Quarterly Report (10-q)

Date : 08/09/2019 @ 8:42PM
Source : Edgar (US Regulatory)
Stock : Resolute Forest Products Inc (RFP)
Quote : 4.07  -0.04 (-0.97%) @ 10:15PM
After Hours
Last Trade
Last $ 4.07 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
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)

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.
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 July 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
 
 
Page
Number
PART I. FINANCIAL INFORMATION
 
 
 
 
 
Item 1. Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
Item 5. 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
 
2018
 
 
 
2019
 
 
2018
 
 
Sales
$
755

 
$
976

 
 
$
1,550

 
$
1,850

 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales, excluding depreciation, amortization and distribution costs
 
536

 
 
639

 
 
 
1,090

 
 
1,253

 
Depreciation and amortization
 
42

 
 
54

 
 
 
82

 
 
107

 
Distribution costs
 
101

 
 
123

 
 
 
201

 
 
239

 
Selling, general and administrative expenses
 
36

 
 
42

 
 
 
73

 
 
85

 
Closure costs, impairment and other related charges
 

 
 
1

 
 
 

 
 
1

 
Net gain on disposition of assets
 

 
 
(4
)
 
 
 

 
 
(4
)
 
Operating income
 
40

 
 
121

 
 
 
104

 
 
169

 
Interest expense
 
(7
)
 
 
(11
)
 
 
 
(16
)
 
 
(24
)
 
Non-operating pension and other postretirement benefit credits
 
12

 
 
12

 
 
 
24

 
 
25

 
Other expense, net
 
(1
)
 
 
(3
)
 
 
 
(5
)
 
 
(10
)
 
Income before income taxes
 
44

 
 
119

 

 
107

 
 
160

 
Income tax provision
 
(19
)
 
 
(47
)
 
 
 
(40
)
 
 
(78
)
 
Net income including noncontrolling interests
 
25

 
 
72

 
 
 
67

 
 
82

 
Net income attributable to noncontrolling interests
 

 
 

 
 
 

 
 

 
Net income attributable to Resolute Forest Products Inc.
$
25

 
$
72

 
 
$
67

 
$
82

 
Net income per share attributable to Resolute Forest Products Inc. common shareholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.79

 
 
$
0.73

 
$
0.90

 
Diluted
 
0.27

 
 
0.77

 
 
 
0.71

 
 
0.88

 
Weighted-average number of Resolute Forest Products Inc. common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
92.4

 
 
91.3

 
 
 
92.4

 
 
91.2

 
Diluted
 
93.6

 
 
93.2

 
 
 
93.8

 
 
93.1

 
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
 
2018
 
 
 
2019
 
 
2018
 
 
Net income including noncontrolling interests
$
25

 
$
72

 
 
$
67

 
$
82

 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unamortized prior service credits
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in unamortized prior service credits
 
(4
)
 
 
(4
)
 
 
 
(7
)
 
 
(8
)
 
Income tax provision
 

 
 

 
 
 

 
 

 
Change in unamortized prior service credits, net of tax
 
(4
)
 
 
(4
)
 
 
 
(7
)
 
 
(8
)
 
Unamortized actuarial losses
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in unamortized actuarial losses
 
3

 
 
9

 
 
 
11

 
 
18

 
Income tax provision
 

 
 
(2
)
 
 
 
(2
)
 
 
(4
)
 
Change in unamortized actuarial losses, net of tax
 
3

 
 
7

 
 
 
9

 
 
14

 
Other comprehensive (loss) income, net of tax
 
(1
)
 
 
3

 
 
 
2

 
 
6

 
Comprehensive income including noncontrolling interests
 
24

 
 
75

 
 
 
69

 
 
88

 
Comprehensive income attributable to noncontrolling interests
 

 
 

 
 
 

 
 

 
Comprehensive income attributable to Resolute Forest Products Inc.
$
24

 
$
75

 
 
$
69

 
$
88

 
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)

 
June 30,
2019
December 31,
2018
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
$
98

 
$
304

 
Accounts receivable, net:
 
 
 
 
 
 
Trade
 
333

 
 
347

 
Other
 
67

 
 
102

 
Inventories, net
 
530

 
 
508

 
Other current assets
 
42

 
 
43

 
Total current assets
 
1,070

 
 
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

 
Deferred income tax assets
 
869

 
 
876

 
Operating lease right-of-use assets
 
63

 
 

 
Other assets
 
221

 
 
190

 
Total assets
$
3,752

 
$
3,935

 
Liabilities and equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
376

 
$
427

 
Current portion of long-term debt
 
1

 
 
223

 
Current portion of operating lease liabilities
 
8

 
 

 
Total current liabilities
 
385

 
 
650

 
Long-term debt, net of current portion
 
422

 
 
422

 
Pension and other postretirement benefit obligations
 
1,231

 
 
1,257

 
Operating lease liabilities, net of current portion
 
59

 
 

 
Other liabilities
 
55

 
 
71

 
Total liabilities
 
2,152

 
 
2,400

 
Commitments and contingencies
 

 
 

 
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
 

 
 

 
Additional paid-in capital
 
3,803

 
 
3,802

 
Deficit
 
(1,131
)
 
 
(1,198
)
 
Accumulated other comprehensive loss
 
(948
)
 
 
(950
)
 
Treasury stock at cost, 28.7 shares and 28.0 shares as of June 30, 2019 and December 31, 2018, respectively
 
(125
)
 
 
(120
)
 
Total Resolute Forest Products Inc. shareholders’ equity
 
1,599

 
 
1,534

 
Noncontrolling interests
 
1

 
 
1

 
Total equity
 
1,600

 
 
1,535

 
Total liabilities and equity
$
3,752

 
$
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 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

 
 
Six 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 December 31, 2018
$

 
$
3,802

 
$
(1,198
)
 
$
(950
)
 
$
(120
)
 
$
1

 
$
1,535

 
Share-based compensation, net of withholding taxes
 

 
 
1

 
 

 
 

 
 

 
 

 
 
1

 
Net income
 

 
 

 
 
67

 
 

 
 

 
 

 
 
67

 
Purchases of treasury stock (0.7 shares) (Note 11)
 

 
 

 
 

 
 

 
 
(5
)
 
 

 
 
(5
)
 
Stock unit awards vested (0.3 shares), net of shares forfeited for employee withholding taxes
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Other comprehensive income, net of tax
 

 
 

 
 

 
 
2

 
 

 
 

 
 
2

 
Balance as of June 30, 2019
$

 
$
3,803

 
$
(1,131
)
 
$
(948
)
 
$
(125
)
 
$
1

 
$
1,600

 

4


 
Three Months Ended June 30, 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 March 31, 2018
$

 
$
3,796

 
$
(1,284
)
 
$
(777
)
 
$
(120
)
 
$
1

 
$
1,616

 
Share-based compensation, net of withholding taxes
 

 
 
1

 
 

 
 

 
 

 
 

 
 
1

 
Net income
 

 
 

 
 
72

 
 

 
 

 
 

 
 
72

 
Other comprehensive income, net of tax
 

 
 

 
 

 
 
3

 
 

 
 

 
 
3

 
Balance as of June 30, 2018
$

 
$
3,797

 
$
(1,212
)
 
$
(774
)
 
$
(120
)
 
$
1

 
$
1,692

 
 
Six Months Ended June 30, 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
 

 
 
4

 
 

 
 

 
 

 
 

 
 
4

 
Net income
 

 
 

 
 
82

 
 

 
 

 
 

 
 
82

 
Stock unit awards vested (0.1 shares), net of shares forfeited for employee withholding taxes
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Other comprehensive income, net of tax
 

 
 

 
 

 
 
6

 
 

 
 

 
 
6

 
Balance as of June 30, 2018
$

 
$
3,797

 
$
(1,212
)
 
$
(774
)
 
$
(120
)
 
$
1

 
$
1,692

 
See accompanying notes to unaudited interim Consolidated Financial Statements.

5


RESOLUTE FOREST PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions of U.S. dollars)

 
Six Months Ended 
 June 30,
 
2019
 
 
2018
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income including noncontrolling interests
$
67

 
$
82

 
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
 
 
 
 
 
 
Share-based compensation
 
3

 
 
5

 
Depreciation and amortization
 
82

 
 
107

 
Reversal of inventory write-downs related to closures
 

 
 
(1
)
 
Deferred income taxes
 
40

 
 
75

 
Net pension contributions and other postretirement benefit payments
 
(57
)
 
 
(70
)
 
Net gain on disposition of assets
 

 
 
(4
)
 
(Gain) loss on translation of foreign currency denominated deferred income taxes
 
(35
)
 
 
44

 
Loss (gain) on translation of foreign currency denominated pension and other postretirement benefit obligations
 
37

 
 
(36
)
 
Net planned major maintenance amortization (payments)
 
7

 
 
(3
)
 
Changes in working capital:
 
 
 
 
 
 
Accounts receivable
 
38

 
 
17

 
Inventories
 
(21
)
 
 
(20
)
 
Other current assets
 
(3
)
 
 
(1
)
 
Accounts payable and accrued liabilities
 
(64
)
 
 
18

 
Other, net
 
1

 
 
7

 
Net cash provided by operating activities
 
95

 
 
220

 
Cash flows from investing activities:
 
 
 
 
 
 
Cash invested in fixed assets
 
(45
)
 
 
(53
)
 
Disposition of assets
 
2

 
 
2

 
Decrease (increase) in countervailing duty cash deposits on supercalendered paper
 
1

 
 
(11
)
 
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber
 
(33
)
 
 
(41
)
 
Decrease (increase) in countervailing duty cash deposits on uncoated groundwood paper
 
6

 
 
(6
)
 
Net cash used in investing activities
 
(69
)
 
 
(109
)
 
Cash flows from financing activities:
 
 
 
 
 
 
Net repayments under revolving credit facilities
 

 
 
(114
)
 
Payments of debt
 
(225
)
 
 

 
Purchases of treasury stock
 
(5
)
 
 

 
Payments of financing and credit facility fees
 
(2
)
 
 
(1
)
 
Cash used in financing activities
 
(232
)
 
 
(115
)
 
Effect of exchange rate changes on cash and cash equivalents, and restricted cash
 
1

 
 
(2
)
 
Net decrease in cash and cash equivalents, and restricted cash
 
(205
)
 
 
(6
)
 
Cash and cash equivalents, and restricted cash:
 
 
 
 
 
 
Beginning of period
 
345

 
 
49

 
End of period
$
140

 
$
43

 
Cash and cash equivalents, and restricted cash at period end:
 
 
 
 
 
 
Cash and cash equivalents
$
98

 
$
6

 
Restricted cash (included in “Other current assets” and “Other assets”)
 
42

 
 
37

 
See accompanying notes to unaudited interim Consolidated Financial Statements.

6


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 June 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 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

7


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 six months ended June 30, 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
)
 
Other comprehensive loss before reclassifications
 

 
 
(3
)
 
 

 
 
(3
)
 
Amounts reclassified from accumulated other comprehensive loss (1)
 
(7
)
 
 
12

 
 

 
 
5

 
Net current period other comprehensive (loss) income
 
(7
)
 
 
9

 
 

 
 
2

 
Balance as of June 30, 2019
$
21

 
$
(962
)
 
$
(7
)
 
$
(948
)
 

(1)  
See the table below for details about these reclassifications.
The reclassifications out of accumulated other comprehensive loss for the six months ended June 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
Unamortized Prior Service Credits
 
 
 
 
Amortization of prior service credits
$
(6
)
 
Non-operating pension and other postretirement benefit credits (1)
Curtailment gain
 
(1
)
 
Non-operating pension and other postretirement benefit credits (1)
 
 

 
Income tax provision
 
$
(7
)
 
Net of tax
Unamortized Actuarial Losses
 
 
 
 
Amortization of actuarial losses
$
15

 
Non-operating pension and other postretirement benefit credits (1)
 
 
(3
)
 
Income tax provision
 
$
12

 
Net of tax
Total Reclassifications
$
5

 
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 .”

8


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 and six months ended June 30, 2019 and 2018 , was as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Unaudited, in millions, except per share amounts)
2019
 
 
2018
 
 
 
2019
 
 
2018
 
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Resolute Forest Products Inc.
$
25

 
$
72

 
 
$
67

 
$
82

 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic weighted-average number of Resolute Forest Products Inc. common shares outstanding
 
92.4

 
 
91.3

 
 
 
92.4

 
 
91.2

 
Dilutive impact of nonvested stock unit awards (1)
 
1.2

 
 
1.9

 
 
 
1.4

 
 
1.9

 
Diluted weighted-average number of Resolute Forest Products Inc. common shares outstanding
 
93.6

 
 
93.2

 
 
 
93.8

 
 
93.1

 
Net income per share attributable to Resolute Forest Products Inc. common shareholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.79

 
 
$
0.73

 
$
0.90

 
Diluted
 
0.27

 
 
0.77

 
 
 
0.71

 
 
0.88

 

(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 1.0 million and 1.3 million for the three months ended June 30, 2019 and 2018 , respectively, and 1.0 million and 1.3 million for the six months ended June 30, 2019 and 2018 , respectively.
Note 4. Inventories, Net
Inventories, net as of June 30, 2019 and December 31, 2018 , were comprised of the following:
(Unaudited, in millions)
June 30,
2019
December 31,
2018
Raw materials
$
102

 
$
106

 
Work in process
 
41

 
 
39

 
Finished goods
 
194

 
 
180

 
Mill stores and other supplies
 
193

 
 
183

 
 
$
530

 
$
508

 


9


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 six months ended June 30, 2019 , were as follows:
(Unaudited, in millions)
Three Months Ended 
 June 30, 2019
 
Six Months Ended 
 June 30, 2019
Operating lease cost
$
3

 
 
$
6

 
Variable lease cost (1)
 
4

 
 
 
10

 
(1)  
Variable lease cost is determined by the consumption of the underlying asset.
Supplemental information related to operating leases was as follows:
(Unaudited)
June 30,
2019
Weighted-average remaining operating lease term (in years)
 
11.4

 
Weighted-average operating lease discount rate
 
4.7
%
 

(Unaudited, in millions)
Six Months Ended 
 June 30, 2019
Operating cash flow payments for operating lease liabilities
$
5

 
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
 
2

 

The maturities of operating lease liabilities as of June 30, 2019 , were as follows:
(Unaudited, in millions)
Operating Leases
Years ending December 31,
 
 
 
2019
$
5

 
2020
 
11

 
2021
 
9

 
2022
 
9

 
2023
 
7

 
2024 and thereafter
 
46

 
Total lease payments
 
87

 
Less: imputed interest
 
(20
)
 
Total operating lease liabilities
$
67

 


10


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 June 30, 2019 and December 31, 2018 , were comprised of the following:
(Unaudited, in millions)
June 30,
2019
December 31,
2018
Trade accounts payable
$
270

 
$
299

 
Accrued compensation
 
49

 
 
66

 
Accrued interest
 
3

 
 
5

 
Pension and other postretirement benefit obligations
 
17

 
 
17

 
Accrued provision for former Fibrek Inc. dissenting shareholders
 
11

 
 

 
Income and other taxes payable
 
4

 
 
4

 
Deposits
 
10

 
 
20

 
Other
 
12

 
 
16

 
 
$
376

 
$
427

 

Note 7. Long-Term Debt
Overview
Long-term debt, including current portion, as of June 30, 2019 and December 31, 2018 , was comprised of the following:
(Unaudited, in millions)
June 30,
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 (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

11


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 six months ended June 30, 2019.
The fair value of the 2023 Notes (Level 1) was $379 million and $598 million as of June 30, 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 (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, 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 June 30, 2019 and December 31, 2018 .
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 $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 “a gent ”). 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.

12


RESOLUTE FOREST PRODUCTS INC.
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 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 June 30, 2019 , we had $353 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 and six months ended June 30, 2019 and 2018 , were as follows:
Pension Plans:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Unaudited, in millions)
2019
 
 
2018
 
 
 
2019
 
 
2018
 
 
Interest cost
$
45

 
$
48

 
 
$
90

 
$
96

 
Expected return on plan assets
 
(61
)
 
 
(67
)
 
 
 
(124
)
 
 
(134
)
 
Amortization of actuarial losses
 
9

 
 
10

 
 
 
18

 
 
20

 
Amortization of prior service credits
 
(1
)
 
 

 
 
 
(1
)
 
 
(1
)
 
Non-operating pension credits
 
(8
)
 
 
(9
)
 
 
 
(17
)
 
 
(19
)
 
Service cost
 
3

 
 
4

 
 
 
7

 
 
9

 
Net periodic benefit credits before special events
 
(5
)
 
 
(5
)
 
 
 
(10
)
 
 
(10
)
 
Curtailment and settlement (gain) loss
 
(1
)
 
 
1

 
 
 
(1
)
 
 
1

 
 
$
(6
)
 
$
(4
)
 
 
$
(11
)
 
$
(9
)
 

13


RESOLUTE FOREST PRODUCTS INC.
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 million and $5 million for the three months ended June 30, 2019 and 2018, respectively, and $9 million and $10 million for the six months ended June 30, 2019 and 2018, respectively.
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 and six months ended June 30, 2019 and 2018 , as a result of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(Unaudited, in millions)
2019
 
 
2018
 
 
 
2019
 
 
2018
 
 
Income before income taxes
$
44

 
$
119

 
 
$
107

 
$
160

 
Income tax provision:
 
 
 
 
 
 
 
 
 
 
 
 
 
Expected income tax provision
 
(9
)
 
 
(25
)
 
 
 
(22
)
 
 
(34
)
 
Changes resulting from:
 
 
 
 
 
 
 
 
 
 
 
 
 
Valuation allowance (1)
 
(4
)
 
 
13

 
 
 
(11
)
 
 
8

 
Foreign exchange
 
1

 
 
(7
)
 
 
 
4

 
 
(14
)
 
U.S. tax on non-U.S. earnings (2)
 
(5
)