UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
¨ | 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)
Delaware | 98-0526415 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
111 Robert-Bourassa Boulevard, Suite 5000; Montreal, Quebec; Canada H3C 2M1 |
(Address of principal executive offices) (Zip Code) |
(514) 875-2160 |
(Registrant’s telephone number, including area code) |
(Former name, former address and former fiscal year, if changed since last report) |
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 þ 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 þ 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.
Large accelerated filer | ¨ | Accelerated filer | þ | 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 þ
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.001 per share | RFP | New York Stock Exchange Toronto Stock Exchange |
(Title of class) | (Trading Symbol) | (Name of exchange on which registered) |
As of April 30, 2019, there were 91,119,872 shares of Resolute Forest Products Inc. common stock, $0.001 par value, outstanding.
RESOLUTE FOREST PRODUCTS INC.
TABLE OF CONTENTS
Page Number | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements: | ||
PART II. OTHER INFORMATION | ||
PART I. | FINANCIAL INFORMATION |
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 March 31, | ||||||||
2019 | 2018 | |||||||
Sales | $ | 795 | $ | 874 | ||||
Costs and expenses: | ||||||||
Cost of sales, excluding depreciation, amortization and distribution costs | 554 | 614 | ||||||
Depreciation and amortization | 40 | 53 | ||||||
Distribution costs | 100 | 116 | ||||||
Selling, general and administrative expenses | 37 | 43 | ||||||
Operating income | 64 | 48 | ||||||
Interest expense | (9 | ) | (13 | ) | ||||
Non-operating pension and other postretirement benefit credits | 12 | 13 | ||||||
Other expense, net | (4 | ) | (7 | ) | ||||
Income before income taxes | 63 | 41 | ||||||
Income tax provision | (21 | ) | (31 | ) | ||||
Net income including noncontrolling interests | 42 | 10 | ||||||
Net income attributable to noncontrolling interests | — | — | ||||||
Net income attributable to Resolute Forest Products Inc. | $ | 42 | $ | 10 | ||||
Net income per share attributable to Resolute Forest Products Inc. common shareholders: | ||||||||
Basic | $ | 0.45 | $ | 0.11 | ||||
Diluted | 0.45 | 0.11 | ||||||
Weighted-average number of Resolute Forest Products Inc. common shares outstanding: | ||||||||
Basic | 92.4 | 91.2 | ||||||
Diluted | 93.9 | 93.0 | ||||||
See accompanying notes to unaudited interim Consolidated Financial Statements.
1
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions of U.S. dollars)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income including noncontrolling interests | $ | 42 | $ | 10 | ||||
Other comprehensive income: | ||||||||
Unamortized prior service credits | ||||||||
Change in unamortized prior service credits | (3 | ) | (4 | ) | ||||
Income tax provision | — | — | ||||||
Change in unamortized prior service credits, net of tax | (3 | ) | (4 | ) | ||||
Unamortized actuarial losses | ||||||||
Change in unamortized actuarial losses | 8 | 9 | ||||||
Income tax provision | (2 | ) | (2 | ) | ||||
Change in unamortized actuarial losses, net of tax | 6 | 7 | ||||||
Other comprehensive income, net of tax | 3 | 3 | ||||||
Comprehensive income including noncontrolling interests | 45 | 13 | ||||||
Comprehensive income attributable to noncontrolling interests | — | — | ||||||
Comprehensive income attributable to Resolute Forest Products Inc. | $ | 45 | $ | 13 | ||||
See accompanying notes to unaudited interim Consolidated Financial Statements.
2
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions of U.S. dollars, except per share amount)
March 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 69 | $ | 304 | ||||
Accounts receivable, net: | ||||||||
Trade | 353 | 347 | ||||||
Other | 82 | 102 | ||||||
Inventories, net | 556 | 508 | ||||||
Other current assets | 58 | 43 | ||||||
Total current assets | 1,118 | 1,304 | ||||||
Fixed assets, less accumulated depreciation of $1,538 and $1,498 as of March 31, 2019 and December 31, 2018, respectively | 1,492 | 1,515 | ||||||
Amortizable intangible assets, less accumulated amortization of $24 as of both March 31, 2019 and December 31, 2018 | 51 | 50 | ||||||
Deferred income tax assets | 872 | 876 | ||||||
Operating lease right-of-use assets | 63 | — | ||||||
Other assets | 206 | 190 | ||||||
Total assets | $ | 3,802 | $ | 3,935 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 433 | $ | 427 | ||||
Current portion of long-term debt | 1 | 223 | ||||||
Current portion of operating lease liabilities | 7 | — | ||||||
Total current liabilities | 441 | 650 | ||||||
Long-term debt, net of current portion | 422 | 422 | ||||||
Pension and other postretirement benefit obligations | 1,247 | 1,257 | ||||||
Operating lease liabilities, net of current portion | 59 | — | ||||||
Other liabilities | 53 | 71 | ||||||
Total liabilities | 2,222 | 2,400 | ||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
Resolute Forest Products Inc. shareholders’ equity: | ||||||||
Common stock, $0.001 par value. 119.1 shares issued and 91.1 shares outstanding as of March 31, 2019; 118.8 shares issued and 90.8 shares outstanding as of December 31, 2018 | — | — | ||||||
Additional paid-in capital | 3,802 | 3,802 | ||||||
Deficit | (1,156 | ) | (1,198 | ) | ||||
Accumulated other comprehensive loss | (947 | ) | (950 | ) | ||||
Treasury stock at cost, 28.0 shares as of March 31, 2019 and December 31, 2018 | (120 | ) | (120 | ) | ||||
Total Resolute Forest Products Inc. shareholders’ equity | 1,579 | 1,534 | ||||||
Noncontrolling interests | 1 | 1 | ||||||
Total equity | 1,580 | 1,535 | ||||||
Total liabilities and equity | $ | 3,802 | $ | 3,935 | ||||
See accompanying notes to unaudited interim Consolidated Financial Statements.
3
RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited, in millions of U.S. dollars)
Three Months Ended March 31, 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 December 31, 2018 | $ | — | $ | 3,802 | $ | (1,198 | ) | $ | (950 | ) | $ | (120 | ) | $ | 1 | $ | 1,535 | |||||||||||
Net income | — | — | 42 | — | — | — | 42 | |||||||||||||||||||||
Stock unit awards vested (0.3 shares), net of shares forfeited for employee withholding taxes | — | — | — | — | — | — | — | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | 3 | — | — | 3 | |||||||||||||||||||||
Balance as of March 31, 2019 | $ | — | $ | 3,802 | $ | (1,156 | ) | $ | (947 | ) | $ | (120 | ) | $ | 1 | $ | 1,580 | |||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||
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 December 31, 2017 | $ | — | $ | 3,793 | $ | (1,294 | ) | $ | (780 | ) | $ | (120 | ) | $ | 1 | $ | 1,600 | |||||||||||
Share-based compensation, net of withholding taxes | — | 3 | — | — | — | — | 3 | |||||||||||||||||||||
Net income | — | — | 10 | — | — | — | 10 | |||||||||||||||||||||
Stock unit awards vested (0.1 shares), net of shares forfeited for employee withholding taxes | — | — | — | — | — | — | — | |||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | 3 | — | — | 3 | |||||||||||||||||||||
Balance as of March 31, 2018 | $ | — | $ | 3,796 | $ | (1,284 | ) | $ | (777 | ) | $ | (120 | ) | $ | 1 | $ | 1,616 | |||||||||||
See accompanying notes to unaudited interim Consolidated Financial Statements.
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RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions of U.S. dollars)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income including noncontrolling interests | $ | 42 | $ | 10 | ||||
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: | ||||||||
Share-based compensation | 2 | 3 | ||||||
Depreciation and amortization | 40 | 53 | ||||||
Reversal of inventory write-downs related to closures | — | (1 | ) | |||||
Deferred income taxes | 21 | 30 | ||||||
Net pension contributions and other postretirement benefit payments | (26 | ) | (35 | ) | ||||
(Gain) loss on translation of foreign currency denominated deferred income taxes | (19 | ) | 27 | |||||
Loss (gain) on translation of foreign currency denominated pension and other postretirement benefit obligations | 20 | (22 | ) | |||||
Net planned major maintenance (payments) amortization | (2 | ) | 6 | |||||
Changes in working capital: | ||||||||
Accounts receivable | 6 | 19 | ||||||
Inventories | (47 | ) | (50 | ) | ||||
Other current assets | (7 | ) | (5 | ) | ||||
Accounts payable and accrued liabilities | (6 | ) | 28 | |||||
Other, net | (1 | ) | (1 | ) | ||||
Net cash provided by operating activities | 23 | 62 | ||||||
Cash flows from investing activities: | ||||||||
Cash invested in fixed assets | (26 | ) | (25 | ) | ||||
Decrease (increase) in countervailing duty cash deposits on supercalendered paper | 1 | (5 | ) | |||||
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber | (14 | ) | (14 | ) | ||||
Decrease (increase) in countervailing duty cash deposits on uncoated groundwood paper | 6 | (2 | ) | |||||
Net cash used in investing activities | (33 | ) | (46 | ) | ||||
Cash flows from financing activities: | ||||||||
Net repayments under revolving credit facilities | — | (9 | ) | |||||
Payments of debt | (225 | ) | — | |||||
Payments of financing and credit facility fees | — | (1 | ) | |||||
Cash used in financing activities | (225 | ) | (10 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents, and restricted cash | 1 | (1 | ) | |||||
Net (decrease) increase in cash and cash equivalents, and restricted cash | (234 | ) | 5 | |||||
Cash and cash equivalents, and restricted cash: | ||||||||
Beginning of period | 345 | 49 | ||||||
End of period | $ | 111 | $ | 54 | ||||
Cash and cash equivalents, and restricted cash at period end: | ||||||||
Cash and cash equivalents | $ | 69 | $ | 13 | ||||
Restricted cash (included in “Other current assets” and “Other assets”) | 42 | 41 | ||||||
See accompanying notes to unaudited interim Consolidated Financial Statements.
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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 March 31, 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 our footnotes 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
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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 three months ended March 31, 2019, was as follows:
(Unaudited, in millions) | Unamortized Prior Service Credits | Unamortized Actuarial Losses | Foreign Currency Translation | Total | ||||||||||||
Balance as of December 31, 2018 | $ | 28 | $ | (971 | ) | $ | (7 | ) | $ | (950 | ) | |||||
Amounts reclassified from accumulated other comprehensive loss (1) | (3 | ) | 6 | — | 3 | |||||||||||
Balance as of March 31, 2019 | $ | 25 | $ | (965 | ) | $ | (7 | ) | $ | (947 | ) | |||||
(1) | See the table below for details about these reclassifications. |
The reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2019, were comprised of the following:
(Unaudited, in millions) | Amounts Reclassified From Accumulated Other Comprehensive Loss | Affected Line in the Consolidated Statements of Operations | |||
Unamortized Prior Service Credits | |||||
Amortization of prior service credits | $ | (3 | ) | Non-operating pension and other postretirement benefit credits (1) | |
— | Income tax provision | ||||
$ | (3 | ) | Net of tax | ||
Unamortized Actuarial Losses | |||||
Amortization of actuarial losses | $ | 8 | Non-operating pension and other postretirement benefit credits (1) | ||
(2 | ) | Income tax provision | |||
$ | 6 | Net of tax | |||
Total Reclassifications | $ | 3 | Net of tax | ||
(1) | These items are included in the computation of net periodic benefit cost related to our pension and other postretirement benefit (or “OPEB”) plans summarized in Note 8, “Employee Benefit Plans.” |
7
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
Note 3. Net Income Per Share
The reconciliation of the basic and diluted net income per share for the three months ended March 31, 2019 and 2018, was as follows:
Three Months Ended March 31, | ||||||||
(Unaudited, in millions, except per share amounts) | 2019 | 2018 | ||||||
Numerator: | ||||||||
Net income attributable to Resolute Forest Products Inc. | $ | 42 | $ | 10 | ||||
Denominator: | ||||||||
Basic weighted-average number of Resolute Forest Products Inc. common shares outstanding | 92.4 | 91.2 | ||||||
Dilutive impact of nonvested stock unit awards (1) | 1.5 | 1.8 | ||||||
Diluted weighted-average number of Resolute Forest Products Inc. common shares outstanding | 93.9 | 93.0 | ||||||
Net income per share attributable to Resolute Forest Products Inc. common shareholders: | ||||||||
Basic | $ | 0.45 | $ | 0.11 | ||||
Diluted | 0.45 | 0.11 | ||||||
(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 that were excluded from the calculation of diluted net income per share, as their impact would have been antidilutive, was 1.1 million and 1.3 million for the three months ended March 31, 2019 and 2018, respectively.
Note 4. Inventories, Net
Inventories, net as of March 31, 2019 and December 31, 2018, were comprised of the following:
(Unaudited, in millions) | March 31, 2019 | December 31, 2018 | ||||||
Raw materials | $ | 124 | $ | 106 | ||||
Work in process | 41 | 39 | ||||||
Finished goods | 201 | 180 | ||||||
Mill stores and other supplies | 190 | 183 | ||||||
$ | 556 | $ | 508 | |||||
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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 months ended March 31, 2019, were as follows:
(Unaudited, in millions) | Three Months Ended March 31, 2019 | |||
Operating lease cost | $ | 3 | ||
Variable lease cost (1) | 6 | |||
(1) | Variable lease cost is determined by the consumption of the underlying asset. |
Supplemental information related to operating leases was as follows:
(Unaudited) | March 31, 2019 | |||
Weighted-average remaining operating lease term (in years) | 11.7 | |||
Weighted-average operating lease discount rate | 4.7 | % | ||
(Unaudited, in millions) | Three Months Ended March 31, 2019 | |||
Operating cash flow payments for operating lease liabilities | $ | 3 | ||
The maturities of operating lease liabilities as of March 31, 2019, were as follows:
(Unaudited, in millions) | Operating Leases | |||
Years ending December 31, | ||||
2019 | $ | 8 | ||
2020 | 10 | |||
2021 | 8 | |||
2022 | 8 | |||
2023 | 7 | |||
2024 and thereafter | 45 | |||
Total lease payments | 86 | |||
Less: imputed interest | (20 | ) | ||
Total operating lease liabilities | $ | 66 | ||
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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 March 31, 2019 and December 31, 2018, were comprised of the following:
(Unaudited, in millions) | March 31, 2019 | December 31, 2018 | ||||||
Trade accounts payable | $ | 303 | $ | 299 | ||||
Accrued compensation | 48 | 66 | ||||||
Accrued interest | 9 | 5 | ||||||
Pension and other postretirement benefit obligations | 17 | 17 | ||||||
Accrued provision for former Fibrek Inc. dissenting shareholders | 10 | — | ||||||
Income and other taxes payable | 3 | 4 | ||||||
Deposits | 22 | 20 | ||||||
Other | 21 | 16 | ||||||
$ | 433 | $ | 427 | |||||
Note 7. Long-Term Debt
Overview
Long-term debt, including current portion, as of March 31, 2019 and December 31, 2018, was comprised of the following:
(Unaudited, in millions) | March 31, 2019 | December 31, 2018 | ||||||
5.875% senior unsecured notes due 2023: | ||||||||
Principal amount | $ | 375 | $ | 600 | ||||
Deferred financing costs | (3 | ) | (5 | ) | ||||
Unamortized discount | (2 | ) | (3 | ) | ||||
Total 5.875% senior unsecured notes due 2023 | 370 | 592 | ||||||
Term loan due 2025 | 46 | 46 | ||||||
Finance lease obligation | 7 | 7 | ||||||
Total debt | 423 | 645 | ||||||
Less: Current portion of 5.875% senior unsecured notes due 2023 | — | (222 | ) | |||||
Less: Current portion of finance lease obligation | (1 | ) | (1 | ) | ||||
Long-term debt, net of current portion | $ | 422 | $ | 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 (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
10
RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
extinguishment of debt of $3 million in “Other expense, net” in our Consolidated Statement of Operations for the three months ended March 31, 2019.
The fair value of the 2023 Notes (Level 1) was $375 million and $598 million as of March 31, 2019 and December 31, 2018, respectively.
Senior Secured Credit Facility
On September 7, 2016, we entered into a senior secured credit facility (or the “Senior Secured Credit Facility”) for up to $185 million. The Senior Secured Credit Facility provides a term loan of $46 million with a maturity date of September 7, 2025 (the “Term Loan”), and a revolving credit facility of up to $139 million with a maturity date of September 7, 2022 (the “Revolving Credit Facility”). As of March 31, 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 March 31, 2019 and December 31, 2018.
ABL Credit Facility
On May 22, 2015, we entered into a senior secured asset-based revolving credit facility (the “ABL Credit Facility”), with an aggregate lender commitment of up to $600 million at any time outstanding, subject to borrowing base availability based on specified advance rates, eligibility criteria and customary reserves. The ABL Credit Facility will mature on May 22, 2020. As of March 31, 2019, we had $387 million of availability under the ABL Credit Facility, which was undrawn except for $51 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 cost relating to our pension and OPEB plans for the three months ended March 31, 2019 and 2018, were as follows:
Pension Plans:
Three Months Ended March 31, | ||||||||
(Unaudited, in millions) | 2019 | 2018 | ||||||
Interest cost | $ | 45 | $ | 48 | ||||
Expected return on plan assets | (63 | ) | (67 | ) | ||||
Amortization of actuarial losses | 9 | 10 | ||||||
Amortization of prior service credits | — | (1 | ) | |||||
Non-operating pension credits | (9 | ) | (10 | ) | ||||
Service cost | 4 | 5 | ||||||
$ | (5 | ) | $ | (5 | ) | |||
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RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
OPEB Plans:
Three Months Ended March 31, | ||||||||
(Unaudited, in millions) | 2019 | 2018 | ||||||
Interest cost | $ | 1 | $ | 1 | ||||
Amortization of actuarial gains | (1 | ) | (1 | ) | ||||
Amortization of prior service credits | (3 | ) | (3 | ) | ||||
Non-operating other postretirement benefit credits | (3 | ) | (3 | ) | ||||
Service cost | — | — | ||||||
$ | (3 | ) | $ | (3 | ) | |||
Defined contribution plans
Our expense for the defined contribution plans totaled $5 million for both the three months ended March 31, 2019 and 2018.
Note 9. Income Taxes
The income tax provision attributable to income before income taxes differs from the amounts computed by applying the U.S. federal statutory income tax rate of 21% for the three months ended March 31, 2019 and 2018, as a result of the following:
Three Months Ended March 31, | ||||||||
(Unaudited, in millions) | 2019 | 2018 | ||||||
Income before income taxes | $ | 63 | $ | 41 | ||||
Income tax provision: | ||||||||
Expected income tax provision | (13 | ) | (9 | ) | ||||
Changes resulting from: | ||||||||
Valuation allowance (1) | (7 | ) | (5 | ) | ||||
Foreign exchange | 3 | (7 | ) | |||||
U.S. tax on non-U.S. earnings (2) | — | (7 | ) | |||||
State income taxes, net of federal income tax benefit | 1 | 2 | ||||||
Foreign tax rate differences | (5 | ) | (5 | ) | ||||
$ | (21 | ) | $ | (31 | ) | |||
(1) | Relates to our U.S. operations. |
(2) | Reduced income tax benefits on U.S. losses for the three months ended March 31, 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 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 March 31, 2019, will not have a material adverse effect on our Consolidated Financial Statements.
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RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim 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 cases, including cases that were scheduled in March 2019, were settled without any material impact in our Consolidated Statement of Operations for the three months ended March 31, 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 softwood lumber products U.S. imports from our Canadian sawmills. 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 (or “NAFTA”) binational panel on appeal. Through March 31, 2019, our cash deposits totaled $91 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 softwood lumber products U.S. imports from our Canadian sawmills. 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 panel on appeal. Through March 31, 2019, our cash deposits totaled $26 million and, based on the 3.2% rate and our current operating parameters, could be as high as $15 million per year.
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, no 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 issuance of a final order of the Quebec Superior Court in Canada 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 to 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 of the fair value of their claims 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
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RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
connection with the proceedings, but we have accrued Cdn $14 million ($10 million, based on the exchange rate in effect on March 31, 2019) for the eventual payment of those claims. The hearing in this matter began in March 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 ($110 million, based on the exchange rate in effect on March 31, 2019), would have to be funded if we do not obtain the relief sought. The hearing in this matter could occur in 2019.
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 March 31, 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 $23 million recorded as of both March 31, 2019 and December 31, 2018, 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.
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RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
Note 11. 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 income” in our Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management. For the same reason, inventory write-downs related to closures, start-up costs, 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 months ended March 31, 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 | ||||||||||||||||||||||||
Sales | ||||||||||||||||||||||||||||||||
First three months | ||||||||||||||||||||||||||||||||
2019 | $ | 231 | $ | 39 | $ | 161 | $ | 212 | $ | 152 | $ | 795 | $ | — | $ | 795 | ||||||||||||||||
2018 | 257 | 22 | 209 | 198 | 188 | 874 | — | 874 | ||||||||||||||||||||||||
Depreciation and amortization | ||||||||||||||||||||||||||||||||
First three months | ||||||||||||||||||||||||||||||||
2019 | $ | 5 | $ | 5 | $ | 8 | $ | 7 | $ | 10 | $ | 35 | $ | 5 | $ | 40 | ||||||||||||||||
2018 | 7 | 1 | 8 | 16 | 12 | 44 | 9 | 53 | ||||||||||||||||||||||||
Operating income (loss) | ||||||||||||||||||||||||||||||||
First three months | ||||||||||||||||||||||||||||||||
2019 | $ | 42 | $ | (8 | ) | $ | 6 | $ | 28 | $ | 15 | $ | 83 | $ | (19 | ) | $ | 64 | ||||||||||||||
2018 | 33 | (1 | ) | 53 | (4 | ) | (7 | ) | 74 | (26 | ) | 48 | ||||||||||||||||||||
(1) | Inter-segment sales of $11 million and $10 million, which are transacted at cost, were excluded from market pulp sales for the three months ended March 31, 2019 and 2018, respectively. |
(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 $5 million and $8 million for the three months ended March 31, 2019 and 2018, respectively. |
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Notes to Unaudited Interim Consolidated Financial Statements
Note 12. 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 Income (Loss) for the three months ended March 31, 2019 and 2018, the Balance Sheets as of March 31, 2019 and December 31, 2018, and the Statements of Cash Flows for the three months ended March 31, 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 | ||||||||||||||||||||
For the Three Months Ended March 31, 2019 | ||||||||||||||||||||
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
Sales | $ | — | $ | 672 | $ | 597 | $ | (474 | ) | $ | 795 | |||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales, excluding depreciation, amortization and distribution costs | — | 648 | 371 | (465 | ) | 554 | ||||||||||||||
Depreciation and amortization | — | 10 | 30 | — | 40 | |||||||||||||||
Distribution costs | — | 26 | 79 | (5 | ) | 100 | ||||||||||||||
Selling, general and administrative expenses | 6 | 9 | 22 | — | 37 | |||||||||||||||
Operating (loss) income | (6 | ) | (21 | ) | 95 | (4 | ) | 64 | ||||||||||||
Interest expense | (17 | ) | (2 | ) | (4 | ) | 14 | (9 | ) | |||||||||||
Non-operating pension and other postretirement benefit credits | — | 3 | 9 | — | 12 | |||||||||||||||
Other (expense) income, net | (3 | ) | 17 | (4 | ) | (14 | ) | (4 | ) | |||||||||||
Equity in income of subsidiaries | 68 | 11 | — | (79 | ) | — | ||||||||||||||
Income before income taxes | 42 | 8 | 96 | (83 | ) | 63 | ||||||||||||||
Income tax provision | — | — | (22 | ) | 1 | (21 | ) | |||||||||||||
Net income including noncontrolling interests | 42 | 8 | 74 | (82 | ) | 42 | ||||||||||||||
Net income attributable to noncontrolling interests | — | — | — | — | — | |||||||||||||||
Net income attributable to Resolute Forest Products Inc. | $ | 42 | $ | 8 | $ | 74 | $ | (82 | ) | $ | 42 | |||||||||
Comprehensive income attributable to Resolute Forest Products Inc. | $ | 45 | $ | 6 | $ | 79 | $ | (85 | ) | $ | 45 | |||||||||
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RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||||||
For the Three Months Ended March 31, 2018 | ||||||||||||||||||||
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
Sales | $ | — | $ | 809 | $ | 592 | $ | (527 | ) | $ | 874 | |||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of sales, excluding depreciation, amortization and distribution costs | — | 771 | 366 | (523 | ) | 614 | ||||||||||||||
Depreciation and amortization | — | 20 | 33 | — | 53 | |||||||||||||||
Distribution costs | — | 39 | 79 | (2 | ) | 116 | ||||||||||||||
Selling, general and administrative expenses | 5 | 17 | 21 | — | 43 | |||||||||||||||
Operating (loss) income | (5 | ) | (38 | ) | 93 | (2 | ) | 48 | ||||||||||||
Interest expense | (23 | ) | (3 | ) | (3 | ) | 16 | (13 | ) | |||||||||||
Non-operating pension and other postretirement benefit credits | — | 4 | 9 | — | 13 | |||||||||||||||
Other income (expense), net | — | 14 | (5 | ) | (16 | ) | (7 | ) | ||||||||||||
Equity in income of subsidiaries | 38 | 21 | — | (59 | ) | — | ||||||||||||||
Income (loss) before income taxes | 10 | (2 | ) | 94 | (61 | ) | 41 | |||||||||||||
Income tax provision | — | — | (32 | ) | 1 | (31 | ) | |||||||||||||
Net income (loss) including noncontrolling interests | 10 | (2 | ) | 62 | (60 | ) | 10 | |||||||||||||
Net income attributable to noncontrolling interests | — | — | — | — | — | |||||||||||||||
Net income (loss) attributable to Resolute Forest Products Inc. | $ | 10 | $ | (2 | ) | $ | 62 | $ | (60 | ) | $ | 10 | ||||||||
Comprehensive income (loss) attributable to Resolute Forest Products Inc. | $ | 13 | $ | (5 | ) | $ | 68 | $ | (63 | ) | $ | 13 | ||||||||
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RESOLUTE FOREST PRODUCTS INC.
Notes to Unaudited Interim Consolidated Financial Statements
CONDENSED CONSOLIDATING BALANCE SHEET | ||||||||||||||||||||
As of March 31, 2019 | ||||||||||||||||||||
(Unaudited, in millions) | Parent | Guarantor Subsidiaries | Non-guarantor Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||
Assets | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 62 | $ | 7 | $ | — | $ | 69 | ||||||||||
Accounts receivable, net | 1 | 298 | 136 | — | 435 | |||||||||||||||
Accounts receivable from affiliates | — | 594 | 1,136 | (1,730 | ) | — | ||||||||||||||
Inventories, net | — | 212 | 361 | (17 | ) | 556 | ||||||||||||||
Note, advance and interest receivable from parent | — | 433 | — | (433 | ) | — | ||||||||||||||
Interest receivable from affiliate | — | 1 | — | |||||||||||||||||