RESOLUTE FOREST PRODUCTS INC. The following management's discussion and analysis is intended to help the reader understandResolute 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 ," "Resolute," "we," "our," "us" or the "Company," we meanResolute 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 ofResolute 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 the impact of the novel coronavirus (or, "COVID-19") pandemic and resulting economic conditions on our business, results of operations and market price of our securities, and to our: efforts and initiatives to reduce costs, increase revenues, improve 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; estimated capital expenditures; 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," "see," "anticipate," "continue," "attempt," "project," "progress," "build," "plan," "grow" and other terms with similar meaning indicating possible future events or potential impact on our business orResolute 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: the COVID-19 pandemic and resulting economic conditions; 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 wood manufacturing in theU.S. , and tissue production and sales, or divestitures or other strategic transactions or projects, including loss of synergies following business divestitures; uncertainty or changes in political or economic conditions in theU.S. ,Canada or other countries in which we sell our products, including the effects of pandemics; 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 or occupational health and safety issues; difficulties in our employee relations or in employee attraction or retention; disruptions to our supply chain, operations, or the delivery of our products, including due to public health epidemics; 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; changes relating to the London Interbank Offered Rate, which could impact our borrowings under our credit facilities; losses that are not covered by insurance; any shutdown of machines or facilities, restructuring of operations or sale of assets resulting in 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 theU.S. of the vast majority 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 endedDecember 31, 2019 , filed with theU.S. Securities and Exchange Commission (or, the "SEC") onMarch 2, 2020 (or, the 18
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"2019 Annual Report"), which have been heightened by the COVID-19 pandemic, including related governmental responses and economic impacts, market disruptions and changes in consumer habits, and which should be read in conjunction with the COVID-19 pandemic risk factor update further described in Part II, Item 1A, "Risk Factors," in this Form 10-Q. 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 theSEC 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. OVERVIEWResolute 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 theU.S. andCanada . We are the largest Canadian producer of wood products east of the Canadian Rockies, the largest producer of uncoated mechanical papers inNorth America , and a competitive pulp producer inNorth America . We are also a leading global producer of newsprint and 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 and cost-effective operations, including significant internal energy production from cogeneration and hydroelectric facilities, which support our value proposition; - control over fiber transformation chain from standing timber to end-product for the majority of our offering;
- nearly 100% of our products sourced from high-quality virgin fiber;
- harvesting rights for the majority of fiber needs in
- sophisticated logistics capabilities to meet demanding customer expectations.
• Solid balance sheet
- favorable pricing and flexibility under borrowing agreements
together with our liquidity levels support ability to weather
challenging market cycles and to execute our transformation
strategy;
- significant tax assets to defer cash income taxes and provide
synergies to execute this strategy; and
- 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;
- culture of accountability, encouraging transparency and
straightforwardness; and
- core identity tied to renewable resources we harvest in a truly
sustainable manner.
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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 2019 Annual Report. First Quarter Overview Impact of the COVID-19 pandemic While we continue to operate across all of our business segments, we've had to take a number of measures in the face of the dramatic reduction in economic activity due to the COVID-19 pandemic, such as reducing our operational footprint to demand levels consistent with essential needs, drawing on our credit facilities to keep higher levels of cash, reducing selling, general and administrative (or, "SG&A") expenses and suspending or deferring capital spending. Specifically, as of the end of the first quarter, we had reduced our operational footprint by temporarily idling paper machines representing in aggregate 23% of our run-rate capacity (equivalent of 22,000 metric tons per month in newsprint and 19,000 short tons per month in specialty papers) and sawmills representing in aggregate 15% of our run-rate capacity (equivalent of 25 million board feet per month). These decisions have led to workforce reductions and spending limitations or deferrals. The impact of the COVID-19 pandemic has not negatively affected our market pulp and tissue businesses, which continue to operate to capacity. During the quarter, we drew on our credit facilities to keep higher levels of immediately-available cash, closing the quarter with cash and cash equivalents of$116 million . Business acquisition OnFebruary 1, 2020 (or, the "Acquisition Date"), we acquired from Conifex Timber Inc. all of the equity securities and membership interests in certain of its subsidiaries, the business of which consists mainly in the operation of three sawmills and related assets inCross City (Florida ) and inGlenwood andEl Dorado (Arkansas ) (or, the "U.S. Sawmill Business"). TheU.S. Sawmill Business acquired produces construction-grade dimensional lumber and decking products from locally sourced southern yellow pine for distribution within theU.S. The fair value of the consideration, paid in cash at the Acquisition Date, for theU.S. Sawmill Business acquired was$175 million , subject to post-closing working capital adjustments. For more information, see Note 2, "Business Acquisition," to our Consolidated Financial Statements. Three months endedMarch 31, 2020 vs.March 31, 2019 Our operating loss was$8 million in the quarter, compared to operating income of$64 million in the first quarter of 2019. Excluding special items, we incurred an operating loss of$10 million , compared to operating income of$64 million in the year-ago period. Special items are described below. Our net loss in the quarter was$1 million , or$0.01 per share, compared to net income of$42 million , or$0.45 per diluted share, in the year-ago period. Our net loss in the quarter, excluding special items, was$29 million , or$0.33 per share, compared to net income of$30 million , or$0.32 per diluted share, in the year-ago period. Three Months EndedMarch 31, 2020 (Unaudited, in millions, except per share amounts) Operating Loss Net Loss EPS GAAP, as reported$ (8 ) $ (1 ) $ (0.01 ) Adjustments for special items: Closure costs, impairment and other related charges (2 ) (2 ) (0.02 ) Non-operating pension and other postretirement benefit credits - (15 ) (0.17 ) Other income, net - (28 ) (0.32 ) Income tax effect of special items - 17 0.19 Adjusted for special items (1)$ (10 ) $ (29 ) $ (0.33 ) 20
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Three Months EndedMarch 31, 2019 (Unaudited, in millions, except per share amounts) Operating Income Net Income EPS GAAP, as reported$ 64 $ 42 $ 0.45 Adjustments for special items: Non-operating pension and other postretirement benefit credits - (12 ) (0.13 ) Other expense, net - 4 0.04 Income tax effect of special items - (4 ) (0.04 ) Adjusted for special items (1)$ 64 $ 30 $ 0.32
(1)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
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RESULTS OF OPERATIONS
Consolidated Results
Selected financial information
Three Months Ended
March 31,
(Unaudited, in millions, except per share amounts) 2020 2019
Sales $ 689 $ 795
Operating (loss) income per segment:
Market pulp $ (3 ) $ 42
Tissue 2 (8 )
Wood products 5 6
Newsprint (6 ) 28
Specialty papers 3 15
Segment total 1 83
Corporate and other (9 ) (19 )
Operating (loss) income $ (8 ) $ 64
Net (loss) income attributable to
$ (1 ) $ 42 Net (loss) income per common share attributable toResolute Forest Products Inc. common shareholders: Basic$ (0.01 ) $ 0.45 Diluted$ (0.01 ) $ 0.45 Adjusted EBITDA (1)$ 32 $ 104 March 31, December 31, (Unaudited, in millions) 2020 2019 Cash and cash equivalents$ 116 $ 3 Total assets$ 3,859 $ 3,626 (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 interest 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 closure costs, impairment and other related charges, non-operating pension and OPEB costs and credits, and other income and expense, net. 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 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. 22
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Three Months Ended
March 31,
(Unaudited, in millions) 2020 2019
Net (loss) income including noncontrolling interest $ (1 ) $ 42
Interest expense 9 9
Income tax provision 27 21
Depreciation and amortization 42 40
EBITDA 77 112
Closure costs, impairment and other related charges (2 ) -
Non-operating pension and other postretirement benefit credits (15 ) (12 ) Other (income) expense, net
(28 ) 4
Adjusted EBITDA $ 32 $ 104
Three months ended March 31, 2020 vs. March 31, 2019
Operating (loss) income variance analysis
[[Image Removed: consobridge.jpg]]
Sales
Sales decreased by $106 million compared to the year-ago period, to $689
million . After removing the sales related to the acquisition of the U.S. Sawmill
Business in the first quarter of 2020, sales declined by $122 million . Lower
volume reduced sales by $10 million , reflecting lower shipments in newsprint and
wood products from our Canadian sawmills, partly offset by higher shipments of
market pulp and tissue. Pricing had an unfavorable impact of $112 million ,
mainly as a result of a drop in the average transaction price for market pulp,
newsprint, and specialty papers, down by 28%, 20%, and 11%, respectively.
Cost of sales, excluding depreciation, amortization and distribution costs
Cost of sales, excluding depreciation, amortization and distribution costs (or,
"COS") improved by $30 million in the quarter. After removing the COS related to
the acquisition of the U.S. Sawmill Business, the Canadian dollar fluctuation,
and the effect of lower volume, COS decreased by $38 million , largely
reflecting:
• favorable maintenance costs ($16 million ), as a result of reduced
spending, the timing of scheduled outages and the indefinite idling of our
Augusta (Georgia) mill in the fourth quarter of 2019;
• lower recycled fiber prices (
• a decrease in power and steam prices (
• lower labor expense (
of our Augusta mill;
partly offset by unfavorable chemical usage (
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Selling, general and administrative expenses SG&A expenses improved by$3 million in the first quarter of 2020 compared to the same period last year, mainly due to lower compensation expense. Net (loss) income variance analysis Non-operating pension and other postretirement benefit credits We recorded non-operating pension and OPEB credits of$15 million in the first quarter of 2020, compared to$12 million in the year-ago period. The difference mainly reflects: an OPEB curtailment credit related to the indefinite idling of our Augusta mill ($14 million ); and lower interest cost ($7 million ); partly offset by: higher amortization ($8 million ); lower expected return on plan assets ($7 million ); and a pension special termination benefit cost related to the indefinite idling of our Augusta mill ($3 million ). Other income (expense), net We recorded other income, net of$28 million in the first quarter of 2020, compared to other expense, net of$4 million in the year-ago period. The difference mostly reflects, in the current period, foreign exchange gain of$23 million , compared to foreign exchange loss of$4 million in the year-ago period. Income taxes We recorded an income tax provision of$27 million in the quarter, on income before income taxes of$26 million , compared to an expected income tax provision of$5 million based on theU.S. federal statutory income tax rate of 21%. The difference mainly reflects: foreign exchange items ($12 million ); and an increase to our valuation allowance related to ourU.S. operations ($9 million ) where we recognize a valuation allowance against virtually all of our net deferred income tax assets. In the first quarter of 2019, we recorded an income tax provision of$21 million , on income before income taxes of$63 million , compared to an expected income tax provision of$13 million based on theU.S. federal statutory income tax rate of 21%. The difference mainly reflects: an increase to our valuation allowance related to ourU.S. operations ($7 million ); and foreign tax rate differences ($5 million ); partly offset by foreign exchange items ($3 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; 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 expenses are allocated to our segments, with the exception of certain discretionary charges and credits, which we present under "corporate and other." 24
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MARKET PULP
Highlights
Three Months Ended
March 31,
(Unaudited, in millions, except where otherwise stated) 2020 2019
Sales $ 177 $ 231
Operating (loss) income (1) $ (3 ) $ 42
EBITDA (2) $ 3 $ 47
(In thousands of metric tons)
Shipments 303 286
Downtime - 8
March 31,(Unaudited, in thousands of metric tons) 2020 2019 Finished goods inventory
69 78
(1) Net (loss) income including noncontrolling interest 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
March 31,
(Unaudited, in millions) 2020 2019
Net (loss) income including noncontrolling interest $ (3 ) $ 42
Depreciation and amortization 6 5
EBITDA $ 3 $ 47
Industry trends
[[Image Removed: pulptrends.jpg]]
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World demand for chemical pulp grew by 7.0% in the first two months of 2020, reflecting an increase inChina of 16.9%, whileNorth America was down by 7.5%, andWestern Europe was essentially flat. World capacity grew by 1.3% over the same period. World demand for softwood pulp remained essentially flat, with shipments toChina up by 3.0%, whileWestern Europe andNorth America were down by 6.8% and 2.3%, respectively. The operating rate was 92%. In the same period, world demand for hardwood pulp rose by 13.3%, with shipments toChina andWestern Europe up by 29.9% and 7.8%, respectively, whileNorth America was down by 16.0%. The operating rate was 78%. Three months endedMarch 31, 2020 vs.March 31, 2019 Operating (loss) income variance analysis [[Image Removed: pulpbridge.jpg]] Sales Sales were$54 million lower, or 23%, to$177 million in the first quarter of the year. Sales volume was$13 million higher, mainly due to the timing of a scheduled outage in the year-ago period. Pricing also reduced sales by$67 million , reflecting a decline in the average transaction price of$223 per metric ton due to softer global pulp markets compared to the cyclical peak in the year-ago period. Cost of sales, excluding depreciation, amortization and distribution costs After adjusting for the effect of higher volume and the Canadian dollar fluctuation, manufacturing costs improved by$18 million , reflecting: • lower recycled fiber prices ($8 million );
• favorable maintenance costs (
scheduled outages;
• a decrease in wood fiber costs (
• lower power and steam prices (
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TISSUE
Highlights
Three Months Ended
March 31,
(Unaudited, in millions, except where otherwise stated) 2020 2019
Sales $ 49 $ 39
Operating income (loss) (1) $ 2 $ (8 )
EBITDA (2) $ 6 $ (3 )
(In thousands of short tons)
Shipments (3) 28 24
Downtime - 1
March 31,(Unaudited, in thousands of short tons) 2020 2019 Finished goods inventory (3)
5 7
(1) Net income (loss) including noncontrolling interest 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.
(3) Tissue converted products, which are measured in cases, are converted to
short tons.
Three Months Ended
March 31,
(Unaudited, in millions) 2020 2019
Net income (loss) including noncontrolling interest $ 2 $ (8 )
Depreciation and amortization 4 5
EBITDA $ 6 $ (3 )
Industry trends
[[Image Removed: tissuetrends.jpg]]
Total U.S. tissue consumption grew by 3.2% in the first quarter of 2020 compared
to the year-ago period. Converted product shipments increased by 11.2%, led by
at-home shipments, up by 14.4%, while away-from-home shipments increased by
4.5%.
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U.S. parent roll production rose by 4.2% in the first quarter, contributing to a 94% average industry production-to-capacity ratio, up from 92% in the year-ago period. Three months endedMarch 31, 2020 vs.March 31, 2019 Operating income (loss) variance analysis [[Image Removed: tissuebridge.jpg]] Sales Sales were$10 million higher, or 26%, to$49 million in the first quarter of the year. Shipments rose by 4,000 short tons, largely due to higher demand for at-home end-uses in the unfolding COVID-19 pandemic. The average transaction price was$94 per short ton higher, due to favorable product and customer mix 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, our manufacturing costs improved by$3 million compared to the year-ago period, mainly due to favorable wood fiber costs. 28
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WOOD PRODUCTS
Highlights
Three Months Ended
March 31,
(Unaudited, in millions, except where otherwise stated) 2020 2019
Sales $ 174 $ 161
Operating income (1) $ 5 $ 6
EBITDA (2) $ 16 $ 14
(In millions board feet)
Shipments (3) 443 428
Downtime 95 41
March 31,(Unaudited, in millions board feet) 2020 2019 Finished goods inventory (3) 148 159
(1) Net income including noncontrolling interest 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.
(3) Includes wood pellets measured by mass, converted to board feet using a
density-based conversion ratio.
Three Months Ended
March 31,
(Unaudited, in millions) 2020 2019
Net income including noncontrolling interest $ 5 $ 6
Depreciation and amortization 11 8
EBITDA $ 16 $ 14
Industry trends
[[Image Removed: woodtrends.jpg]]
Average U.S. housing starts were 1.5 million on a seasonally-adjusted basis in
the first quarter of 2020, up by 20.9% from the same period last year, which
reflects an 11.3% increase in single-family starts, and a 44.6% increase in
multi-family starts.
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The 2x4 - Random Length (or, "RL") #1-2 Kiln Dried (or, "KD")Great Lakes (or, "GL") price rose by 9.8% in the first quarter compared to the year-ago period, while the 2x4x8 Stud KD GL price increased by 14.2%. The 2x4 - RL #2 KD Southern Pine (Westside) price fell by 7.1%, while the 2x4 - RL #2 KD Southern Pine (Eastside) price was down by 6.9%. Three months endedMarch 31, 2020 vs.March 31, 2019 Operating income variance analysis [[Image Removed: woodbridge.jpg]] Sales Sales were$13 million higher, or 8%, to$174 million in the first quarter of the year, primarily due to the capacity addition from the acquisition of theU.S. Sawmill Business in the first quarter of 2020. After removing the sales related to this acquisition, sales volume was$10 million lower, mainly due to a continuation of market downtime from the fourth quarter of 2019 during the gradual recovery inU.S. housing starts, as well as lack of transportation availability resulting from rail blockades inCanada and the economic fallout of the unfolding COVID-19 pandemic. Pricing contributed to a$7 million increase in sales, reflecting a rise in the average transaction price of$18 per thousand board feet due to an improvement inU.S. housing starts. Cost of sales, excluding depreciation, amortization and distribution costs After adjusting for the effect of lower volume, the COS related to the acquisition of theU.S. Sawmill Business, and the Canadian dollar fluctuation, manufacturing costs increased by$6 million , mainly reflecting higher wood fiber, labor and maintenance costs. Depreciation and amortization Depreciation and amortization increased by$3 million compared to the year-ago period, including the acquisition of theU.S. Sawmill Business. 30
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NEWSPRINT
Highlights
Three Months Ended
March 31,
(Unaudited, in millions, except where otherwise stated) 2020 2019
Sales $ 155 $ 212
Operating (loss) income (1) $ (6 ) $ 28
EBITDA (2) $ - $ 35
(In thousands of metric tons)
Shipments 305 335
Downtime 18 1
March 31,(Unaudited, in thousands of metric tons) 2020 2019 Finished goods inventory
105 135
(1) Net (loss) income including noncontrolling interest 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
March 31,
(Unaudited, in millions) 2020 2019
Net (loss) income including noncontrolling interest $ (6 ) $ 28
Depreciation and amortization 6 7
EBITDA $ - $ 35
Industry trends
[[Image Removed: newstrends.jpg]]
North American newsprint demand fell by 12.2% in the first quarter of the year
compared to the same period last year. Demand from newspaper publishers fell by
14.5%, while demand from commercial printers also decreased, by 8.2%. The North
American shipment-to-capacity ratio was 86%, compared to 84% in the year-ago
period.
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Global demand for newsprint fell by 12.1% in the first quarter of 2020, withWestern Europe down by 14.3%, andAsia down by 11.5%. Accordingly, the global operating rate decreased to 79%, down from 85% in the year-ago period. Three months endedMarch 31, 2020 vs.March 31, 2019 Operating (loss) income variance analysis [[Image Removed: newsbridge.jpg]] Sales Newsprint sales fell by$57 million , or 27%, to$155 million in the first quarter of the year. Shipments decreased by 30,000 metric tons, largely reflecting ongoing structural demand decline. The average transaction price declined by$127 per metric ton due to weaker market fundamentals, mostly in export markets. Cost of sales, excluding depreciation, amortization and distribution costs Manufacturing costs improved by$11 million after adjusting for the effect of lower volume and the Canadian dollar fluctuation, reflecting: • favorable maintenance costs ($8 million ), due to the indefinite idling of our Augusta mill in the fourth quarter of 2019, as well as reduced spending; and • lower labor costs ($4 million ), primarily due to the indefinite idling of our Augusta mill;
partly offset by an increase in wood fiber costs (
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SPECIALTY PAPERS
Highlights
Three Months Ended
March 31,
(Unaudited, in millions, except where otherwise stated) 2020 2019
Sales $ 134 $ 152
Operating income (1) $ 3 $ 15
EBITDA (2) $ 14 $ 25
(In thousands of short tons)
Shipments 195 199
Downtime 4 12
March 31,(Unaudited, in thousands of short tons) 2020 2019 Finished goods inventory
49 54
(1) Net income including noncontrolling interest 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
March 31,
(Unaudited, in millions) 2020 2019
Net income including noncontrolling interest $ 3 $ 15
Depreciation and amortization 11 10
EBITDA $ 14 $ 25
Industry trends
[[Image Removed: specialtytrends.jpg]]
North American demand for uncoated mechanical papers contracted by 14.2% in the
first quarter of 2020, compared to the year-ago period, reflecting a 20.4% drop
in supercalendered grades, and an 8.0% decrease in standard grades. Compared to
the first quarter of 2019, the shipment-to-capacity ratio for all uncoated
mechanical papers was unchanged at 84%.
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Three months endedMarch 31, 2020 vs.March 31, 2019 Operating income variance analysis [[Image Removed: specialtybridge.jpg]] Sales Specialty paper sales decreased by$18 million , or 12%, to$134 million in the first quarter of the year. The average transaction price fell by$81 per short ton compared to the same period last year, and shipments also decreased by 4,000 short tons, reflecting weaker market conditions. Cost of sales, excluding depreciation, amortization and distribution costs After removing the effect of lower volume and the Canadian dollar fluctuation, manufacturing costs improved by$6 million , mainly due to: favorable maintenance costs ($4 million ), largely due to the timing of scheduled outages; and lower power and steam costs ($4 million ). 34
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Corporate and Other
Highlights
Three Months Ended
March 31,
(Unaudited, in millions) 2020 2019Cost of sales, excluding depreciation, amortization and distribution costs
$ (2 ) $ (7 ) Depreciation and amortization (4 ) (5 ) Selling, general and administrative expenses (5 ) (7 ) Closure costs, impairment and other related charges 2 - Operating loss (9 ) (19 ) Interest expense (9 ) (9 )
Non-operating pension and other postretirement benefit credits
15 12
Other income (expense), net 28 (4 )
Income tax provision (27 ) (21 )
Net loss including noncontrolling interest $ (2 ) $ (41 ) The table below shows the reconciliation of net loss including noncontrolling interest 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
March 31,
(Unaudited, in millions) 2020 2019
Net loss including noncontrolling interest $ (2 ) $ (41 )
Interest expense 9 9
Income tax provision 27 21
Depreciation and amortization 4 5
EBITDA 38 (6 )
Closure costs, impairment and other related charges (2 ) -
Non-operating pension and other postretirement benefit credits (15 ) (12 )
Other (income) expense, net (28 ) 4
Adjusted EBITDA $ (7 ) $ (14 )
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LIQUIDITY AND CAPITAL RESOURCES Capital Resources We rely on cash and cash equivalents, cash flows provided by operations, and our 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 ofMarch 31, 2020 , we had cash and cash equivalents of$116 million and availability of$233 million under our 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 repay or refinance our outstanding indebtedness, including under the 5.875% senior unsecured notes due 2023 (or, the "2023 Notes") and credit facilities, as we continue to focus on reducing costs and enhancing our flexibility. Credit rating risk OnMarch 18, 2020 ,Standard & Poor's revised: • our senior unsecured debt rating from B+ to B;
• our long-term corporate credit rating from BB- to B+; and
• our outlook from stable to negative.
On
• our corporate family rating from Ba3 to B1;
• our outlook from stable to negative; and
• our liquidity rating from SGL-1 to SGL-2.
Although our debt agreements do not include any provision that would require material changes in payment schedules or terminations as a result of a credit rating downgrade, we believe our access to capital markets at a reasonable cost is determined in part by credit quality. A credit rating downgrade could impact our ability to access capital markets at a reasonable cost. These ratings reflect the views of the rating agencies only. An explanation of the significance of these ratings can be obtained from each rating agency. The ratings are not a recommendation to buy, sell or hold securities. Any rating can be revised upward or downward or withdrawn at any time by a rating agency. Flow of Funds Summary of cash flows A summary of cash flows for the three months endedMarch 31, 2020 and 2019, was as follows: Three Months Ended March 31, (Unaudited, in millions) 2020 2019
Net cash (used in) provided by operating activities
(206 ) (33 )
Net cash provided by (used in) financing activities 368 (225 )
Effect of exchange rate changes on cash and cash
equivalents, and restricted cash (3 ) 1
Net increase (decrease) in cash and cash equivalents, and
restricted cash $ 110 $ (234 )
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Three months endedMarch 31, 2020 vs.March 31, 2019 Net cash (used in) provided by operating activities We used$49 million of cash in operating activities in the first quarter of 2020, compared to$23 million of cash generated in the year-ago period, primarily due to lower profitability and an unfavorable working capital variance. Net cash used in investing activities We used$206 million of cash in investing activities in the current period, compared to$33 million in the year-ago period. The difference primarily reflects: the acquisition of theU.S. Sawmill Business, net of cash acquired, in the current period ($174 million ); and higher net countervailing and anti-dumping duty cash deposits ($8 million ); partly offset by lower capital expenditures ($5 million ). Net cash provided by (used in) financing activities Net cash provided by financing activities was$368 million in the first quarter of 2020, compared to net cash used in financing activities of$225 million in the year-ago period. The difference mostly reflects borrowings under our credit facilities in the current period ($369 million ), compared to the repurchase of$225 million in aggregate principal amount of our 2023 Notes in the year-ago period. In the current period, we drew$180 million in 10-year term loans under our existing senior secured credit facility (or, the "Senior Secured Credit Facility") to finance the acquisition of theU.S. Sawmill Business, and$189 million from existing revolving credit facilities to build an immediately-available cash cushion and to fund short-term working capital requirements. 2020 outlook To help manage liquidity in the months ahead, we are revising our expected capital expenditures for 2020 from$115 million to$90 million , including capital to be invested in the recently-acquiredU.S. Sawmill Business. Governments acrossNorth America have recognized the importance of the forest products sector in the fight against the COVID-19 pandemic. Resolute manufactures a number of key products, including: lumber for our infrastructure, now and in the economic recovery to come; pulp for producing personal care products, food protective papers and medical supplies used by our healthcare professionals on the front lines; bath tissue and paper towels to meet our basic needs for cleanliness and comfort; and newsprint and other papers, helping keep us all informed, the world over. As we navigate these highly uncertain times, our short-term priorities will be focused on: • operating our assets in accordance with rigorous protocols around health and safety, including the special measures we've put in place to minimize the spread of the virus at all of our locations; • closely managing sources of liquidity and developing opportunities to access additional liquidity, should it be required; • working with all levels of government in the regions where we operate to support a speedy economic recovery; • closely monitoring the growing risk around credit exposure with some of our customers; • advocating with regulators to minimize the risk of rising pension contributions should financial markets remain depressed and interest rates low;
• adjusting capacity dynamically based on rapidly-changing conditions; and
• keeping tight control on SG&A expenses and reducing capital spending.
Employee Benefit Plans Newly enactedU.S. legislation, the Coronavirus Aid, Relief and Economic Security Act, allows plan sponsors to delay contributions due during 2020 untilJanuary 1, 2021 . Accordingly, we expect to postpone the remaining$34 million in contributions toU.S. pension plans. Share Repurchase Program OnMarch 2, 2020 , our board of directors authorized a share repurchase program of up to 15% of our common stock, for aggregate consideration of up to$100 million . 37
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SUPPLEMENTAL OBLIGOR GROUP INFORMATION The following information is presented in accordance with Rule 13-01 of Regulation S-X adopted in 2020, and the public information requirements of Rule 144 promulgated pursuant to the Securities Act of 1933, as amended, in connection to the 2023 Notes issued byResolute Forest Products Inc. (or, the "Issuer") and fully guaranteed, on a joint and several basis, by all of our existing and subsequently acquired or organized direct or indirect wholly-ownedU.S. subsidiaries that guarantee the ABL Credit Facility as further defined below (or, the "Guarantor Subsidiaries") (together, the "Obligor Group "). The 2023 Notes are not guaranteed by our foreign subsidiaries (or, the "Non-Guarantor Subsidiaries"). The following summarized financial information of theObligor Group is presented on a combined basis, with all intercompany transactions between the Issuer and the Guarantor Subsidiaries eliminated and excluding any earnings from and investments in the Non-Guarantor Subsidiaries. Financial information of the Non-Guarantor Subsidiaries is not included. Summarized financial information for the three months endedMarch 31, 2020 and year endedDecember 31, 2019 , was as follows: Three Months Ended (Unaudited, in millions) March 31, 2020 Year Ended December 31, 2019 Sales (1)$ 578 $ 2,379 Operating loss$ (38 ) $ (203 ) Net loss$ (38 ) $ (207 ) (1) Includes$13 million and$76 million of sales to the Non-Guarantor Subsidiaries for the three months endedMarch 31, 2020 and year endedDecember 31, 2019 , respectively.
Summarized financial information as of
December 31, 2019
Total current assets (1) $ 501 $ 414
Total long-term assets (2) $ 900 $ 833
Total current liabilities (3) $ 752 $ 913
Total long-term liabilities $ 1,235 $ 872
(1) Includes
Subsidiaries as of
(2) Includes a note receivable of
Subsidiaries as of
(3) Includes accounts payable to the Non-Guarantor Subsidiaries of
million and
respectively.
The 2023 Notes are unsecured and effectively junior to indebtedness under both the senior secured asset-based revolving credit facility (or, "ABL Credit Facility") and the Senior Secured Credit Facility, and to future secured indebtedness. In addition, the 2023 Notes are structurally subordinated to all existing and future liabilities of our Non-Guarantor Subsidiaries.
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RESOLUTE FOREST PRODUCTS INC.
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