAAP measures is useful because they are consistent with the indicators management uses internally to measure the Company’s performance, and it allows the reader to more easily compare our operations and financial performance from period to period. Operating income (loss), net income (loss) and EPS, in each case as adjusted for special items, are internal measures, and therefore may not be comparable to those of other companies. These non-GAAP measures should not be viewed as substitutes to financial measures determined under GAAP.
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Our operating income was $104$86 million in the first halfnine months of the year, compared to $169$304 million in the year-ago period. Excluding special items, we generated operating income of $104$85 million, compared to $173$308 million in the year-ago period. Special items are described below.
Our net income in the first halfnine months of the year was $67$24 million, or $0.71$0.26 per diluted share, compared to $82$199 million or $0.88$2.14 per diluted share in the year-ago period. Our net income in the period, excluding special items, was $41$7 million, or $0.44$0.08 per diluted share, compared to $83$179 million, or $0.89$1.92 per diluted share, in the year-ago period.
| | Six Months Ended June 30, 2019 | Operating Income (Loss) | Net Income (Loss) | EPS | | | |
Nine Months Ended September 30, 2019 | Operating Income | Net Income | EPS | | |
(Unaudited, in millions, except per share amounts) | Operating Income (Loss) | Net Income (Loss) | EPS | | |
GAAP, as reported | $ | 86 |
| | $ | 24 |
| | $ | 0.26 |
| |
Adjustments for special items: | | | | | | | | | | | | | | |
Foreign exchange loss | | — |
| | 10 |
| | 0.11 |
| | | — |
| | 9 |
| | 0.10 |
| |
Net gain on disposition of assets | | | (1 | ) | | (1 | ) | | (0.01 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | (24 | ) | | (0.26 | ) | | | — |
| | (36 | ) | | (0.39 | ) | |
Other income, net | | — |
| | (5 | ) | | (0.05 | ) | | |
Other expense, net (1) | | | — |
| | 13 |
| | 0.14 |
| |
Income tax effect of special items | | — |
| | (7 | ) | | (0.07 | ) | | | — |
| | (2 | ) | | (0.02 | ) | |
Adjusted for special items (1) | $ | 104 |
| | $ | 41 |
| | $ | 0.44 |
| | |
Adjusted for special items (2) | | $ | 85 |
| | $ | 7 |
| | $ | 0.08 |
| |
| | Six Months Ended June 30, 2018 | Operating Income (Loss) | Net Income (Loss) | EPS | | | |
Nine Months Ended September 30, 2018 | Operating Income | Net Income | EPS | | |
(Unaudited, in millions, except per share amounts) | Operating Income (Loss) | Net Income (Loss) | EPS | | |
GAAP, as reported | $ | 304 |
| | $ | 199 |
| | $ | 2.14 |
| |
Adjustments for special items: | | | | | | | | | | | | | | |
Foreign exchange loss | | — |
| | 2 |
| | 0.02 |
| | | — |
| | 2 |
| | 0.02 |
| |
Closure costs, impairment and other related charges | | 1 |
| | 1 |
| | 0.01 |
| | | 1 |
| | 1 |
| | 0.01 |
| |
Reversal of inventory write-downs related to closures | | (1 | ) | | (1 | ) | | (0.01 | ) | | | (1 | ) | | (1 | ) | | (0.01 | ) | |
Start-up costs | | 8 |
| | 8 |
| | 0.09 |
| | | 8 |
| | 8 |
| | 0.09 |
| |
Net gain on disposition of assets | | (4 | ) | | (4 | ) | | (0.05 | ) | | | (4 | ) | | (4 | ) | | (0.04 | ) | |
Non-operating pension and other postretirement benefit credits | | — |
| | (25 | ) | | (0.27 | ) | | | — |
| | (38 | ) | | (0.41 | ) | |
Other expense, net | | — |
| | 8 |
| | 0.09 |
| | |
Other income, net (1) | | | — |
| | (6 | ) | | (0.07 | ) | |
Income tax effect of special items | | — |
| | 12 |
| | 0.13 |
| | | — |
| | 18 |
| | 0.19 |
| |
Adjusted for special items (1)(2) | $ | 173 |
| | $ | 83 |
| | $ | 0.89 |
| | $ | 308 |
| | $ | 179 |
| | $ | 1.92 |
| |
| |
(1) | Excludes foreign exchange gains and losses. |
| |
(2) | Operating income (loss), net income (loss) and EPS, in each case as adjusted for special items, are non-GAAP financial measures. For more information on the calculation and reasons we include these measures, see note 12 under “Overview – SecondThird Quarter Overview” above. |
ASU 2016-02 “Leases”
Effective January 1, 2019, we adopted Accounting Standards Update (or “ASU”) 2016-02, “Leases,” issued by the Financial Accounting Standards Board, and the series of related accounting standard updates that followed, through a cumulative-effect adjustment as of that date. For more information, including the effect on our Consolidated Balance Sheet as of January 1, 2019, refer to Note 1, “Organization and Basis of Presentation – New accounting pronouncement adopted in 2019,” to our Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated Results
Selected financial information
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions, except per share amounts) | 2019 | 2018 | | 2019 | 2018 | 2019 | 2018 | | 2019 | 2018 |
Sales | $ | 755 |
| | $ | 976 |
| | $ | 1,550 |
| | $ | 1,850 |
| | $ | 705 |
| | $ | 974 |
| | $ | 2,255 |
| | $ | 2,824 |
| |
Operating income (loss) per segment: | | | | | | | | | | |
Operating (loss) income per segment: | | | | | | | | | | |
Market pulp | | 27 |
| | 41 |
| | 69 |
| | 74 |
| | | (12 | ) | | 57 |
| | 57 |
| | 131 |
| |
Tissue | | (4 | ) | | (10 | ) | | (12 | ) | | (11 | ) | | | (3 | ) | | (10 | ) | | (15 | ) | | (21 | ) | |
Wood products | | (3 | ) | | 79 |
| | 3 |
| | 132 |
| | | (4 | ) | | 45 |
| | (1 | ) | | 177 |
| |
Newsprint | | 17 |
| | 18 |
| | 45 |
| | 14 |
| | | 4 |
| | 32 |
| | 49 |
| | 46 |
| |
Specialty papers | | 15 |
| | 4 |
| | 30 |
| | (3 | ) | | | 4 |
| | 26 |
| | 34 |
| | 23 |
| |
Segment total | | 52 |
| | 132 |
| | 135 |
| | 206 |
| | | (11 | ) | | 150 |
| | 124 |
| | 356 |
| |
Corporate and other | | (12 | ) | | (11 | ) | | (31 | ) | | (37 | ) | | | (7 | ) | | (15 | ) | | (38 | ) | | (52 | ) | |
Operating income | | 40 |
| | 121 |
| | 104 |
| | 169 |
| | |
Net income attributable to Resolute Forest Products Inc. | | 25 |
| | 72 |
| | 67 |
| | 82 |
| | |
Net income per common share attributable to Resolute Forest Products Inc. common shareholders: | | | | | | | | | | |
Operating (loss) income | | | (18 | ) | | 135 |
| | 86 |
| | 304 |
| |
Net (loss) income attributable to Resolute Forest Products Inc. | | | (43 | ) | | 117 |
| | 24 |
| | 199 |
| |
Net (loss) income per common share attributable to Resolute Forest Products Inc. common shareholders: | | | | | | | | | | |
Basic | $ | 0.27 |
| | $ | 0.79 |
| | $ | 0.73 |
| | $ | 0.90 |
| | $ | (0.47 | ) | | $ | 1.28 |
| | $ | 0.26 |
| | $ | 2.18 |
| |
Diluted | | 0.27 |
| | 0.77 |
| | 0.71 |
| | 0.88 |
| | | (0.47 | ) | | 1.25 |
| | 0.26 |
| | 2.14 |
| |
Adjusted EBITDA (1) | $ | 82 |
| | $ | 172 |
| | $ | 186 |
| | $ | 280 |
| | $ | 23 |
| | $ | 189 |
| | $ | 209 |
| | $ | 469 |
| |
| | (Unaudited, in millions) | June 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 |
Cash and cash equivalents | $ | 98 |
| | $ | 304 |
| | $ | 69 |
| | $ | 304 |
| |
Total assets | | 3,752 |
| | 3,935 |
| | | 3,671 |
| | 3,935 |
| |
| |
(1) | Earnings before interest expense, income taxes, and depreciation and amortization (or “EBITDA”) and adjusted EBITDA are not financial measures recognized under GAAP. EBITDA is calculated as net income (loss) including noncontrolling interests from the Consolidated Statements of Operations, adjusted for interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA means EBITDA, excluding special items, such as foreign exchange gains and losses, closure costs, impairment and other related charges, inventory write-downs related to closures, start-up costs, gains and losses on disposition of assets, non-operating pension and OPEB costs and credits, and other charges or credits. We believe that using non-GAAP measures such as EBITDA and adjusted EBITDA is useful because they are consistent with the indicators management uses internally to measure the Company’s performance and it allows the reader to more easily compare our operations and financial performance from period to period. EBITDA and adjusted EBITDA are internal measures, and therefore may not be comparable to those of other companies. These non-GAAP measures should not be viewed as substitutes to financial measures determined under GAAP. |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net income including noncontrolling interests | $ | 25 |
| | $ | 72 |
| | $ | 67 |
| | $ | 82 |
| | |
Net (loss) income including noncontrolling interests | | $ | (43 | ) | | $ | 117 |
| | $ | 24 |
| | $ | 199 |
| |
Interest expense | | 7 |
| | 11 |
| | 16 |
| | 24 |
| | | 8 |
| | 12 |
| | 24 |
| | 36 |
| |
Income tax provision | | 19 |
| | 47 |
| | 40 |
| | 78 |
| | | 12 |
| | 33 |
| | 52 |
| | 111 |
| |
Depreciation and amortization | | 42 |
| | 54 |
| | 82 |
| | 107 |
| | | 42 |
| | 54 |
| | 124 |
| | 161 |
| |
EBITDA | $ | 93 |
| | $ | 184 |
| | $ | 205 |
| | $ | 291 |
| | $ | 19 |
| | $ | 216 |
| | $ | 224 |
| | $ | 507 |
| |
Foreign exchange loss | | 6 |
| | 1 |
| | 10 |
| | 2 |
| | |
Foreign exchange (gain) loss | | | (1 | ) | | — |
| | 9 |
| | 2 |
| |
Closure costs, impairment and other related charges | | — |
| | 1 |
| | — |
| | 1 |
| | | — |
| | — |
| | — |
| | 1 |
| |
Reversal of inventory write-downs related to closures | | — |
| | — |
| | — |
| | (1 | ) | | | — |
| | — |
| | — |
| | (1 | ) | |
Start-up costs | | — |
| | — |
| | — |
| | 8 |
| | | — |
| | — |
| | — |
| | 8 |
| |
Net gain on disposition of assets | | — |
| | (4 | ) | | — |
| | (4 | ) | | | (1 | ) | | — |
| | (1 | ) | | (4 | ) | |
Non-operating pension and other postretirement benefit credits | | (12 | ) | | (12 | ) | | (24 | ) | | (25 | ) | | | (12 | ) | | (13 | ) | | (36 | ) | | (38 | ) | |
Other (income) expense, net | | (5 | ) | | 2 |
| | (5 | ) | | 8 |
| | |
Other expense (income), net (1) | | | 18 |
| | (14 | ) | | 13 |
| | (6 | ) | |
Adjusted EBITDA | $ | 82 |
| | $ | 172 |
| | $ | 186 |
| | $ | 280 |
| | $ | 23 |
| | $ | 189 |
| | $ | 209 |
| | $ | 469 |
| |
| |
(1) | Excludes foreign exchange gains and losses. |
The operating results of our Calhoun (Tennessee) tissue operations, previously recorded under “corporate and other,” have been recorded in our tissue segment since April 1, 2018.
Three months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating (loss) income variance analysis
Sales
Sales decreased by $221$269 million compared to the year-ago period, to $755$705 million. After removing the effect of the divestitures of the Catawba (South Carolina) and Fairmont (West Virginia) facilities in the fourth quarter of 2018, sales volume was $42$27 million lower, mainly due to lower shipments of newsprint, specialty papers, and wood products, partially offset by higher volumes of market pulp, while pricingpulp. Pricing also contributed to a $68$111 million decrease in sales. Thesales, reflecting lower average transaction priceprices for wood products, fell by 32%, more than offsetting the higher prices in specialty papersmarket pulp, and newsprint, updown by 7%25%, 20%, and 2%9%, respectively.
Cost of sales, excluding depreciation, amortization and distribution costs
Cost of sales, excluding depreciation, amortization and distribution costs, which we refer to as “COS”, improved by $103$70 million in the quarter. After removing the COS related to the divestitures, the effect of lower volume, and the Canadian dollar fluctuation, COS increased by $31$49 million, mainly reflecting:
unfavorable maintenance costs ($24 million), mainly related to scheduled outages;
higher wood fiber costs ($1813 million), mostly due to wood shortages;
an increase in maintenancelabor costs ($37 million), largely scheduled repairs;;
higher chemical costs ($5 million); and
lower contribution from our cogeneration assets that sell power externallyhydroelectric facilities ($23 million), due to scheduled maintenance; and
higher chemical costspartly offset by favorable recycled fiber prices ($25 million).
Distribution costs
After removing the impact of divestitures, the effect of lower volume, and the Canadian dollar fluctuation, distribution costs decreased by $3 million, reflecting an improvement in freight rates and transportation optimization, mainly in specialty papers.
Depreciation and amortization
Depreciation and amortization was $12 million lower in the quarter, mainly reflecting the full amortization of certain newsprint assets that were fully depreciated at the end of the fourth quarter of 2018, the divestitures of the Catawba and Fairmont facilities, and the increase of the useful lives of certain of our newsprint machinery and equipment.
Selling, general and administrative expenses
Selling, general and administrative expenses (or “SG&A”) improved by $6$10 million in the quarter, primarilymainly due to lower stock-based compensation expense and lower incentive plan expense, which is based on company performance.
Net (loss) income variance analysis
Interest expense
Interest expense was $4 million lower in the quarter, as we repurchased $225 million in aggregate principal amount of our 5.875% senior unsecured notes due 2023 (or the “2023 notesNotes”) on January 3, 2019, and we fully repaid borrowings2019.
Other (expense) income, net
We recorded other expense, net of $144$17 million under our revolving credit facilities in 2018.the quarter, compared to other income, net of $14 million in the year-ago period. The difference mainly reflects the $23 million provision related to the Fibrek litigation recorded in the current quarter.
Income taxes
We recorded an income tax provision of $19$12 million in the period, on incomea loss before income taxes of $44$31 million, compared to an expected income tax provisionbenefit of $9$6 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects U.S. tax on non-U.S. earnings ($5 million), a valuation allowance related to our U.S. operations ($7 million) where we recognize a valuation allowance against virtually all of our net deferred income tax assets, U.S. tax on non-U.S. earnings ($46 million), and state and foreign tax rate differencesexchange items ($3 million).
In the secondthird quarter of 2018, we recorded an income tax provision of $47$33 million, on income before income taxes of $119$150 million, compared to an expected income tax provision of $25$31 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects U.S. tax on non-U.S. earnings ($1828 million), and foreign tax rate differences ($7 million), and foreign exchange items ($7 million), partlymostly offset by a valuation allowance reversal related to our U.S. operations ($1332 million).
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating income variance analysis
Sales
Sales decreased by $300$569 million compared to the year-ago period, to $1,550$2,255 million. After removing the effect of the divestitures of the Catawba and Fairmont facilities, sales declined by $82$221 million. Lower shipments in all business segments, except tissue,volume reduced sales by $64$91 million, reflecting lower shipments in newsprint, wood products, and specialty papers, while pricing had an unfavorable impact of $31$142 million. The 26% drop in the average transaction price for wood products and market pulp, down by 26% and 4%, respectively, more than outweighed increases in the average transaction price for specialty papers newsprint, and market pulp.newsprint. The inclusion of our Calhoun tissue operations’ results in our tissue segment increased sales by $16 million.
Cost of sales, excluding depreciation, amortization and distribution costs
COS was $163$233 million lower in the period. After removing the COS related to the divestitures and Calhoun’s tissue operations, as well as the effect of lower volume, and the Canadian dollar fluctuation, COS increased by $82$131 million, largely reflecting:
higher wood fiber costs ($3851 million), mostlymainly due to wood shortages;
an increase inunfavorable maintenance costs ($1539 million), largely associated with scheduled repairs;outages;
higher labor expense ($10 million);
a rise in recycled fiber prices ($817 million);
lower contribution from our hydroelectric facilities ($5 million) and our cogeneration assets that sell power externally ($3 million) and our hydroelectric facilities, largely due to scheduled maintenance;
higher chemical costs ($28 million); and
higher chemical costsa rise in recycled fiber prices ($3 million);
partly offset by start-up costs incurred in the year-ago period ($7 million) for the Calhoun tissue manufacturing and converting facility.
Distribution costs
After removing the distribution costs related to Calhoun’s tissue operations and divestitures, the effect of lower volume, and the Canadian dollar fluctuation, distribution costs decreased by $4$6 million, reflecting improved freight rates and transportation optimization, mainly in specialty papers.
Depreciation and amortization
Depreciation and amortization was $25$37 million lower in the first half of 2019,period, mainly reflecting the full amortization of certain newsprint assets that were fully depreciated at the end of the fourth quarter of 2018, the divestitures of the Catawba and Fairmont facilities, and the increase of the useful lives of certain of our newsprint machinery and equipment.
Selling, general and administrative expenses
SG&A improved by $12$22 million in the first halfnine months of the year compared to the same period last year, mainly due to lower incentive plan expense, which is based on company performance.performance, and lower stock-based compensation expense.
Net income variance analysis
Interest expense
Interest expense was $8$12 million lower in the first half of 2019,period, as we repurchased $225 million in aggregate principal amount of our 2023 notesNotes on January 3, 2019, and we fully repaid borrowings of $144 million under our revolving credit facilities in 2018.
Other (expense) income, net
We recorded other expense, net of $22 million in the first nine months of 2019, compared to other income, net of $4 million in the year-ago period. The difference mostly reflects the $23 million provision related to the Fibrek litigation recorded in the current period.
Income taxes
We recorded an income tax provision of $40$52 million in the period, on income before income taxes of $107$76 million, compared to an expected income tax provision of $22$16 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects a valuation allowance related to our U.S. operations ($18 million), U.S. tax on non-U.S. earnings ($11 million), and state and foreign tax rate differences ($7 million), and U.S. tax on non-U.S. earnings ($5 million), partly offset by foreign exchange items ($4 million).
In the first halfnine months of 2018, we recorded an income tax provision of $78$111 million, on income before income taxes of $160$310 million, compared to an expected income tax provision of $34$65 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects U.S. tax on non-U.S. earnings ($2553 million), foreign exchange items ($14 million), and state and foreign tax rate differences ($1019 million), and foreign exchange items ($12 million), partly offset by a valuation allowance reversal related to our U.S. operations ($840 million).
Segment Earnings
We manage our business based on the products we manufacture. Our reportable segments correspond to our principal product lines: market pulp, tissue, wood products, newsprint, and specialty papers.
We do not allocate any of the income or loss items following “operating (loss) income” in our Consolidated Statements of Operations to our segments because those items are reviewed separately by management. Similarly, we do not allocate to the segments: closure costs, impairment and other related charges; inventory write-downs related to closures; start-up costs; gains and losses on disposition of assets; as well as other discretionary charges or credits.
We allocate depreciation and amortization expense to our segments, although the related fixed assets and amortizable intangible assets are not allocated to segment assets. Additionally, all SG&A are allocated to our segments, with the exception of certain discretionary charges and credits, which we present under “corporate and other.”
MARKET PULP
Highlights
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions, except where otherwise stated) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Sales | $ | 189 |
| | $ | 264 |
| | $ | 420 |
| | $ | 521 |
| | $ | 201 |
| | $ | 288 |
| | $ | 621 |
| | $ | 809 |
| |
Operating income (1) | | 27 |
| | 41 |
| | 69 |
| | 74 |
| | |
Operating (loss) income (1) | | | (12 | ) | | 57 |
| | 57 |
| | 131 |
| |
EBITDA (2) | | 32 |
| | 49 |
| | 79 |
| | 89 |
| | | (5 | ) | | 64 |
| | 74 |
| | 153 |
| |
(In thousands of metric tons) | | | | | | | | | | | | | | | | | | |
Shipments | | 257 |
| | 353 |
| | 543 |
| | 715 |
| | | 320 |
| | 367 |
| | 863 |
| | 1,082 |
| |
Downtime | | 15 |
| | 22 |
| | 23 |
| | 28 |
| | | 16 |
| | 26 |
| | 39 |
| | 54 |
| |
| | | June 30, | September 30, |
(Unaudited, in thousands of metric tons) | 2019 | 2018 | 2019 | 2018 |
Finished goods inventory | | 110 |
| | 108 |
| | | 74 |
| | 116 |
| |
| |
(1) | Net (loss) income including noncontrolling interests is equal to operating (loss) income in this segment. |
| |
(2) | EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above. |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net income including noncontrolling interests | $ | 27 |
| | $ | 41 |
| | $ | 69 |
| | $ | 74 |
| | |
Net (loss) income including noncontrolling interests | | $ | (12 | ) | | $ | 57 |
| | $ | 57 |
| | $ | 131 |
| |
Depreciation and amortization | | 5 |
| | 8 |
| | 10 |
| | 15 |
| | | 7 |
| | 7 |
| | 17 |
| | 22 |
| |
EBITDA | | 32 |
| | 49 |
| | 79 |
| | 89 |
| | | (5 | ) | | 64 |
| | 74 |
| | 153 |
| |
Industry trends
World demand for chemical pulp fell by 2.9%was largely unchanged in the first fivenine months of the year compared to the year-ago period, reflecting decreasesas the decrease of 10.5% and 3.7%9.4% in Western Europe andwas mostly offset by China, respectively,up by 5.9%, while North America was up 11.2%.unchanged. World capacity grew by 1.1%0.9% over the same period.
World demand for softwood pulp grew by 1.0%4.6% in the first fivenine months of the year, with increases in shipments to China and North America of 15.5% and China of 5.0% and 4.0%1.7%, respectively, while Western Europe was down by 5.4%5.9%. The operating rate was 91%93%.
In the same period, demand for hardwood pulp dropped by 6.0%2.8%, with shipments to Western Europe and ChinaNorth America down by 14.3%11.6% and 9.2%2.0%, respectively, while North AmericaChina was up by 21.1%0.5%. The operating rate was 80%86%, reflecting elevated producer inventory levels.
Three months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating (loss) income variance analysis
Sales
Sales were $75$87 million lower, or 28%30%, to $189$201 million in the quarter, reflecting a reduction in shipments of 96,000 metric tons, mainly due toquarter. After removing the saleeffect of the paper and pulp mill atdivestitures of the Catawba and Fairmont facilities, sales volume contributed to a $28 million increase in sales, mainly reflecting steps taken in the recycled bleached kraft pulp mill at Fairmont. Volumes were also unfavorably impacted by weaker global pulp markets.current quarter to reduce finished goods inventory. Consequently, finished goods inventory rosefell to 110,00074,000 metric tons at quarter-end. Challenging global market conditions also weighed on the average transaction price, which decreased by $8$159 per metric ton this quarter.
Cost of sales, excluding depreciation, amortization and distribution costs
Manufacturing costs increased by $8$17 million after adjusting for the effect of lowerhigher volume, the divestitures, and the Canadian dollar fluctuation, reflecting:
unfavorable maintenance costs ($13 million), mainly reflecting related to scheduled outages;
higher wood fiber costs ($8 million) due to wood shortages.shortages; and
Depreciationhigher chemical costs ($4 million);
partly offset by:
favorable recycled fiber prices ($5 million); and amortization
Depreciation and amortization was $3 million lowerhigher contribution from our cogeneration assets in the quarter, mainlySaint-Félicien (Quebec) that sell power externally ($3 million), due to the divestitures ofextended outage in the Catawba and Fairmont facilities.year-ago period.
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating income variance analysis
Sales
Sales were $101$188 million lower, or 19%23%, to $420$621 million in the first halfnine months of the year, primarily due to lower production capacity resulting from the saledivestitures of the paper and pulp mill at Catawba and Fairmont facilities. After removing the recycled bleached kraft pulp mill at Fairmont. Lowereffect of these divestitures, sales volume due towas $12 million higher, mainly in the current weakness in pulp markets was compensatedthird quarter of 2019. Pricing also reduced sales by an increase in the$23 million. The average transaction price of $47declined by $27 per metric ton, as price increases realized across all grades in 2018 outweighed theeroded with weaker pricing in the second quarter of 2019.global pulp markets.
Cost of sales, excluding depreciation, amortization and distribution costs
After adjusting for the effect of lowerhigher volume, the divestitures, and the Canadian dollar fluctuation, manufacturing costs increased by $31$48 million, reflecting:
higher wood fiber costs ($1624 million), mostly due to wood shortages;
unfavorable maintenance costs ($19 million), largely associated with scheduled outages;
higher chemical costs ($5 million); and
a rise in recycled fiber prices ($83 million); and
partly offset by higher maintenance costscontribution from our cogeneration assets in Saint-Félicien that sell power externally ($63 million), mostly planned.due to the extended outage in the year-ago period.
Depreciation and amortization
Depreciation and amortization was $5 million lower in the current year, mainly due to the divestitures of the Catawba and Fairmont facilities.
Selling, general and administrative expenses
SG&A improved by $5 million in the first nine months of the year, mainly due to lower incentive plan expense, which is based on company performance, and lower allocated expenses as a result of capacity reductions.
TISSUE
Highlights
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions, except where otherwise stated) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Sales | $ | 43 |
| | $ | 35 |
| | $ | 82 |
| | $ | 57 |
| | $ | 43 |
| | $ | 38 |
| | $ | 125 |
| | $ | 95 |
| |
Operating loss (1) | | (4 | ) | | (10 | ) | | (12 | ) | | (11 | ) | | | (3 | ) | | (10 | ) | | (15 | ) | | (21 | ) | |
EBITDA (2) | | — |
| | (5 | ) | | (3 | ) | | (5 | ) | | | 1 |
| | (5 | ) | | (2 | ) | | (10 | ) | |
(In thousands of short tons) | | | | | | | | | | | | | | | | | | |
Shipments (3) | | 25 |
| | 23 |
| | 49 |
| | 38 |
| | | 25 |
| | 23 |
| | 74 |
| | 61 |
| |
Downtime | | — |
| | 1 |
| | 1 |
| | 1 |
| | | 1 |
| | — |
| | 2 |
| | 1 |
| |
| | | June 30, | September 30, |
(Unaudited, in thousands of short tons) | 2019 | 2018 | 2019 | 2018 |
Finished goods inventory (3) | | 7 |
| | 8 |
| | | 6 |
| | 7 |
| |
| |
(1) | Net loss including noncontrolling interests is equal to operating loss in this segment. |
| |
(2) | EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above. |
| |
(3) | Tissue converted products, which are measured in cases, are converted to short tons. |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net loss including noncontrolling interests | $ | (4 | ) | | $ | (10 | ) | | $ | (12 | ) | | $ | (11 | ) | | $ | (3 | ) | | $ | (10 | ) | | $ | (15 | ) | | $ | (21 | ) | |
Depreciation and amortization | | 4 |
| | 5 |
| | 9 |
| | 6 |
| | | 4 |
| | 5 |
| | 13 |
| | 11 |
| |
EBITDA | | — |
| | (5 | ) | | (3 | ) | | (5 | ) | | | 1 |
| | (5 | ) | | (2 | ) | | (10 | ) | |
Industry trends
Total tissue consumption in the U.S. grew by 2.6%2.5% in the first halfnine months of 2019 compared to the same period last year. U.S. converted tissue products shipments also increased by 2.3%2.2% as a result of an increase in away-from-home shipments, up 3.3%,
and at-home shipments, up 1.8%1.7%. U.S. parent roll production showed a growth of 2.4%2.7% from the year-ago period. Tissue capacity also increased by 3.3%, contributing to a 93% average industry operating rate, down 0.9%0.6% from the year-ago period.
Three months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating loss variance analysis
Sales
Sales were $8$5 million higher, or 23%13%, to $43 million in the quarter, reflecting the positive trend in converted products shipments, which increased by 22% compared to the year-ago period,favorable product mix and the realization of previously announced away-from-home products price increases. Accordingly, the average transaction price rose by $144$156 per short ton, or 9%10%.
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating loss variance analysis
The operating results of our Calhoun tissue operations have been recorded in our tissue segment since April 1, 2018. The operating loss of $12 million incurred in the first quarter of 2018 for our Calhoun tissue manufacturing and converting facility was recorded under “corporate and other.”
Sales
Sales were $25$30 million higher, or 44%32%, to $82$125 million in the first halfnine months of the year. Shipments rose by 11,00013,000 short tons, primarily due to the inclusion of Calhoun’s results in our tissue segment starting on April 1, 2018, and sales volume growth. The average transaction price was $157$154 per short ton higher, due to favorable product mix. Pricing also improved due tomix and the realization of previously announced away-from-home products price increases.
Cost of sales, excluding depreciation, amortization and distribution costs
After removing the effect of higher volume and the COS related to Calhoun’s operations and the divestiture of the Fairmont mill, our manufacturing costs improved by $2$1 million compared to the year-ago period, mainly due to lower maintenance costs.
Depreciation and amortization
Depreciation and amortization was $3$2 million higher in the current year, mostly attributable toreflecting the inclusion of Calhoun’s results in our tissue segment.segment, partly offset by the reduced carrying value of our Florida assets after the impairment charge taken in the fourth quarter of 2018.
WOOD PRODUCTS
Highlights
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions, except where otherwise stated) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Sales | $ | 168 |
| | $ | 254 |
| | $ | 329 |
| | $ | 463 |
| | $ | 146 |
| | $ | 203 |
| | $ | 475 |
| | $ | 666 |
| |
Operating (loss) income (1) | | (3 | ) | | 79 |
| | 3 |
| | 132 |
| | | (4 | ) | | 45 |
| | (1 | ) | | 177 |
| |
EBITDA (2) | | 6 |
| | 86 |
| | 20 |
| | 147 |
| | | 4 |
| | 53 |
| | 24 |
| | 200 |
| |
(In millions board feet) | | | | | | | | | | | | | | | | | | |
Shipments (3) | | 484 |
| | 494 |
| | 912 |
| | 949 |
| | | 429 |
| | 445 |
| | 1,341 |
| | 1,394 |
| |
Downtime | | 53 |
| | 26 |
| | 94 |
| | 49 |
| | | 74 |
| | 44 |
| | 168 |
| | 93 |
| |
| | | June 30, | September 30, |
(Unaudited, in millions board feet) | 2019 | 2018 | 2019 | 2018 |
Finished goods inventory (3) | | 122 |
| | 128 |
| | | 122 |
| | 162 |
| |
| |
(1) | Net (loss) income including noncontrolling interests is equal to operating (loss) income in this segment. |
| |
(2) | EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above. |
| |
(3) | Includes wood pellets measured by mass, converted to board feet using a density-based conversion ratio. |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net (loss) income including noncontrolling interests | $ | (3 | ) | | $ | 79 |
| | $ | 3 |
| | $ | 132 |
| | $ | (4 | ) | | $ | 45 |
| | $ | (1 | ) | | $ | 177 |
| |
Depreciation and amortization | | 9 |
| | 7 |
| | 17 |
| | 15 |
| | | 8 |
| | 8 |
| | 25 |
| | 23 |
| |
EBITDA | | 6 |
| | 86 |
| | 20 |
| | 147 |
| | | 4 |
| | 53 |
| | 24 |
| | 200 |
| |
Industry trends
Average U.S. housing starts were 1.21.3 million on a seasonally-adjusted basis in the first halfnine months of 2019, down 4.1%1.6% from the same period last year, which reflects a 4.5%1.9% decrease in single-family starts, and a 2.3%0.7% decrease in multi-family starts. The 2x4 –
2x4 – Random Length (or “RL”) #1-2 Kiln Dried Great Lakes (or “KD GL”) price dropped by 32.9%29.9% in the first halfnine months of 2019 compared to the year-ago period, whileand the 2x4x8 Stud KD GL price was down by 27.3%26.1%.
Three months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating (loss) income variance analysis
Sales
Sales were $86$57 million lower, or 34%28%, to $168$146 million in the quarter, as the average transaction price fell by $166$116 per thousand board feet, or 32%25%, and shipments decreased by 1016 million board feet, reflecting weaker lumber market conditions. Given market headwinds,Finished goods inventory remained at 122 million board feet during the quarter, as we temporarily curtailed lumber production in the quarter, for a total of 5374 million board feet. Consequently, finished goods inventory fell to more normal levels of 122 million board feet at quarter-end.
Cost of sales, excluding depreciation, amortization and distribution costs
After removing the effect of lower volume and the Canadian dollar fluctuation, manufacturing costs increased by $7$6 million, largelymainly reflecting higher wood fiber costs.maintenance costs ($3 million).
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating (loss) income variance analysis
Sales
Sales were $134$191 million lower, or 29%, to $329$475 million in the first halfnine months of the year, driven by a $128$124 per thousand board feet decrease in the average transaction price and a 3753 million board feet decrease in shipments, as market conditions remained weak in 2019. Despite lower shipments, finished goods inventory remained at a normalized level of 122 million board feet, as we took 75 million board feet of additional downtime compared to the year-ago period, for a total of 168 million board feet in 2019.
Cost of sales, excluding depreciation, amortization and distribution costs
Manufacturing costs increased by $18$24 million after adjusting for the effect of lower volume and the Canadian dollar fluctuation, reflecting mainly reflecting:
higher wood fiber costs ($1312 million), and ;
an increase in labor costs ($46 million); and
unfavorable maintenance costs ($5 million).
Selling, general and administrative expenses
SG&A improved by $4 million in the first nine months of the year, mainly due to lower incentive plan expense, which is based on company performance.
NEWSPRINT
Highlights
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions, except where otherwise stated) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Sales | $ | 209 |
| | $ | 230 |
| | $ | 421 |
| | $ | 428 |
| | $ | 180 |
| | $ | 232 |
| | $ | 601 |
| | $ | 660 |
| |
Operating income (1) | | 17 |
| | 18 |
| | 45 |
| | 14 |
| | | 4 |
| | 32 |
| | 49 |
| | 46 |
| |
EBITDA (2) | | 25 |
| | 35 |
| | 60 |
| | 47 |
| | | 11 |
| | 48 |
| | 71 |
| | 95 |
| |
(In thousands of metric tons) | | | | | | | | | | | | | | | | | | |
Shipments | | 350 |
| | 393 |
| | 685 |
| | 748 |
| | | 314 |
| | 371 |
| | 999 |
| | 1,119 |
| |
Downtime | | 52 |
| | 6 |
| | 53 |
| | 14 |
| | | 71 |
| | 4 |
| | 124 |
| | 18 |
| |
| | | June 30, | September 30, |
(Unaudited, in thousands of metric tons) | 2019 | 2018 | 2019 | 2018 |
Finished goods inventory | | 105 |
| | 85 |
| | | 104 |
| | 96 |
| |
| |
(1) | Net income including noncontrolling interests is equal to operating income in this segment. |
| |
(2) | EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above. |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net income including noncontrolling interests | $ | 17 |
| | $ | 18 |
| | $ | 45 |
| | $ | 14 |
| | $ | 4 |
| | $ | 32 |
| | $ | 49 |
| | $ | 46 |
| |
Depreciation and amortization | | 8 |
| | 17 |
| | 15 |
| | 33 |
| | | 7 |
| | 16 |
| | 22 |
| | 49 |
| |
EBITDA | | 25 |
| | 35 |
| | 60 |
| | 47 |
| | | 11 |
| | 48 |
| | 71 |
| | 95 |
| |
Industry trends
North American newsprint demand for newsprint declinedfell by 15.7%13.6% in the first halfnine months of the year compared to the same period last year, as demandyear. Demand from newspaper publishers was reducedfell by 19.6%16.2%, reflecting in part continued consumer inventory destocking. Demandwhile demand from commercial printers also decreased, droppingdeclined by 8.4%9.0%. TheEven with the slower pace of demand decline in the third quarter of 2019, the North American shipment-to-capacity ratio was 84% in the first half of 2019,dropped to 83%, down from 96%95% in the year-ago period.
Global demand for newsprint was down by 8.2%10.9% in the first halfnine months of the year compared to the year-ago period, with North America, Asia, and Western Europe down 15.7%13.6%, 7.3%12.6%, and 5.3%6.5%, respectively. The global operating rate was 85%82%, compared to 91%90% in the year-ago period.
Three months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating income variance analysis
Sales
Newsprint sales decreased by $21$52 million, or 9%22%, to $209$180 million in the secondthird quarter of the year. Despite the recent softening market conditions, theThe average transaction price increasedfell by $13$56 per metric ton compared to the same quarter last year. Shipments, however,year, and shipments dropped by 43,00057,000 metric tons, reflecting the ongoing structural demand decline. To offset this slowdown in demand, 52,000Finished goods inventory remained at 104,000 metric tons ofat quarter-end, as we took temporary production downtime was taken this quarter, reducing finished goods inventory closer to trend levels of 105,00071,000 metric tons at quarter-end.this quarter.
Cost of sales, excluding depreciation, amortization and distribution costs
After removing the effect of lower volume, and the Canadian dollar fluctuation, manufacturing costs increased by $12$9 million, mainly reflecting:
higherunfavorable maintenance costs ($32 million) and steam usage ($2 million), mostly due to more planned repairs;outages;
an increase in wood fiber costs ($3 million), due to wood shortages;
lower contribution from our cogeneration assets that sell power externally ($2 million), due to scheduled maintenance; and
higher power and steama rise in labor costs ($23 million).
Depreciation and amortization
Depreciation and amortization was $9 million lower in the quarter, reflecting the full amortization of certain assets that were fully depreciated at the end of the fourth quarter of 2018, and the increase of the useful lives of certain of our machinery and equipment.
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating income variance analysis
Sales
Newsprint sales decreased by $7$59 million, or 2%9%, to $421$601 million in the first halfnine months of the year. Shipments decreased by 63,000120,000 metric tons, largely reflecting reduced production due to ongoing structural demand decline. However,Despite weaker market fundamentals, the average transaction price was $44$12 per metric ton higher compared to the first nine months of 2018, reflecting the realization of previously announced price increases in the first half of 2018.2019.
Cost of sales, excluding depreciation, amortization and distribution costs
Manufacturing costs increased by $20$29 million after adjusting for the effect of lower volume and the Canadian dollar fluctuation, mainly reflecting:
higher maintenance costs ($5 million), mostly due to more planned repairs;
an increase in wood fiber costs ($58 million), due to wood shortages;
higherunfavorable maintenance costs ($7 million), largely planned;
unfavorable labor costs ($36 million);
higher power and steam costs ($4 million); and
lower contribution from our cogeneration assets that sell power externally ($34 million)., largely due to scheduled maintenance.
Depreciation and amortization
Depreciation and amortization was $18$27 million lower in the first halfnine months of the year, reflecting the full amortization of certain assets that were fully depreciated at the end of the fourth quarter of 2018, and the increase of the useful lives of certain of our machinery and equipment.
SPECIALTY PAPERS
Highlights
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions, except where otherwise stated) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Sales | $ | 146 |
| | $ | 193 |
| | $ | 298 |
| | $ | 381 |
| | $ | 135 |
| | $ | 213 |
| | $ | 433 |
| | $ | 594 |
| |
Operating income (loss) (1) | | 15 |
| | 4 |
| | 30 |
| | (3 | ) | | |
Operating income (1) | | | 4 |
| | 26 |
| | 34 |
| | 23 |
| |
EBITDA (2) | | 26 |
| | 16 |
| | 51 |
| | 21 |
| | | 15 |
| | 38 |
| | 66 |
| | 59 |
| |
(In thousands of short tons) | | | | | | | | | | | | | | | | | | |
Shipments | | 193 |
| | 275 |
| | 392 |
| | 554 |
| | | 185 |
| | 289 |
| | 577 |
| | 843 |
| |
Downtime | | 14 |
| | 12 |
| | 26 |
| | 15 |
| | | 17 |
| | 1 |
| | 43 |
| | 16 |
| |
| | | June 30, | September 30, |
(Unaudited, in thousands of short tons) | 2019 | 2018 | 2019 | 2018 |
Finished goods inventory | | 55 |
| | 70 |
| | | 49 |
| | 78 |
| |
| |
(1) | Net income (loss) including noncontrolling interests is equal to operating income (loss) in this segment. |
| |
(2) | EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above. |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net income (loss) including noncontrolling interests | $ | 15 |
| | $ | 4 |
| | $ | 30 |
| | $ | (3 | ) | | |
Net income including noncontrolling interests | | $ | 4 |
| | $ | 26 |
| | $ | 34 |
| | $ | 23 |
| |
Depreciation and amortization | | 11 |
| | 12 |
| | 21 |
| | 24 |
| | | 11 |
| | 12 |
| | 32 |
| | 36 |
| |
EBITDA | | 26 |
| | 16 |
| | 51 |
| | 21 |
| | | 15 |
| | 38 |
| | 66 |
| | 59 |
| |
Industry trends
North American demand for uncoated mechanical papers was downcontracted by 13.6%14.9% in the first halfnine months of 2019, compared to the year-ago period. Lower consumptionPoor market fundamentals, grade switching, and consumer inventory destocking led to a 19.5%20.1% decline in the demand for standard papers,grades, while the demand for supercalendered grades felldropped by 7.0%9.3%. Accordingly,Compared to the operating ratefirst nine months of 2018, the shipment-to-capacity ratio for all uncoated mechanical papers decreased from 92% to 83%, compared to 92% in the year-ago period..
Three months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating income variance analysis
Sales
Specialty paper sales decreased by $47$78 million, or 24%37%, to $146$135 million in the secondthird quarter of the year as the increase in theyear. The average transaction price of $52 per short ton was more than offset by loweressentially unchanged, while sales volume,volumes were down by 82,000104,000 short tons, mainly resulting from the sale of the paper and pulpCatawba mill at Catawba.divestiture.
Cost of sales, excluding depreciation, amortization and distribution costs
Manufacturing costs increased by $7$17 million after adjusting for the effect of lower volume, the Catawba mill divestiture, and the Canadian dollar fluctuation, mainly reflecting:
higher maintenance costs ($6 million) and lower contribution from our hydroelectric facilities ($3 million) and our cogeneration assets that sell power externally ($2 million), largely due to scheduled outages; and
higher wood fiber costs ($3 million), mostly as a result of wood shortages.
Distribution costs
After removing the impact of the Catawba mill divestiture, distribution costs decreased by $3 million, reflecting an improvement in freight rates and transportation optimization.
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Operating income (loss) variance analysis
Sales
Specialty paper sales decreased by $83$161 million, or 22%27%, to $298$433 million in the first halfnine months of the year. While the average transaction price increased by $73$46 per short ton compared to the same period last year, shipments decreased by 162,000266,000 short tons, mainly due to the sale of the paper and pulpCatawba mill at Catawba.divestiture.
Cost of sales, excluding depreciation, amortization and distribution costs
After removing the impact of lower volume, the Catawba mill divestiture, and the Canadian dollar fluctuation, manufacturing costs increased by $17$34 million, mainly due to:
higher maintenance costs ($410 million), largelyin part due to more planned repairs;outages;
higher wood fiber costs ($47 million), mostly due to wood shortages;
lower contribution from our hydroelectric facilities ($5 million) and our cogeneration assets that sell power externally ($2 million), largely due to scheduled maintenance;
an increase in labor costs ($2 million);
lower internal hydroelectric generation ($24 million); and
higher chemical costs ($23 million).
Distribution costs
After removing the impact ofdistribution costs related to the Catawba mill divestiture, the effect of lower volume, and the Canadian dollar fluctuation, distribution costs decreased by $5 million, reflecting an improvement inimproved freight rates and transportation optimization.
Depreciation and amortization
Depreciation and amortization was $4 million lower in the current year, mainly due to the divestiture of the Catawba facility.
Selling, general and administrative expenses
SG&A improved by $6 million in the first nine months of the year, mainly due to lower incentive plan expense, which is based on company performance, and lower allocated expenses as a result of capacity reductions.
Corporate and Other
Highlights
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Cost of sales, excluding depreciation, amortization and distribution costs | $ | — |
| | $ | (2 | ) | | $ | (7 | ) | | $ | (9 | ) | | $ | — |
| | $ | (1 | ) | | $ | (7 | ) | | $ | (10 | ) | |
Depreciation and amortization | | (5 | ) | | (5 | ) | | (10 | ) | | (14 | ) | | | (5 | ) | | (6 | ) | | (15 | ) | | (20 | ) | |
Selling, general and administrative expenses | | (7 | ) | | (7 | ) | | (14 | ) | | (17 | ) | | | (3 | ) | | (8 | ) | | (17 | ) | | (25 | ) | |
Closure costs, impairment and other related charges | | — |
| | (1 | ) | | — |
| | (1 | ) | | | — |
| | — |
| | — |
| | (1 | ) | |
Net gain on disposition of assets | | — |
| | 4 |
| | — |
| | 4 |
| | | 1 |
| | — |
| | 1 |
| | 4 |
| |
Operating loss | $ | (12 | ) | | $ | (11 | ) | | $ | (31 | ) | | $ | (37 | ) | | $ | (7 | ) | | $ | (15 | ) | | $ | (38 | ) | | $ | (52 | ) | |
Interest expense | | (7 | ) | | (11 | ) | | (16 | ) | | (24 | ) | | | (8 | ) | | (12 | ) | | (24 | ) | | (36 | ) | |
Non-operating pension and other postretirement benefit credits | | 12 |
| | 12 |
| | 24 |
| | 25 |
| | | 12 |
| | 13 |
| | 36 |
| | 38 |
| |
Other expense, net | | (1 | ) | | (3 | ) | | (5 | ) | | (10 | ) | | |
Other (expense) income, net | | | (17 | ) | | 14 |
| | (22 | ) | | 4 |
| |
Income tax provision | | (19 | ) | | (47 | ) | | (40 | ) | | (78 | ) | | | (12 | ) | | (33 | ) | | (52 | ) | | (111 | ) | |
Net loss including noncontrolling interests | $ | (27 | ) | | $ | (60 | ) | | $ | (68 | ) | | $ | (124 | ) | | $ | (32 | ) | | $ | (33 | ) | | $ | (100 | ) | | $ | (157 | ) | |
The table below shows the reconciliation of net loss including noncontrolling interests to EBITDA and adjusted EBITDA, which are non-GAAP financial measures. For more information on the calculation and reasons we include these measures, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net loss including noncontrolling interests | $ | (27 | ) | | $ | (60 | ) | | $ | (68 | ) | | $ | (124 | ) | | $ | (32 | ) | | $ | (33 | ) | | $ | (100 | ) | | $ | (157 | ) | |
Interest expense | | 7 |
| | 11 |
| | 16 |
| | 24 |
| | | 8 |
| | 12 |
| | 24 |
| | 36 |
| |
Income tax provision | | 19 |
| | 47 |
| | 40 |
| | 78 |
| | | 12 |
| | 33 |
| | 52 |
| | 111 |
| |
Depreciation and amortization | | 5 |
| | 5 |
| | 10 |
| | 14 |
| | | 5 |
| | 6 |
| | 15 |
| | 20 |
| |
EBITDA | $ | 4 |
| | $ | 3 |
| | $ | (2 | ) | | $ | (8 | ) | | $ | (7 | ) | | $ | 18 |
| | $ | (9 | ) | | $ | 10 |
| |
Foreign exchange loss | | 6 |
| | 1 |
| | 10 |
| | 2 |
| | |
Foreign exchange (gain) loss | | | (1 | ) | | — |
| | 9 |
| | 2 |
| |
Closure costs, impairment and other related charges | | — |
| | 1 |
| | — |
| | 1 |
| | | — |
| | — |
| | — |
| | 1 |
| |
Reversal of inventory write-downs related to closures | | — |
| | — |
| | — |
| | (1 | ) | | | — |
| | — |
| | — |
| | (1 | ) | |
Start-up costs | | — |
| | — |
| | — |
| | 8 |
| | | — |
| | — |
| | — |
| | 8 |
| |
Net gain on disposition of assets | | — |
| | (4 | ) | | — |
| | (4 | ) | | | (1 | ) | | — |
| | (1 | ) | | (4 | ) | |
Non-operating pension and other postretirement benefit credits | | (12 | ) | | (12 | ) | | (24 | ) | | (25 | ) | | | (12 | ) | | (13 | ) | | (36 | ) | | (38 | ) | |
Other (income) expense, net | | (5 | ) | | 2 |
| | (5 | ) | | 8 |
| | |
Other expense (income), net (1) | | | 18 |
| | (14 | ) | | 13 |
| | (6 | ) | |
Adjusted EBITDA | $ | (7 | ) | | $ | (9 | ) | | $ | (21 | ) | | $ | (19 | ) | | $ | (3 | ) | | $ | (9 | ) | | $ | (24 | ) | | $ | (28 | ) | |
| |
(1) | Excludes foreign exchange gains and losses. |
Three months ended September 30, 2019 vs. September 30, 2018
Selling, general and administrative expenses
SG&A improved by $5 million in the quarter, mainly due to lower stock-based compensation expense.
Nine months ended September 30, 2019 vs. September 30, 2018
Depreciation and amortization
Depreciation and amortization was $5 million lower in the current year, mostly attributable to the inclusion of Calhoun’s results in our tissue segment since April 1, 2018.
Selling, general and administrative expenses
SG&A improved by $8 million in the first nine months of the year, mainly due to lower stock-based compensation expense.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
We rely on cash and cash equivalents, net cash provided by operations, and our revolving credit facilities to fund our operations, make pension contributions, and finance our working capital, capital expenditures, and duty cash deposits. In addition, from time to time we may use available cash to reduce debt and to return capital to shareholders, including through share repurchases or special dividends. As of JuneSeptember 30, 2019, we had cash and cash equivalents of $98$69 million and availability of $492$497 million under our revolving credit facilities.
Based on our current projections, we expect to have sufficient financial resources available to finance our business plan, make pension contributions, meet working capital and duty cash deposit requirements, and maintain an appropriate level of capital spending.
Based on market conditions, we may seek to retire, repay or refinance our outstanding indebtedness, including under the 2023 notesNotes and credit facilities, through redemptions, prepayments, open market purchases or individually negotiated transactions, as we continue to focus on reducing costs and enhancing our flexibility.
Five-year extension of ABL Credit Facility
On May 14, 2019, we entered into an amendment to the credit agreement dated May 22, 2015, for a senior secured asset-based revolving credit facility (or the “ABL Credit Facility.Facility”). The amended credit agreement provides for an extension of the maturity date to May 14, 2024, with an aggregate lender commitment of $500 million at any time outstanding, subject to borrowing base availability based on specified advance rates, eligibility criteria and customary reserves. The amended aggregate lender commitment amount represents a voluntary reduction of $100 million. For more information, see Note 7, “Long-Term Debt – ABL Credit Facility,” to our Consolidated Financial Statements.
Senior Secured Credit Facility
On October 28, 2019, we entered into an amended and restated senior secured credit facility (or the “Senior Secured Credit Facility”) for up to $360 million, replacing our existing $185 million senior secured credit facility. The Senior Secured Credit Facility provides a term loan facility of up to $180 million with a delayed draw period of up to three years, and the choice of maturities of six to ten years from the date of drawing, and a six-year revolving credit facility of up to $180 million with a maturity date of October 28, 2025 (or the “Revolving Credit Facility”). There is also an uncommitted option to increase the Senior Secured Credit Facility by up to an additional $360 million, subject to certain terms and conditions. On October 28, 2019, we repaid our existing $46 million term loan by borrowing under the Revolving Credit Facility. For more information, see Note 7, “Long-Term Debt – Senior Secured Credit Facility,” to our Consolidated Financial Statements.
Flow of Funds
Summary of cash flows
A summary of cash flows for the sixnine months ended JuneSeptember 30, 2019 and 2018, was as follows:
| | | Six Months Ended June 30, | Nine Months Ended September 30, |
(Unaudited, in millions) | 2019 | | | 2018 | | | 2019 | | | 2018 | | |
Net cash provided by operating activities | $ | 95 |
| | $ | 220 |
| | $ | 120 |
| | $ | 351 |
| |
Net cash used in investing activities | | (69 | ) | | (109 | ) | | | (119 | ) | | (147 | ) | |
Cash used in financing activities | | (232 | ) | | (115 | ) | | | (239 | ) | | (145 | ) | |
Effect of exchange rate changes on cash and cash equivalents, and restricted cash | | 1 |
| | (2 | ) | | | 1 |
| | (1 | ) | |
Net decrease in cash and cash equivalents, and restricted cash | $ | (205 | ) | | $ | (6 | ) | | |
Net (decrease) increase in cash and cash equivalents, and restricted cash | | $ | (237 | ) | | $ | 58 |
| |
SixNine months ended JuneSeptember 30, 2019 vs. JuneSeptember 30, 2018
Net cash provided by operating activities
We generated $95$120 million of cash from operating activities in the first halfnine months of 2019, compared to $220$351 million in the year-ago period. The decrease is primarily attributable to lower profitability, and an increase in working capital in the current period, partially offset by lower interest payments and pension contributions.
Net cash used in investing activities
We used $69$119 million of cash in investing activities in the current period, which included:
$4582 million in capital expenditures; and
$3346 million of countervailing and anti-dumping duty cash deposits on softwood lumber;
offset in part by the full refund of countervailing duty cash deposits on uncoated groundwood paper of $6 million.
In the year-ago period, net cash used in investing activities was $109$147 million, or $40$28 million higher, reflecting capital expenditures of $94 million and net countervailing and anti-dumping duty cash deposits of $58 million and capital expenditures of $53$55 million.
Cash used in financing activities
In 2019, we repurchased $225 million in aggregate principal amount of our 2023 notes,Notes, as well as $5$12 million of shares, as described below. This compares to repayments of $114$144 million under our revolving credit facilities in the first halfnine months of 2018.
Share Repurchase Program
During the sixnine months ended JuneSeptember 30, 2019, we repurchased 0.71.8 million shares, at a cost of $5$12 million under our $150 million share repurchase program, which was launched in 2012. There remains $19$12 million under the program as of JuneSeptember 30, 2019.
RESOLUTE FOREST PRODUCTS INC.
| |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information relating to quantitative and qualitative disclosures about market risk is disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2018 Annual Report. There have been no material changes in our exposure to market risk as previously disclosed in our 2018 Annual Report.
| |
ITEM 4. | CONTROLS AND PROCEDURES |
(a) Evaluation of Disclosure Controls and Procedures:
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) of the Securities Exchange Act of 1934, as of JuneSeptember 30, 2019. Based on that evaluation, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date in recording, processing, summarizing and timely reporting information required to be disclosed in our reports to the SEC.
(b) Changes in Internal Control over Financial Reporting:
In connection with the evaluation of internal control over financial reporting, there were no changes during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
RESOLUTE FOREST PRODUCTS INC.
| |
PART II. | OTHER INFORMATION |
In addition to the legal proceedings presented under Part I, Item 3, “Legal Proceedings,” in our 2018 Annual Report, see the description of our material pending legal proceedings in Note 10, “Commitments and Contingencies – Legal matters,” to our Consolidated Financial Statements, which is incorporated in this “Item 1 – Legal Proceedings” by reference.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors set forth under Part I, Item 1A, “Risk Factors” in our 2018 Annual Report, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors previously disclosed in our 2018 Annual Report.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table sets forth information about our stock repurchases for the three months ended JuneSeptember 30, 2019:
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) |
April 1 to April 30 | | — |
| | $ | — |
| | | — |
| | $ | 23,983,730 |
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May 1 to May 31 | | — |
| | | — |
| | | — |
| | | 23,983,730 |
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June 1 to June 30 | | 720,000 |
| | | 6.23 |
| | | 720,000 |
| | | 19,498,130 |
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Total | | 720,000 |
| | $ | 6.23 |
| | | 720,000 |
| | $ | 19,498,130 |
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Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) |
July 1 to July 31 | | 1,106,120 |
| | $ | 6.79 |
| | | 1,106,120 |
| | $ | 11,987,575 |
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August 1 to August 31 | | — |
| | | — |
| | | — |
| | | 11,987,575 |
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September 1 to September 30 | | — |
| | | — |
| | | — |
| | | 11,987,575 |
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Total | | 1,106,120 |
| | $ | 6.79 |
| | | 1,106,120 |
| | $ | 11,987,575 |
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(1) | $150 million share repurchase program launched in 2012. |
As of July 31, 2019, we repurchased 1,106,120 additional shares at an average price per share of $6.79 for a total cost of $7 million.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
As previously reported, on May 24, 2019, the stockholders of Resolute Forest Products approved the Resolute Forest Products 2019 Equity Incentive Plan (or the “2019 Incentive Plan”) at the Company’s 2019 Annual Meeting of Stockholders. The Company’s Board of Directors previously adopted the 2019 Incentive Plan on March 28, 2019, subject to shareholder approval.
Effective as of May 24, 2019, the 2019 Incentive Plan authorizes the granting of restricted stock, restricted stock units, performance stock units, performance shares and other equity-based awards to eligible persons, including executive officers and other employees of the Company, its subsidiaries and affiliates as well as non-employee directors of the Company. An aggregate of 3,000,000 shares are authorized and reserved for issuance under the 2019 Incentive Plan. The 2019 Incentive Plan replaces the Resolute Forest Products Equity Incentive Plan, which was adopted in 2010. A more detailed description of the 2019 Incentive Plan was included in the Company’s Proxy Statement dated April 10, 2019 (the “Proxy Statement”), under the caption “Management Proposals – Item 4: Vote to Approve the Resolute Forest Products 2019 Equity Incentive Plan.”
The foregoing and the summary of the 2019 Incentive Plan in the Proxy Statement are not complete summaries of the terms of the 2019 Incentive Plan and are qualified by reference to the full text of the 2019 Incentive Plan, which was attached as Appendix A to the Proxy Statement and is attached hereto as Exhibit 10.4 and incorporated by reference.
RESOLUTE FOREST PRODUCTS INC.
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Exhibit No. | | Description |
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| | Second Amendment to theAmended and Restated Credit Agreement, dated as of May 14,October 28, 2019, among Resolute Forest Products Inc., Resolute FP Canada Inc., certain otherU.S. subsidiaries of Resolute Forest Products Inc. as borrowers orand guarantors, various lenders, Bank of America, N.A.,and American AgCredit, FLCA, as U.S. Administrative Agentadministrative agent and Collateral Agent, and Bank of America, N.A. (through its Canada branch), as Canadian Administrative Agentcollateral agent (incorporated by reference from Exhibit 10.1 to Resolute Forest Products Inc.’s Current Report on Form 8-K filed May 20,October 30, 2019, SEC file No. 001-33776). |
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| | 2019Form of Resolute Forest Products Inc. Short-Term2019 Equity Incentive Plan – U.S.Cash Settled Restricted Stock Unit Agreement. |
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| | 2019Form of Resolute Forest Products Inc. Short-Term2019 Equity Incentive Plan – Canada / International.Stock Settled Performance Stock Unit Agreement. |
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| | Form of Resolute Forest Products Inc. 2019 Equity Incentive Plan.Plan Stock Settled Restricted Stock Unit Agreement. |
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| | Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Senior Vice President and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Senior Vice President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | | XBRL Instance Document. |
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101.SCH* | | XBRL Taxonomy Extension Schema Document. |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document. |
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† | This is a management contract or compensatory plan or arrangement. |
* | Interactive data files furnished with this Form 10-Q, which represent the following materials from this Form 10-Q formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive (Loss) Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Interim Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document. |
RESOLUTE FOREST PRODUCTS INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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RESOLUTE FOREST PRODUCTS INC. |
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By | | /s/ Remi G. Lalonde |
| | Remi G. Lalonde |
| | Senior Vice President and Chief Financial Officer |
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By | | /s/ Hugues Dorban |
| | Hugues Dorban |
| | Vice President and Chief Accounting Officer |
Date: August 9,November 12, 2019