Resolute Forest Products Inc. - Quarter Report: 2019 September (Form 10-Q)

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 SEPTEMBER 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
Common Stock, par value $0.001 per share	RFP	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 October 31, 2019, there were 89,293,752 shares of Resolute Forest Products Inc. common stock, $0.001 par value, outstanding.

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RESOLUTE FOREST PRODUCTS INC.

TABLE OF CONTENTS



	Page Number
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	1

Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2019 and 2018	2

Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	3

Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2019 and 2018	4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	6

Notes to Unaudited Interim Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3. Quantitative and Qualitative Disclosures About Market Risk	55

Item 4. Controls and Procedures	55

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	56

Item 1A. Risk Factors	56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 6. Exhibits	57

SIGNATURES	58

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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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Sales	$	705		$	974		$	2,255		$	2,824
Costs and expenses:
Cost of sales, excluding depreciation, amortization and distribution costs		558			628			1,648			1,881
Depreciation and amortization		42			54			124			161
Distribution costs		94			117			295			356
Selling, general and administrative expenses		30			40			103			125
Closure costs, impairment and other related charges		—			—			—			1
Net gain on disposition of assets		(1	)		—			(1	)		(4	)
Operating (loss) income		(18	)		135			86			304
Interest expense		(8	)		(12	)		(24	)		(36	)
Non-operating pension and other postretirement benefit credits		12			13			36			38
Other (expense) income, net		(17	)		14			(22	)		4
(Loss) income before income taxes		(31	)		150			76			310
Income tax provision		(12	)		(33	)		(52	)		(111	)
Net (loss) income including noncontrolling interests		(43	)		117			24			199
Net income attributable to noncontrolling interests		—			—			—			—
Net (loss) income attributable to Resolute Forest Products Inc.	$	(43	)	$	117		$	24		$	199
Net (loss) income per share attributable to Resolute Forest Products Inc. common shareholders:
Basic	$	(0.47	)	$	1.28		$	0.26		$	2.18
Diluted		(0.47	)		1.25			0.26			2.14
Weighted-average number of Resolute Forest Products Inc. common shares outstanding:
Basic		90.9			91.3			91.9			91.3
Diluted		90.9			93.4			93.0			93.2

See accompanying notes to unaudited interim Consolidated Financial Statements.

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RESOLUTE FOREST PRODUCTS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited, in millions of U.S. dollars)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net (loss) income including noncontrolling interests	$	(43	)	$	117		$	24		$	199
Other comprehensive income:
Unamortized prior service credits
Change in unamortized prior service credits		(2	)		(9	)		(9	)		(17	)
Income tax provision		—			—			—			—
Change in unamortized prior service credits, net of tax		(2	)		(9	)		(9	)		(17	)
Unamortized actuarial losses
Change in unamortized actuarial losses		6			11			17			29
Income tax provision		(2	)		(2	)		(4	)		(6	)
Change in unamortized actuarial losses, net of tax		4			9			13			23
Other comprehensive income, net of tax		2			—			4			6
Comprehensive (loss) income including noncontrolling interests		(41	)		117			28			205
Comprehensive income attributable to noncontrolling interests		—			—			—			—
Comprehensive (loss) income attributable to Resolute Forest Products Inc.	$	(41	)	$	117		$	28		$	205

See accompanying notes to unaudited interim Consolidated Financial Statements.

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RESOLUTE FOREST PRODUCTS INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in millions of U.S. dollars, except per share amount)



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	69		$	304
Accounts receivable, net:
Trade		314			347
Other		63			102
Inventories, net		522			508
Other current assets		40			43
Total current assets		1,008			1,304
Fixed assets, less accumulated depreciation of $1,611 and $1,498 as of September 30, 2019 and December 31, 2018, respectively		1,477			1,515
Amortizable intangible assets, less accumulated amortization of $26 and $24 as of September 30, 2019 and December 31, 2018, respectively		49			50
Deferred income tax assets		846			876
Operating lease right-of-use assets		63			—
Other assets		228			190
Total assets	$	3,671		$	3,935
Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities	$	396		$	427
Current portion of long-term debt		1			223
Current portion of operating lease liabilities		8			—
Total current liabilities		405			650
Long-term debt, net of current portion		423			422
Pension and other postretirement benefit obligations		1,179			1,257
Operating lease liabilities, net of current portion		58			—
Other liabilities		54			71
Total liabilities		2,119			2,400
Commitments and contingencies
Equity:
Resolute Forest Products Inc. shareholders’ equity:
Common stock, $0.001 par value. 119.1 shares issued and 89.3 shares outstanding as of September 30, 2019; 118.8 shares issued and 90.8 shares outstanding as of December 31, 2018		—			—
Additional paid-in capital		3,803			3,802
Deficit		(1,174	)		(1,198	)
Accumulated other comprehensive loss		(946	)		(950	)
Treasury stock at cost, 29.8 shares and 28.0 shares as of September 30, 2019 and December 31, 2018, respectively		(132	)		(120	)
Total Resolute Forest Products Inc. shareholders’ equity		1,551			1,534
Noncontrolling interests		1			1
Total equity		1,552			1,535
Total liabilities and equity	$	3,671		$	3,935

See accompanying notes to unaudited interim Consolidated Financial Statements.

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RESOLUTE FOREST PRODUCTS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited, in millions of U.S. dollars)



	Three Months Ended September 30, 2019
	Resolute Forest Products Inc. Shareholders’ Equity
	Common Stock		Additional Paid-In Capital		Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Non-controlling Interests		Total Equity
Balance as of June 30, 2019	$	—	$	3,803	$	(1,131	)	$	(948	)	$	(125	)	$	1	$	1,600
Net loss		—		—		(43	)		—			—			—		(43	)
Purchases of treasury stock (1.1 shares) (Note 11)		—		—		—			—			(7	)		—		(7	)
Other comprehensive income, net of tax		—		—		—			2			—			—		2
Balance as of September 30, 2019	$	—	$	3,803	$	(1,174	)	$	(946	)	$	(132	)	$	1	$	1,552



	Nine Months Ended September 30, 2019
	Resolute Forest Products Inc. Shareholders’ Equity
	Common Stock		Additional Paid-In Capital		Deficit			Accumulated Other Comprehensive Loss			Treasury Stock			Non-controlling Interests		Total Equity
Balance as of December 31, 2018	$	—	$	3,802	$	(1,198	)	$	(950	)	$	(120	)	$	1	$	1,535
Share-based compensation, net of withholding taxes		—		1		—			—			—			—		1
Net income		—		—		24			—			—			—		24
Purchases of treasury stock (1.8 shares) (Note 11)		—		—		—			—			(12	)		—		(12	)
Stock unit awards vested (0.3 shares), net of shares forfeited for employee withholding taxes		—		—		—			—			—			—		—
Other comprehensive income, net of tax		—		—		—			4			—			—		4
Balance as of September 30, 2019	$	—	$	3,803	$	(1,174	)	$	(946	)	$	(132	)	$	1	$	1,552

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	Three Months Ended September 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 June 30, 2018	$	—	$	3,797	$	(1,212	)	$	(774	)	$	(120	)	$	1	$	1,692
Share-based compensation, net of withholding taxes		—		1		—			—			—			—		1
Net income		—		—		117			—			—			—		117
Other comprehensive income, net of tax		—		—		—			—			—			—		—
Balance as of September 30, 2018	$	—	$	3,798	$	(1,095	)	$	(774	)	$	(120	)	$	1	$	1,810



	Nine Months Ended September 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		—		5		—			—			—			—		5
Net income		—		—		199			—			—			—		199
Stock unit awards vested (0.1 shares), net of shares forfeited for employee withholding taxes		—		—		—			—			—			—		—
Other comprehensive income, net of tax		—		—		—			6			—			—		6
Balance as of September 30, 2018	$	—	$	3,798	$	(1,095	)	$	(774	)	$	(120	)	$	1	$	1,810

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)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income including noncontrolling interests	$	24		$	199
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Share-based compensation		4			6
Depreciation and amortization		124			161
Reversal of inventory write-downs related to closures		—			(1	)
Deferred income taxes		52			106
Net pension contributions and other postretirement benefit payments		(96	)		(112	)
Net gain on disposition of assets		(1	)		(4	)
(Gain) loss on translation of foreign currency denominated deferred income taxes		(26	)		28
Loss (gain) on translation of foreign currency denominated pension and other postretirement benefit obligations		27			(23	)
Net planned major maintenance amortization (payments)		16			(7	)
Changes in working capital:
Accounts receivable		60			(6	)
Inventories		(14	)		(53	)
Other current assets		(11	)		(13	)
Accounts payable and accrued liabilities		(41	)		61
Other, net		2			9
Net cash provided by operating activities		120			351
Cash flows from investing activities:
Cash invested in fixed assets		(82	)		(94	)
Disposition of assets		2			2
Decrease in countervailing duty cash deposits on supercalendered paper, net		1			13
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber		(46	)		(62	)
Decrease (increase) in countervailing duty cash deposits on uncoated groundwood paper		6			(6	)
Net cash used in investing activities		(119	)		(147	)
Cash flows from financing activities:
Net repayments under revolving credit facilities		—			(144	)
Payments of debt		(225	)		—
Purchases of treasury stock		(12	)		—
Payments of financing and credit facility fees		(2	)		(1	)
Cash used in financing activities		(239	)		(145	)
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		(237	)		58
Cash and cash equivalents, and restricted cash:
Beginning of period		345			49
End of period	$	108		$	107
Cash and cash equivalents, and restricted cash at period end:
Cash and cash equivalents	$	69		$	72
Restricted cash (included in “Other current assets” and “Other assets”)		39			35

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 September 30, 2019, are not necessarily indicative of the results to be expected for the full year. These unaudited interim Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019. Certain prior period amounts in the accompanying notes to our Consolidated Financial Statements have been reclassified to conform to the 2019 presentation.

New accounting pronouncement adopted in 2019

ASU 2016-02 “Leases”

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 nine months ended September 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⁾		(9	)		16			—			7
Net current period other comprehensive (loss) income		(9	)		13			—			4
Balance as of September 30, 2019	$	19		$	(958	)	$	(7	)	$	(946	)


⁽¹⁾	See the table below for details about these reclassifications.

The reclassifications out of accumulated other comprehensive loss for the nine months ended September 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	$	(8	)	Non-operating pension and other postretirement benefit credits ⁽¹⁾
Curtailment gain		(1	)	Non-operating pension and other postretirement benefit credits ⁽¹⁾
		—		Income tax provision
	$	(9	)	Net of tax
Unamortized Actuarial Losses
Amortization of actuarial losses	$	21		Non-operating pension and other postretirement benefit credits ⁽¹⁾
		(5	)	Income tax provision
	$	16		Net of tax
Total Reclassifications	$	7		Net of tax


⁽¹⁾	These items are included in the computation of net periodic benefit credit related to our pension and other postretirement benefit (or “OPEB”) plans summarized in Note 8, “Employee Benefit Plans.”

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

Note 3. Net (Loss) Income Per Share

The reconciliation of the basic and diluted net (loss) income per share for the three and nine months ended September 30, 2019 and 2018, was as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
(Unaudited, in millions, except per share amounts)	2019			2018		2019		2018
Numerator:
Net (loss) income attributable to Resolute Forest Products Inc.	$	(43	)	$	117	$	24	$	199
Denominator:
Basic weighted-average number of Resolute Forest Products Inc. common shares outstanding		90.9			91.3		91.9		91.3
Dilutive impact of nonvested stock unit awards		—			2.1		1.1		1.9
Diluted weighted-average number of Resolute Forest Products Inc. common shares outstanding		90.9			93.4		93.0		93.2
Net (loss) income per share attributable to Resolute Forest Products Inc. common shareholders:
Basic	$	(0.47	)	$	1.28	$	0.26	$	2.18
Diluted		(0.47	)		1.25		0.26		2.14

The weighted-average number of outstanding stock options and nonvested equity-classified restricted stock units, deferred stock units and performance stock units (collectively, “stock unit awards”) that were excluded from the calculation of diluted net (loss) income per share, as their impact would have been antidilutive, for the nine months ended September 30, 2019 and 2018, was as follows:



	Three Months Ended September 30,		Nine Months Ended September 30,
(Unaudited, in millions)	2019	2018	2019	2018
Stock options	1.0	0.9	1.0	1.3
Stock unit awards	2.1	—	—	—

Note 4. Inventories, Net

Inventories, net as of September 30, 2019 and December 31, 2018, were comprised of the following:



(Unaudited, in millions)	September 30, 2019		December 31, 2018
Raw materials	$	117	$	106
Work in process		39		39
Finished goods		170		180
Mill stores and other supplies		196		183
	$	522	$	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 and nine months ended September 30, 2019, were as follows:



(Unaudited, in millions)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost	$	3	$	9
Variable lease cost ⁽¹⁾		5		15


⁽¹⁾	Variable lease cost is determined by the consumption of the underlying asset.

Supplemental information related to operating leases was as follows:



(Unaudited)	September 30, 2019
Weighted-average remaining operating lease term (in years)		11.2
Weighted-average operating lease discount rate		4.7	%



(Unaudited, in millions)	Nine Months Ended September 30, 2019
Operating cash flow payments for operating lease liabilities	$	8
Operating lease right-of-use assets obtained in exchange for operating lease liabilities		4

The maturities of operating lease liabilities as of September 30, 2019, were as follows:



(Unaudited, in millions)	Operating Leases
Years ending December 31,
2019	$	3
2020		11
2021		10
2022		9
2023		7
2024 and thereafter		45
Total lease payments		85
Less: imputed interest		(19	)
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 September 30, 2019 and December 31, 2018, were comprised of the following:



(Unaudited, in millions)	September 30, 2019		December 31, 2018
Trade accounts payable	$	269	$	299
Accrued compensation		49		66
Accrued interest		9		5
Pension and other postretirement benefit obligations		17		17
Accrued provision related to Fibrek Inc. dissenting shareholder litigation (Note 10)		33		—
Income and other taxes payable		3		4
Deposits		4		20
Other		12		16
	$	396	$	427

Note 7. Long-Term Debt

Overview

Long-term debt, including current portion, as of September 30, 2019 and December 31, 2018, was comprised of the following:



(Unaudited, in millions)	September 30, 2019			December 31, 2018
5.875% senior unsecured notes due 2023:
Principal amount	$	375		$	600
Deferred financing costs		(3	)		(5	)
Unamortized discount		(1	)		(3	)
Total 5.875% senior unsecured notes due 2023		371			592
Term loan due 2025		46			46
Finance lease obligation		7			7
Total debt		424			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	$	423		$	422

2023 Notes

We issued $600 million in aggregate principal amount of 5.875% senior unsecured notes due 2023 (or the “2023 Notes”) on May 8, 2013. Upon their issuance, the notes were recorded at their fair value of $594 million, which reflected a discount of $6 million that is being amortized to “Interest expense” in our Consolidated Statements of Operations using the interest method over the term of the notes, resulting in an effective interest rate of 6%. Interest on the notes is payable semi-annually beginning November 15, 2013, until their maturity date of May 15, 2023. In connection with the issuance of the notes, we incurred financing costs of $9 million, which were deferred and recorded as a reduction of the notes. Deferred financing costs are amortized to “Interest expense” in our Consolidated Statements of Operations using the interest method over the term of the notes.

On January 3, 2019 (or the “closing date”), we repurchased $225 million in aggregate principal amount of the 2023 Notes, pursuant to a notes purchase agreement entered into on December 21, 2018, with certain noteholders, at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the closing date. The aggregate principal amount and related deferred financing costs and unamortized discount were included in “Current portion of long-term debt” in our Consolidated Balance Sheet as of December 31, 2018. As a result of the repurchase, we recorded a net loss on

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Notes to Unaudited Interim Consolidated Financial Statements

extinguishment of debt of $3 million in “Other (expense) income, net” in our Consolidated Statement of Operations for the nine months ended September 30, 2019.

The fair value of the 2023 Notes (Level 1) was $375 million and $598 million as of September 30, 2019 and December 31, 2018, respectively.

Senior Secured Credit Facility

On September 7, 2016, we entered into a senior secured credit facility for up to $185 million. This senior secured credit facility provided a term loan of $46 million with a maturity date of September 7, 2025, and a revolving credit facility of up to $139 million with a maturity date of September 7, 2022. As of September 30, 2019, we had $139 million of availability under the revolving credit facility, which was undrawn. The fair value of the term loan (Level 2) approximated its carrying value as of both September 30, 2019 and December 31, 2018.

On October 28, 2019, we entered into an amended and restated senior secured credit facility (or the “Senior Secured Credit Facility”) for up to $360 million, replacing our existing $185 million senior secured credit facility. The Senior Secured Credit Facility provides a term loan facility of up to $180 million with a delayed draw period of up to three years, and the choice of maturities of six to ten years from the date of drawing (or the “Term Loan Facility”), and a six-year revolving credit facility of up to $180 million with a maturity date of October 28, 2025 (or the “Revolving Credit Facility”). There is also an uncommitted option to increase the Senior Secured Credit Facility by up to an additional $360 million, subject to certain terms and conditions. On October 28, 2019, we repaid our $46 million term loan by borrowing under the Revolving Credit Facility.

The obligations under the Senior Secured Credit Facility are guaranteed by certain material U.S. subsidiaries of the Company and are secured by a first priority mortgage on the real property of our Calhoun (Tennessee) facility and a first priority security interest on the fixtures and equipment located therein.

Interest rates under the Senior Secured Credit Facility are based, at the Company’s election, on either a floating rate based on the London Interbank Offered Rate (or the “LIBOR”), or a base rate, in each case plus a spread over the index. The Senior Secured Credit Facility also contains provisions for an expedited amendment procedure for replacing LIBOR if LIBOR quotes are no longer available. The base rate is the highest of (i) the prime rate; (ii) the federal funds rate plus 0.5%; and (iii) the one-month LIBOR plus 1%. The applicable spread over the index fluctuates quarterly based upon (a) the Company’s capitalization ratio, which is defined as the ratio of the Company’s funded indebtedness to the sum of the Company’s funded indebtedness and its adjusted net worth; and (b) in the case of the loans under the Term Loan Facility, the maturity date of such loans. For loans under the Term Loan Facility, the applicable spread ranges from 0.5% to 1.5% for base rate loans, and from 1.5% to 2.5% for LIBOR loans. For loans under the Revolving Credit Facility, the applicable spread ranges from 0.5% to 1.0% for base rate loans, and from 1.5% to 2.0% for LIBOR loans. The Senior Secured Credit Facility was issued by a syndicate of lenders within the farm credit system and is eligible for patronage refunds. Patronage refunds are distributions of profits from lenders in the farm credit system, which are cooperatives that are required to distribute profits to their members. Patronage distributions, which are made in either cash or stock, are received in the year after they were earned. Future refunds are dependent on future farm credit lender profits, made at the discretion of each farm credit lender.

In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we are required to pay a fee in respect of unutilized commitments based on the average daily utilization for the prior fiscal quarter ranging from 0.275% to 0.325% per annum under the Revolving Credit Facility and ranging from 0.25% to 0.40% for the Term Loan Facility during the delay draw period.

The outstanding principal balance of any term loan made under the Term Loan Facility is subject to annual payments of 5% of the initial principal amount of such term loan commencing on the fifth anniversary of each term loan’s draw date with the balance due six to ten years after the draw date based on the chosen maturity of each term loan. Loans under the Revolving Credit Facility and the Term Loan Facility may be prepaid from time to time at our discretion without premium or penalty but subject to breakage costs, if any, in the case of LIBOR loans. Amounts repaid on the Term Loan Facility may not be subsequently re-borrowed. Principal amounts under the Revolving Credit Facility may be drawn, repaid, and redrawn until October 27, 2025.

Pursuant to the Senior Secured Credit Facility, we are also required to maintain (i) a capitalization ratio not greater than 45% at all times; (ii) a collateral coverage ratio of not less than 1.8:1.0; and (iii) a springing consolidated fixed charge coverage ratio of 1.0:1.0, which is triggered only when adjusted availability under the ABL Credit Facility (as discussed and defined below) falls below the greater of $45 million or 10% of the maximum available borrowing amount under the ABL Credit Facility for two

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Notes to Unaudited Interim Consolidated Financial Statements

consecutive business days. The consolidated fixed charge coverage ratio is the ratio of (a) consolidated EBITDA less certain capital expenditures and less cash taxes paid, to (b) consolidated fixed charges, as determined under the Senior Secured Credit Facility.

In addition, the Senior Secured Credit Facility contains certain covenants applicable to the Company and its subsidiaries, including, among others: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence and repayment of indebtedness; (iii) restrictions on the existence or incurrence of liens; (iv) restrictions on the Company and certain of its subsidiaries making certain restricted payments; (v) restrictions on making certain investments; (vi) restrictions on certain mergers, consolidations, and asset dispositions; (vii) restrictions on transactions with affiliates; and (viii) restrictions on modifications to material indebtedness. The Senior Secured Credit Facility includes customary representations, warranties and events of default subject to customary grace periods and notice requirements.

ABL Credit Facility

The aggregate lender commitment under the facility includes a $60 million swingline sub-facility and a $200 million letter of credit sub-facility, and we may convert up to $50 million of the commitments under the facility to a first-in last-out facility (or “FILO Facility”), subject to the consent of each converting lender. The ABL Credit Facility also provides for an uncommitted ability to increase the revolving credit facility by up to $500 million, subject to certain terms and conditions set forth in the agreement.

Revolving loan (and letter of credit) availability under the facility is subject to a borrowing base, which at any time is equal to the sum of (i) 85% of eligible accounts receivable (or 90% with respect to certain insured or letter of credit backed accounts or with accounts owed by investment grade obligors), plus (ii) the lesser of (A) 70% of the lesser of the cost or market value of eligible inventory or (B) 85% of the net orderly liquidation value of eligible inventory, plus (iii) 100% of the value of eligible cash and 95% of the value of permitted investments held in deposit accounts controlled solely by the administrative and collateral agent (or the “agent”). The credit agreement includes reserves that reduce the borrowing base, including: (i) a reserve commencing March 16, 2023 for the outstanding principal amount due under the 2023 Notes; and (ii) a reserve for the outstanding principal amount due under the Senior Secured Credit Facility, commencing 60 days before its maturity. The borrowing base is subject to other customary reserves and eligibility criteria, in the exercise of the agent’s reasonable discretion.

The obligations under the credit agreement are guaranteed by certain material subsidiaries of the Company and are secured by first priority liens on and security interests in accounts receivable, inventory and related assets.

Loans under the credit agreement bear interest at a rate equal to a base rate, the 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.

The credit agreement contains customary covenants for asset-based credit agreements of this type, including, among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence and repayment of indebtedness by the Company and its subsidiaries; (iii) restrictions on the existence or incurrence of liens by the Company and its subsidiaries; (iv) restrictions on the Company and certain of its subsidiaries making certain restricted

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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 September 30, 2019, we had $358 million of availability under the ABL Credit Facility, which was undrawn except for $52 million of ordinary course letters of credit outstanding.

Finance lease obligation

We have a finance lease obligation for a warehouse with a maturity date of December 1, 2027, which can be renewed for 20 years at our option. Minimum monthly payments are determined by an escalatory price clause.

Note 8. Employee Benefit Plans

Pension and other postretirement benefit plans

The components of net periodic benefit credit relating to our pension and OPEB plans for the three and nine months ended September 30, 2019 and 2018, were as follows:

Pension Plans:



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018			2019			2018
Interest cost	$	45		$	46		$	135		$	142
Expected return on plan assets		(63	)		(65	)		(187	)		(199	)
Amortization of actuarial losses		8			9			26			29
Amortization of prior service credits		1			—			—			(1	)
Non-operating pension credits		(9	)		(10	)		(26	)		(29	)
Service cost		4			5			11			14
Net periodic benefit credits before special events		(5	)		(5	)		(15	)		(15	)
Curtailment and settlement (gain) loss		—			—			(1	)		1
	$	(5	)	$	(5	)	$	(16	)	$	(14	)

OPEB Plans:



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018			2019			2018
Interest cost	$	2		$	1		$	4		$	4
Amortization of actuarial gains		(2	)		—			(5	)		(3	)
Amortization of prior service credits		(3	)		(4	)		(8	)		(11	)
Non-operating other postretirement benefit credits		(3	)		(3	)		(9	)		(10	)
Service cost		—			—			—			1
	$	(3	)	$	(3	)	$	(9	)	$	(9	)

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Notes to Unaudited Interim Consolidated Financial Statements

Defined contribution plans

Our expense for the defined contribution plans totaled $5 million and $5 million for the three months ended September 30, 2019 and 2018, respectively, and $14 million and $15 million for the nine months ended September 30, 2019 and 2018, respectively.

Note 9. Income Taxes

The income tax provision attributable to (loss) income before income taxes differs from the amounts computed by applying the U.S. federal statutory income tax rate of 21% for the three and nine months ended September 30, 2019 and 2018, as a result of the following:



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018			2019			2018
(Loss) income before income taxes	$	(31	)	$	150		$	76		$	310
Income tax provision:
Expected income tax benefit (provision)		6			(31	)		(16	)		(65	)
Changes resulting from:
Valuation allowance ⁽¹⁾		(7	)		32			(18	)		40
Foreign exchange		(3	)		2			1			(12	)
U.S. tax on non-U.S. earnings ⁽²⁾		(6	)		(28	)		(11	)		(53	)
State income taxes, net of federal income tax benefit		3			(1	)		5			1
Foreign tax rate differences		(1	)		(7	)		(10	)		(19	)
Other, net		(4	)		—			(3	)		(3	)
	$	(12	)	$	(33	)	$	(52	)	$	(111	)


⁽¹⁾	Relates to our U.S. operations where we recognize a valuation allowance against virtually all of our net deferred income tax assets.


⁽²⁾	Reduces income tax benefits on U.S. losses for the three and nine months ended September 30, 2019 and 2018.

Note 10. Commitments and Contingencies

Legal matters

We become involved in various legal proceedings, claims and governmental inquiries, investigations, and other disputes in the normal course of business, including matters related to contracts, commercial and trade disputes, taxes, environmental issues, activist damages, employment and workers’ compensation claims, grievances, human rights complaints, pension and benefit plans and obligations, health and safety, product safety and liability, asbestos exposure, financial reporting and disclosure obligations, corporate governance, First Nations claims, antitrust, governmental regulations, and other matters. Although the final outcome is subject to many variables and cannot be predicted with any degree of certainty, we regularly assess the status of the matters and establish provisions (including legal costs expected to be incurred) when we believe an adverse outcome is 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 September 30, 2019, will not have a material adverse effect on our Consolidated Financial Statements.

Asbestos-related lawsuits

We are involved in a number of asbestos-related lawsuits filed primarily in U.S. state courts, including certain cases involving multiple defendants. These lawsuits principally allege direct or indirect personal injury or death resulting from exposure to asbestos-containing premises. While we dispute the plaintiffs’ allegations and intend to vigorously defend these claims, the ultimate resolution of these matters cannot be determined at this time. These lawsuits frequently involve claims for unspecified compensatory and punitive damages, and we are unable to reasonably estimate a range of possible losses. However, unfavorable rulings, judgments or settlement terms could materially impact our Consolidated Financial Statements. Certain

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cases, including cases that were scheduled in March 2019, were settled without any material impact in our Consolidated Statements of Operations for the three and nine months ended September 30, 2019.

Countervailing duty and anti-dumping investigations on softwood lumber

On November 25, 2016, countervailing duty and anti-dumping petitions were filed with the U.S. Department of Commerce (or “Commerce”) and the U.S. International Trade Commission (or “ITC”) by certain U.S. softwood lumber products producers and forest landowners, requesting that the U.S. government impose countervailing and anti-dumping duties on Canadian-origin softwood lumber products exported to the U.S. One of our subsidiaries was identified in the petitions as being a Canadian exporting producer of softwood lumber products to the U.S. and was selected as a mandatory respondent to be investigated by Commerce in both the countervailing duty and anti-dumping investigations.

On April 24, 2017, Commerce announced its preliminary determination in the countervailing duty investigation and, as a result, after April 28, 2017, we were required to pay cash deposits to the U.S. Customs and Border Protection agency (or “U.S. Customs”) at a rate of 12.82% for estimated countervailing duties on our U.S. imports of softwood lumber products produced at our Canadian sawmills. The preliminary rate remained in effect until August 26, 2017. Commerce changed the rate in its final affirmative determination on November 2, 2017, but the new rate did not take effect until December 28, 2017, following the ITC’s final affirmative determination and the publication by Commerce of a countervailing duty order. Since that date, we have been required to resume paying cash deposits to U.S. Customs at a rate of 14.7% for our U.S. imports of Canadian-produced softwood lumber products. This rate will continue until Commerce sets a duty rate in an administrative review, or a new rate may be set through a remand determination by a North American Free Trade Agreement binational panel (or “Panel”) on appeal. Through September 30, 2019, our cash deposits totaled $117 million and, based on the 14.7% rate and our current operating parameters, could be as high as $60 million per year.

On June 26, 2017, Commerce announced its preliminary determination in the anti-dumping investigation and, as a result, after June 30, 2017, we were required to pay cash deposits to 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 U.S. Customs, at a rate of 3.2% for our U.S. imports of Canadian-produced softwood lumber products. This rate will apply until Commerce sets a duty rate in an administrative review, or a new rate may be set through a remand determination by a Panel on appeal. Through September 30, 2019, our cash deposits totaled $32 million and, based on the 3.2% rate and our current operating parameters, could be as high as $15 million per year.

On April 1, 2019, Commerce published a notice initiating the administrative reviews of the countervailing duty and anti-dumping orders on softwood lumber products from Canada. We were selected as a mandatory respondent in these administrative reviews and we are in the process of responding to Commerce with the information requested.

On September 4, 2019, a Panel issued an interim decision upholding the affirmative final injury determinations of the ITC in both investigations of softwood lumber products from Canada. The Panel remanded the ITC to reconsider several findings and ordered the ITC to submit its redetermination on remand within 90 days from the date of the Panel interim decision.

We are not presently able to determine the ultimate resolution of these matters, but we believe it is not probable that we will ultimately be assessed with significant duties, if any, on our U.S. imports of Canadian-produced softwood lumber products. Accordingly, 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 by the Quebec Superior Court in Canada (or “Quebec Superior Court”) approving the arrangement on July 27, 2012. Certain former shareholders of Fibrek exercised 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. On September 26, 2019, the Quebec Superior Court rendered a decision fixing the fair value of the shares of the dissenting shareholders at Cdn $1.99 per share, or Cdn $31 million in aggregate, plus interest and an additional indemnity, for a total currently estimated at Cdn $44 million ($33 million, based on the exchange rate in effect on September 30, 2019) payable in cash. Of this amount, Cdn $19 million ($14 million) was payable immediately and paid on October 2, 2019. We are appealing the decision, therefore the payment of any additional consideration and its timing will depend on the outcome of the appeal. As previously reported,

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we had accrued Cdn $14 million ($10 million, based on the exchange rate in effect on September 30, 2019) for the payment of the dissenting shareholders’ claims. We have accrued an additional Cdn $30 million ($23 million, based on the exchange rate in effect on September 30, 2019) for the estimated eventual payment of any amounts following the outcome of the appeal, and as a result recorded $23 million in “Other (expense) income, net” in our Consolidated Statements of Operations for the three and nine months ended September 30, 2019.

Partial wind-ups of pension plans

On June 12, 2012, we filed a motion for directives with the Quebec Superior Court, the court with jurisdiction in the creditor protection proceedings under the Companies’ Creditors Arrangement Act (Canada) (or the “CCAA Creditor Protection Proceedings”), seeking an order to prevent pension regulators in each of Quebec, New Brunswick, and Newfoundland and Labrador from declaring partial wind-ups of pension plans relating to employees of former operations in New Brunswick, and Newfoundland and Labrador, or a declaration that any claim for accelerated reimbursements of deficits arising from a partial wind-up is a barred claim under the CCAA Creditor Protection Proceedings. We contend, among other things, that any such declaration, if issued, would be inconsistent with the Quebec Superior Court’s sanction order confirming the CCAA debtors’ CCAA Plan of Reorganization and Compromise, as amended, and the terms of our emergence from the CCAA Creditor Protection Proceedings. A partial wind-up would likely shorten the period in which any deficit within those plans, which could reach up to Cdn $150 million ($115 million, based on the exchange rate in effect on September 30, 2019), would have to be funded if we do not obtain the relief sought. The hearing in this matter could occur in 2020.

Environmental matters

We are subject to a variety of federal or national, state, provincial, and local environmental laws and regulations in the jurisdictions in which we operate. We believe our operations are in material compliance with current applicable environmental laws and regulations. Environmental regulations promulgated in the future could require substantial additional expenditures for compliance and could have a material impact on us, in particular, and the industry in general.

We may be a “potentially responsible party” with respect to a hazardous waste site that is being addressed pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (commonly known as Superfund). We believe we will not be liable for any significant amounts at this site.

We have environmental liabilities of $8 million recorded as of both September 30, 2019 and December 31, 2018, primarily related to environmental remediation related to closed sites. The amount of these liabilities represents management’s estimate of the ultimate settlement based on an assessment of relevant factors and assumptions and could be affected by changes in facts or assumptions not currently known to management for which the outcome cannot be reasonably estimated at this time. These liabilities are included in “Accounts payable and accrued liabilities” or “Other liabilities” in our Consolidated Balance Sheets.

We also have asset retirement obligations of $23 million recorded as of both September 30, 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.

Note 11. Share Capital

During the three and nine months ended September 30, 2019, we repurchased 1.1 million and 1.8 million shares, respectively, at a cost of $7 million and $12 million, respectively, under our $150 million share repurchase program, which was launched in 2012. We did not repurchase any shares during the three and nine months ended September 30, 2018. There remains $12 million under the program.

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Notes to Unaudited Interim Consolidated Financial Statements

Note 12. Segment Information

We manage our business based on the products we manufacture. Accordingly, our reportable segments correspond to our principal product lines: market pulp, tissue, wood products, newsprint, and specialty papers.

None of the income or loss items following “Operating (loss) income” in our Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by management. For the same reason, closure costs, impairment and other related charges, inventory write-downs related to closures, start-up costs, gains and losses on disposition of assets, as well as other discretionary charges or credits are not allocated to our segments. We allocate depreciation and amortization expense to our segments, although the related fixed assets and amortizable intangible assets are not allocated to segment assets. Additionally, all selling, general and administrative expenses are allocated to our segments, with the exception of certain discretionary charges and credits, which we present under “corporate and other.”

Information about certain segment data for the three and nine months ended September 30, 2019 and 2018, was as follows:



(Unaudited, in millions)	Market Pulp ⁽¹⁾			Tissue ⁽²⁾			Wood Products ⁽³⁾			Newsprint		Specialty Papers		Segment Total			Corporate and Other			Total
Sales
Third quarter
2019	$	201		$	43		$	146		$	180	$	135	$	705		$	—		$	705
2018		288			38			203			232		213		974			—			974
First nine months
2019		621			125			475			601		433		2,255			—			2,255
2018		809			95			666			660		594		2,824			—			2,824
Depreciation and amortization
Third quarter
2019	$	7		$	4		$	8		$	7	$	11	$	37		$	5		$	42
2018		7			5			8			16		12		48			6			54
First nine months
2019		17			13			25			22		32		109			15			124
2018		22			11			23			49		36		141			20			161
Operating (loss) income
Third quarter
2019	$	(12	)	$	(3	)	$	(4	)	$	4	$	4	$	(11	)	$	(7	)	$	(18	)
2018		57			(10	)		45			32		26		150			(15	)		135
First nine months
2019		57			(15	)		(1	)		49		34		124			(38	)		86
2018		131			(21	)		177			46		23		356			(52	)		304

⁽¹⁾

Inter-segment sales of $8 million and $10 million for the three months ended September 30, 2019 and 2018, respectively, and $30 million and $29 million for the nine months ended September 30, 2019 and 2018, were excluded from market pulp sales. Effective July 1, 2019, these sales were transacted either at the lowest market price of the previous month or cost. Previously these sales were transacted at cost. This change has no material impact on the segment presentation.


⁽²⁾	The operating results of our Calhoun tissue operations, previously recorded under “corporate and other,” have been recorded in our tissue segment since April 1, 2018.


⁽³⁾	Wood products sales to our joint ventures, which are transacted at arm’s length negotiated prices, were $6 million and $7 million for the three months ended September 30, 2019 and 2018, respectively, and $17 million and $23 million for the nine months ended September 30, 2019 and 2018, respectively.

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Note 13. Condensed Consolidating Financial Information

The following information is presented in accordance with Rule 3-10 of Regulation S-X and the public information requirements of Rule 144 promulgated pursuant to the Securities Act of 1933, as amended, in connection with Resolute Forest Products Inc.’s 2023 Notes that are fully and unconditionally guaranteed, on a joint and several basis, by all of our 100% owned material U.S. subsidiaries (or the “Guarantor Subsidiaries”). The 2023 Notes are not guaranteed by our foreign subsidiaries (or the “Non-guarantor Subsidiaries”).

The following condensed consolidating financial information sets forth the Statements of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2019 and 2018, the Balance Sheets as of September 30, 2019 and December 31, 2018, and the Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 for the Parent, the Guarantor Subsidiaries on a combined basis, and the Non-guarantor Subsidiaries also on a combined basis. The condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries and Non-guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-guarantor Subsidiaries, using the equity method of accounting. The principal consolidating adjustments are entries to eliminate the investments in subsidiaries and intercompany balances and transactions.



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
For the Three Months Ended September 30, 2019
(Unaudited, in millions)	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Sales	$	—		$	556		$	526		$	(377	)	$	705
Costs and expenses:
Cost of sales, excluding depreciation, amortization and distribution costs		—			562			378			(382	)		558
Depreciation and amortization		—			10			32			—			42
Distribution costs		—			23			69			2			94
Selling, general and administrative expenses		2			10			18			—			30
Net gain on disposition of assets		—			—			(1	)		—			(1	)
Operating (loss) income		(2	)		(49	)		30			3			(18	)
Interest expense		(15	)		(1	)		(3	)		11			(8	)
Non-operating pension and other postretirement benefit credits		—			4			8			—			12
Other income (expense), net		—			10			(16	)		(11	)		(17	)
Equity in loss of subsidiaries		(26	)		(14	)		—			40			—
(Loss) income before income taxes		(43	)		(50	)		19			43			(31	)
Income tax provision		—			—			(11	)		(1	)		(12	)
Net (loss) income including noncontrolling interests		(43	)		(50	)		8			42			(43	)
Net income attributable to noncontrolling interests		—			—			—			—			—
Net (loss) income attributable to Resolute Forest Products Inc.	$	(43	)	$	(50	)	$	8		$	42		$	(43	)
Comprehensive (loss) income attributable to Resolute Forest Products Inc.	$	(41	)	$	(53	)	$	13		$	40		$	(41	)

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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 Nine Months Ended September 30, 2019
(Unaudited, in millions)	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Sales	$	—		$	1,841		$	1,692		$	(1,278	)	$	2,255
Costs and expenses:
Cost of sales, excluding depreciation, amortization and distribution costs		—			1,809			1,120			(1,281	)		1,648
Depreciation and amortization		—			29			95			—			124
Distribution costs		—			72			224			(1	)		295
Selling, general and administrative expenses		12			34			57			—			103
Net gain on disposition of assets		—			—			(1	)		—			(1	)
Operating (loss) income		(12	)		(103	)		197			4			86
Interest expense		(49	)		(3	)		(9	)		37			(24	)
Non-operating pension and other postretirement benefit credits		—			9			27			—			36
Other (expense) income, net		(3	)		42			(24	)		(37	)		(22	)
Equity in income of subsidiaries		88			4			—			(92	)		—
Income (loss) before income taxes		24			(51	)		191			(88	)		76
Income tax provision		—			—			(51	)		(1	)		(52	)
Net income (loss) including noncontrolling interests		24			(51	)		140			(89	)		24
Net income attributable to noncontrolling interests		—			—			—			—			—
Net income (loss) attributable to Resolute Forest Products Inc.	$	24		$	(51	)	$	140		$	(89	)	$	24
Comprehensive income (loss) attributable to Resolute Forest Products Inc.	$	28		$	(59	)	$	152		$	(93	)	$	28

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2018
(Unaudited, in millions)	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Sales	$	—		$	808		$	609		$	(443	)	$	974
Costs and expenses:
Cost of sales, excluding depreciation, amortization and distribution costs		—			708			366			(446	)		628
Depreciation and amortization		—			20			34			—			54
Distribution costs		—			42			75			—			117
Selling, general and administrative expenses		6			17			17			—			40
Operating (loss) income		(6	)		21			117			3			135
Interest expense		(20	)		(2	)		(3	)		13			(12	)
Non-operating pension and other postretirement benefit credits		—			4			9			—			13
Other income, net		—			14			13			(13	)		14
Equity in income of subsidiaries		143			7			—			(150	)		—
Income before income taxes		117			44			136			(147	)		150
Income tax provision		—			—			(32	)		(1	)		(33	)
Net income including noncontrolling interests		117			44			104			(148	)		117
Net income attributable to noncontrolling interests		—			—			—			—			—
Net income attributable to Resolute Forest Products Inc.	$	117		$	44		$	104		$	(148	)	$	117
Comprehensive income attributable to Resolute Forest Products Inc.	$	117		$	38		$	110		$	(148	)	$	117

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2018
(Unaudited, in millions)	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Sales	$	—		$	2,348		$	1,875		$	(1,399	)	$	2,824
Costs and expenses:
Cost of sales, excluding depreciation, amortization and distribution costs		—			2,145			1,128			(1,392	)		1,881
Depreciation and amortization		—			61			100			—			161
Distribution costs		—			119			239			(2	)		356
Selling, general and administrative expenses		18			48			59			—			125
Closure costs, impairment and other related charges		—			—			1			—			1
Net gain on disposition of assets		—			—			(4	)		—			(4	)
Operating (loss) income		(18	)		(25	)		352			(5	)		304
Interest expense		(67	)		(6	)		(9	)		46			(36	)
Non-operating pension and other postretirement benefit credits		—			11			27			—			38
Other income, net		—			47			3			(46	)		4
Equity in income of subsidiaries		284			56			—			(340	)		—
Income before income taxes		199			83			373			(345	)		310
Income tax provision		—			—			(112	)		1			(111	)
Net income including noncontrolling interests		199			83			261			(344	)		199
Net income attributable to noncontrolling interests		—			—			—			—			—
Net income attributable to Resolute Forest Products Inc.	$	199		$	83		$	261		$	(344	)	$	199
Comprehensive income attributable to Resolute Forest Products Inc.	$	205		$	72		$	278		$	(350	)	$	205

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements



CONDENSED CONSOLIDATING BALANCE SHEET
As of September 30, 2019
(Unaudited, in millions)	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	64	$	5	$	—		$	69
Accounts receivable, net		1		243		133		—			377
Accounts receivable from affiliates		—		256		757		(1,013	)		—
Inventories, net		—		192		339		(9	)		522
Advance and interest receivable from parent		—		67		—		(67	)		—
Interest receivable from affiliate		—		1		—		(1	)		—
Other current assets		—		20		20		—			40
Total current assets		1		843		1,254		(1,090	)		1,008
Fixed assets, net		—		523		954		—			1,477
Amortizable intangible assets, net		—		3		46		—			49
Deferred income tax assets		—		1		843		2			846
Operating lease right-of-use assets		—		28		35		—			63
Notes receivable from parent		—		1,280		—		(1,280	)		—
Note receivable from affiliate		—		110		—		(110	)		—
Investments in consolidated subsidiaries and affiliates		3,851		2,069		—		(5,920	)		—
Other assets		—		172		56		—			228
Total assets	$	3,852	$	5,029	$	3,188	$	(8,398	)	$	3,671
Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities	$	13	$	119	$	264	$	—		$	396
Current portion of long-term debt		—		1		—		—			1
Current portion of operating lease liabilities		—		4		4		—			8
Accounts payable to affiliates		261		797		—		(1,058	)		—
Advance and interest payable to subsidiaries		67		—		—		(67	)		—
Interest payable to affiliate		—		—		1		(1	)		—
Total current liabilities		341		921		269		(1,126	)		405
Long-term debt, net of current portion		371		52		—		—			423
Notes payable to subsidiaries		1,280		—		—		(1,280	)		—
Note payable to affiliate		—		—		110		(110	)		—
Pension and other postretirement benefit obligations		—		318		861		—			1,179
Operating lease liabilities, net of current portion		—		26		32		—			58
Other liabilities		—		23		31		—			54
Total liabilities		1,992		1,340		1,303		(2,516	)		2,119
Total equity		1,860		3,689		1,885		(5,882	)		1,552
Total liabilities and equity	$	3,852	$	5,029	$	3,188	$	(8,398	)	$	3,671

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements



CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2018
(Unaudited, in millions)	Parent		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	301	$	3	$	—		$	304
Accounts receivable, net		—		301		148		—			449
Accounts receivable from affiliates		—		588		1,071		(1,659	)		—
Inventories, net		—		194		327		(13	)		508
Note, advance and interest receivable from parent		—		422		—		(422	)		—
Interest receivable from affiliate		—		4		—		(4	)		—
Other current assets		—		15		28		—			43
Total current assets		—		1,825		1,577		(2,098	)		1,304
Fixed assets, net		—		523		992		—			1,515
Amortizable intangible assets, net		—		2		48		—			50
Deferred income tax assets		—		1		872		3			876
Notes receivable from parent		—		657		—		(657	)		—
Note receivable from affiliate		—		107		—		(107	)		—
Investments in consolidated subsidiaries and affiliates		4,119		2,205		—		(6,324	)		—
Other assets		—		126		64		—			190
Total assets	$	4,119	$	5,446	$	3,553	$	(9,183	)	$	3,935
Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities	$	7	$	170	$	250	$	—		$	427
Current portion of long-term debt		222		1		—		—			223
Accounts payable to affiliates		592		1,112		—		(1,704	)		—
Note, advance and interest payable to subsidiaries		422		—		—		(422	)		—
Interest payable to affiliate		—		—		4		(4	)		—
Total current liabilities		1,243		1,283		254		(2,130	)		650
Long-term debt, net of current portion		370		52		—		—			422
Notes payable to subsidiaries		657		—		—		(657	)		—
Note payable to affiliate		—		—		107		(107	)		—
Pension and other postretirement benefit obligations		—		342		915		—			1,257
Other liabilities		6		21		44		—			71
Total liabilities		2,276		1,698		1,320		(2,894	)		2,400
Total equity		1,843		3,748		2,233		(6,289	)		1,535
Total liabilities and equity	$	4,119	$	5,446	$	3,553	$	(9,183	)	$	3,935

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2019
(Unaudited, in millions)	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by operating activities	$	—		$	64		$	56		$	—		$	120
Cash flows from investing activities:
Cash invested in fixed assets		—			(26	)		(56	)		—			(82	)
Disposition of assets		—			2			—			—			2
Decrease in countervailing duty cash deposits on supercalendered paper		—			1			—			—			1
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber		—			(46	)		—			—			(46	)
Decrease in countervailing duty cash deposits on uncoated groundwood paper		—			6			—			—			6
Increase in notes receivable from parent		—			(237	)		—			237			—
Net cash used in investing activities		—			(300	)		(56	)		237			(119	)
Cash flows from financing activities:
Payments of debt		(225	)		—			—			—			(225	)
Purchases of treasury stock		(12	)		—			—			—			(12	)
Payments of financing and credit facility fees		—			(1	)		(1	)		—			(2	)
Increase in notes payable to subsidiary		237			—			—			(237	)		—
Net cash used in financing activities		—			(1	)		(1	)		(237	)		(239	)
Effect of exchange rate changes on cash and cash equivalents, and restricted cash		—			—			1			—			1
Net decrease in cash and cash equivalents, and restricted cash		—			(237	)		—			—			(237	)
Cash and cash equivalents, and restricted cash:
Beginning of period		—			306			39			—			345
End of period	$	—		$	69		$	39		$	—		$	108
Cash and cash equivalents, and restricted cash at period end:
Cash and cash equivalents	$	—		$	64		$	5		$	—		$	69
Restricted cash		—			5			34			—			39

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2018
(Unaudited, in millions)	Parent			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net cash provided by operating activities	$	—		$	291		$	60		$	—		$	351
Cash flows from investing activities:
Cash invested in fixed assets		—			(31	)		(63	)		—			(94	)
Disposition of assets		—			—			2			—			2
Decrease in countervailing duty cash deposits on supercalendered paper, net		—			13			—			—			13
Increase in countervailing and anti-dumping duty cash deposits on softwood lumber		—			(62	)		—			—			(62	)
Increase in countervailing duty cash deposits on uncoated groundwood paper		—			(6	)		—			—			(6	)
Advance to parent		—			(1	)		—			1			—
Decrease in notes receivable from affiliate		—			1			—			(1	)		—
Net cash used in investing activities		—			(86	)		(61	)		—			(147	)
Cash flows from financing activities:
Net repayments under revolving credit facilities		—			(144	)		—			—			(144	)
Payments of financing and credit facility fees		(1	)		—			—			—			(1	)
Advance from subsidiary		1			—			—			(1	)		—
Decrease in notes payable to affiliate		—			—			(1	)		1			—
Net cash used in financing activities		—			(144	)		(1	)		—			(145	)
Effect of exchange rate changes on cash and cash equivalents, and restricted cash		—			—			(1	)		—			(1	)
Net increase (decrease) in cash and cash equivalents, and restricted cash		—			61			(3	)		—			58
Cash and cash equivalents, and restricted cash:
Beginning of period		—			3			46			—			49
End of period	$	—		$	64		$	43		$	—		$	107
Cash and cash equivalents, and restricted cash at period end:
Cash and cash equivalents	$	—		$	64		$	8		$	—		$	72
Restricted cash		—			—			35			—			35

Note 14. Subsequent Event

The following significant event occurred subsequent to September 30, 2019:


•	On October 28, 2019, we entered into an amended and restated Senior Secured Credit Facility for up $360 million, replacing our existing $185 million senior secured credit facility, as further discussed in Note 7. Long-Term Debt – Senior Secured Credit Facility.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis is intended to help the reader understand Resolute Forest Products, our results of operations, cash flows and financial condition. The discussion is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes (or the “Consolidated Financial Statements”) contained in Item 1 – Financial Statements of this Quarterly Report on Form 10-Q (or “Form 10-Q”).

When we refer to “Resolute Forest Products,” “we,” “our,” “us” or the “Company,” we mean Resolute Forest Products Inc. with its subsidiaries, either individually or collectively, unless otherwise indicated.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION AND USE OF THIRD-PARTY DATA

Statements in this Form 10-Q that are not reported financial results or other historical information of Resolute Forest Products are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. They include, for example, statements relating to our: efforts and initiatives to reduce costs and increase revenues and profitability; business and operating outlook; future pension obligations; assessment of market conditions; growth strategies and prospects, and the growth potential of the Company and the industry in which we operate; liquidity; future cash flows, including as a result of the changes to our pension funding obligations; and strategies for achieving our goals generally. Forward-looking statements may be identified by the use of forward-looking terminology such as the words “should,” “would,” “could,” “will,” “may,” “expect,” “believe,” “anticipate,” “attempt,” “project,” and other terms with similar meaning indicating possible future events or potential impact on our business or Resolute Forest Products’ shareholders.

The reader is cautioned not to place undue reliance on these forward-looking statements, which are not guarantees of future performance. These statements are based on management’s current assumptions, beliefs, and expectations, all of which involve a number of business risks and uncertainties that could cause actual results to differ materially. The potential risks and uncertainties that could cause our actual future financial condition, results of operations, and performance to differ materially from those expressed or implied in this Form 10-Q include, but are not limited to, the impact of: developments in non-print media, and the effectiveness of our responses to these developments; intense competition in the forest products industry; any inability to offer products certified to globally recognized forestry management and chain of custody standards; any inability to successfully implement our strategies to increase our earnings power; the possible failure to successfully integrate acquired businesses with ours or to realize the anticipated benefits of acquisitions, such as our entry into tissue production and sales, or divestitures or other strategic transactions or projects; uncertainty or changes in political or economic conditions in the United States, Canada or other countries in which we sell our products; global economic conditions; the highly cyclical nature of the forest products industry; any difficulties in obtaining timber or wood fiber at favorable prices, or at all; changes in the cost of purchased energy and other raw materials; physical and financial risks associated with global, regional, and local weather conditions, and climate change; any disruption in operations or increased labor costs due to labor disputes; difficulties in our employee relations or retention; disruptions to our supply chain, operations, or the delivery of our products; disruptions to our information technology systems including cybersecurity incidents; risks related to the operation and transition of legacy system applications; negative publicity, even if unjustified; currency fluctuations; any increase in the level of required contributions to our pension plans, including as a result of any increase in the amount by which they are underfunded; our ability to maintain adequate capital resources to provide for all of our substantial capital requirements; the terms of our outstanding indebtedness, which could restrict our current and future operations; losses that are not covered by insurance; any additional closure costs and long-lived asset impairment or accelerated depreciation charges; any need to record additional valuation allowances against our recorded deferred income tax assets; our exports from one country to another country becoming or remaining subject to duties, cash deposit requirements, border taxes, quotas, or other trade remedies or restrictions; countervailing and anti-dumping duties on imports to the U.S. of substantially all of our softwood lumber products produced at our Canadian sawmills; any failure to comply with laws or regulations generally; any additional environmental or health and safety liabilities; any violation of trade laws, export controls, or other laws relating to our international sales and operations; adverse outcomes of legal proceedings, claims and governmental inquiries, investigations, and other disputes in which we are involved; the actions of holders of a significant percentage of our common stock; and the potential risks and uncertainties set forth under Part I, Item 1A, “Risk Factors,” of our annual report on Form 10-K for the year ended December 31, 2018, filed with the U.S. Securities and Exchange Commission, or the “SEC”, on March 1, 2019 (or the “2018 Annual Report”).

All forward-looking statements in this Form 10-Q are expressly qualified by the cautionary statements contained or referred to in this section and in our other filings with the SEC and the Canadian securities regulatory authorities. We disclaim any obligation to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

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Market and industry data

The information on industry and general economic conditions in this Form 10-Q was derived from third-party sources and trade publications we believe to be widely accepted and accurate. We have not independently verified the information and cannot assure you of its accuracy.

OVERVIEW

Resolute Forest Products is a global leader in the forest products industry with a diverse range of products, including market pulp, tissue, wood products, newsprint and specialty papers, which are marketed in close to 70 countries. The Company owns or operates some 40 facilities, as well as power generation assets, in the U.S. and Canada. Our facilities are strategically located, providing us with the operational flexibility to develop the right products at the right sites, in favorable geographic locations, for a diversified customer base. We are the largest Canadian producer of wood products east of the Canadian Rockies, a leading global producer of newsprint and a competitive pulp producer in North America. By capacity, we are the largest producer of uncoated mechanical papers in North America. We are also an emerging tissue producer.

We report our activities in five business segments: market pulp, tissue, wood products, newsprint, and specialty papers. We believe an integrated approach across these segments maximizes value creation for our Company and stakeholders.

We are guided by our vision and values, focusing on safety, sustainability, profitability, accountability, and teamwork. We believe we can be distinguished by the following competitive strengths:


•	Competitive cost structure combined with diversified and integrated asset base


–	large-scale 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 stump 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 Canada; and


–	sophisticated logistics capabilities to meet demanding customer expectations.

•

Strong balance sheet – our low debt, which has favorable pricing and flexibility, combined with strong liquidity levels, provide us with the ability to execute our strategy, particularly the continued transformation to a more profitable and sustainable company for the long term. We have significant tax assets to defer cash income taxes and provide synergies to execute this strategy. Customers benefit from a financially stable and reliable business partner in a challenging industry.


•	Seasoned management team


–	deep industry expertise, with influential leaders in forestry, operations, environmental risk management and public policy;


–	culture of accountability, encouraging transparency and straightforwardness; and


–	core identity tied to renewable resources we harvest in a truly sustainable manner.

Our Business

For information relating to our products, strategy and highlights, sustainable development and performance, and power generation assets, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Our Business” in our 2018 Annual Report.

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Third Quarter Overview

Fibrek acquisition

On September 26, 2019, the Quebec Superior Court in Canada rendered a decision fixing the fair value of the shares of the dissenting Fibrek Inc. (or “Fibrek”) shareholders at Cdn $1.99 per share, or Cdn $31 million in aggregate, plus interest and an additional indemnity, for a total currently estimated at Cdn $44 million ($33 million, based on the exchange rate in effect on September 30, 2019) payable in cash. We are appealing the decision. As previously reported, we had accrued Cdn $14 million ($10 million, based on the exchange rate in effect on September 30, 2019) for the payment of the dissenting shareholders’ claims. We have accrued an additional Cdn $30 million ($23 million, based on the exchange rate in effect on September 30, 2019) for the estimated eventual payment of any amounts following the outcome of the appeal, and as a result recorded $23 million in “Other (expense) income, net” in our Consolidated Statements of Operations for the three months ended September 30, 2019.

Share repurchase program

During the third quarter of 2019, we repurchased 1.1 million shares, at a cost of $7 million, under our share repurchase program.

Three months ended September 30, 2019 vs. September 30, 2018

Our operating loss was $18 million in the quarter, compared to operating income of $135 million in the third quarter of 2018. Excluding special items, we incurred an operating loss of $19 million, compared to operating income of $135 million in the year-ago period. Special items are described below.

Our net loss in the quarter was $43 million, or $0.47 per share, compared to net income of $117 million, or $1.25 per diluted share, in the year-ago period. Our net loss in the quarter, excluding special items, was $34 million, or $0.37 per share, compared to net income of $96 million, or $1.03 per diluted share, in the year-ago period.



Three Months Ended September 30, 2019	Operating Loss			Net Loss			EPS
(Unaudited, in millions, except per share amounts)	Operating Loss			Net Loss			EPS
GAAP, as reported	$	(18	)	$	(43	)	$	(0.47	)
Adjustments for special items:
Foreign exchange gain		—			(1	)		(0.01	)
Net gain on disposition of assets		(1	)		(1	)		(0.01	)
Non-operating pension and other postretirement benefit credits		—			(12	)		(0.13	)
Other expense, net ⁽¹⁾		—			18			0.20
Income tax effect of special items		—			5			0.05
Adjusted for special items ⁽²⁾	$	(19	)	$	(34	)	$	(0.37	)



Three Months Ended September 30, 2018	Operating Income		Net Income			EPS
(Unaudited, in millions, except per share amounts)	Operating Income		Net Income			EPS
GAAP, as reported	$	135	$	117		$	1.25
Adjustments for special items:
Non-operating pension and other postretirement benefit credits		—		(13	)		(0.14	)
Other income, net ⁽¹⁾		—		(14	)		(0.15	)
Income tax effect of special items		—		6			0.07
Adjusted for special items ⁽²⁾	$	135	$	96		$	1.03


⁽¹⁾	Excludes foreign exchange gains and losses.

⁽²⁾

Operating income (loss), net income (loss) and net income (loss) per share (or “EPS”), in each case as adjusted for special items, are not financial measures recognized under U.S. generally accepted accounting principles (or “GAAP”). We calculate operating income (loss), as adjusted for special items, as operating income (loss) from our Consolidated Statements of Operations, adjusted for items such as closure costs, impairment and other related charges, inventory write-downs related to closures, start-up costs, gains and losses on disposition of assets, and other charges or credits

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that are excluded from our segment’s performance from GAAP operating income (loss). We calculate net income (loss), as adjusted for special items, as net income (loss) from our Consolidated Statements of Operations, adjusted for the same special items applied to operating income (loss), in addition to foreign exchange gains and losses, non-operating pension and other postretirement benefit (or “OPEB”) costs and credits, other income and expense, net, and the income tax effect of the special items. EPS, as adjusted for special items, is calculated as net income (loss), as adjusted for special items, per diluted share. We believe that using these non-GAAP measures is useful because they are consistent with the indicators management uses internally to measure the Company’s performance, and it allows the reader to more easily compare our operations and financial performance from period to period. Operating income (loss), net income (loss) and EPS, in each case as adjusted for special items, are internal measures, and therefore may not be comparable to those of other companies. These non-GAAP measures should not be viewed as substitutes to financial measures determined under GAAP.

Nine months ended September 30, 2019 vs. September 30, 2018

Our operating income was $86 million in the first nine months of the year, compared to $304 million in the year-ago period. Excluding special items, we generated operating income of $85 million, compared to $308 million in the year-ago period. Special items are described below.

Our net income in the first nine months of the year was $24 million, or $0.26 per diluted share, compared to $199 million or $2.14 per diluted share in the year-ago period. Our net income in the period, excluding special items, was $7 million, or $0.08 per diluted share, compared to $179 million, or $1.92 per diluted share, in the year-ago period.



Nine Months Ended September 30, 2019	Operating Income			Net Income			EPS
(Unaudited, in millions, except per share amounts)	Operating Income			Net Income			EPS
GAAP, as reported	$	86		$	24		$	0.26
Adjustments for special items:
Foreign exchange loss		—			9			0.10
Net gain on disposition of assets		(1	)		(1	)		(0.01	)
Non-operating pension and other postretirement benefit credits		—			(36	)		(0.39	)
Other expense, net ⁽¹⁾		—			13			0.14
Income tax effect of special items		—			(2	)		(0.02	)
Adjusted for special items ⁽²⁾	$	85		$	7		$	0.08



Nine Months Ended September 30, 2018	Operating Income			Net Income			EPS
(Unaudited, in millions, except per share amounts)	Operating Income			Net Income			EPS
GAAP, as reported	$	304		$	199		$	2.14
Adjustments for special items:
Foreign exchange loss		—			2			0.02
Closure costs, impairment and other related charges		1			1			0.01
Reversal of inventory write-downs related to closures		(1	)		(1	)		(0.01	)
Start-up costs		8			8			0.09
Net gain on disposition of assets		(4	)		(4	)		(0.04	)
Non-operating pension and other postretirement benefit credits		—			(38	)		(0.41	)
Other income, net ⁽¹⁾		—			(6	)		(0.07	)
Income tax effect of special items		—			18			0.19
Adjusted for special items ⁽²⁾	$	308		$	179		$	1.92


⁽¹⁾	Excludes foreign exchange gains and losses.


⁽²⁾	Operating income (loss), net income (loss) and EPS, in each case as adjusted for special items, are non-GAAP financial measures. For more information on the calculation and reasons we include these measures, see note 2 under “Overview – Third Quarter Overview” above.

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ASU 2016-02 “Leases”

Effective January 1, 2019, we adopted Accounting Standards Update (or “ASU”) 2016-02, “Leases,” issued by the Financial Accounting Standards Board, and the series of related accounting standard updates that followed, through a cumulative-effect adjustment as of that date. For more information, including the effect on our Consolidated Balance Sheet as of January 1, 2019, refer to Note 1, “Organization and Basis of Presentation – New accounting pronouncement adopted in 2019,” to our Consolidated Financial Statements.

RESULTS OF OPERATIONS

Consolidated Results

Selected financial information



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions, except per share amounts)	2019			2018			2019			2018
Sales	$	705		$	974		$	2,255		$	2,824
Operating (loss) income per segment:
Market pulp		(12	)		57			57			131
Tissue		(3	)		(10	)		(15	)		(21	)
Wood products		(4	)		45			(1	)		177
Newsprint		4			32			49			46
Specialty papers		4			26			34			23
Segment total		(11	)		150			124			356
Corporate and other		(7	)		(15	)		(38	)		(52	)
Operating (loss) income		(18	)		135			86			304
Net (loss) income attributable to Resolute Forest Products Inc.		(43	)		117			24			199
Net (loss) income per common share attributable to Resolute Forest Products Inc. common shareholders:
Basic	$	(0.47	)	$	1.28		$	0.26		$	2.18
Diluted		(0.47	)		1.25			0.26			2.14
Adjusted EBITDA ⁽¹⁾	$	23		$	189		$	209		$	469



(Unaudited, in millions)	September 30, 2019		December 31, 2018
Cash and cash equivalents	$	69	$	304
Total assets		3,671		3,935

⁽¹⁾

Earnings before interest expense, income taxes, and depreciation and amortization (or “EBITDA”) and adjusted EBITDA are not financial measures recognized under GAAP. EBITDA is calculated as net income (loss) including noncontrolling interests from the Consolidated Statements of Operations, adjusted for interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA means EBITDA, excluding special items, such as foreign exchange gains and losses, closure costs, impairment and other related charges, inventory write-downs related to closures, start-up costs, gains and losses on disposition of assets, non-operating pension and OPEB costs and credits, and other charges or credits. We believe that using non-GAAP measures such as EBITDA and adjusted EBITDA is useful because they are consistent with the indicators management uses internally to measure the Company’s performance and it allows the reader to more easily compare our operations and financial performance from period to period. EBITDA and adjusted EBITDA are internal measures, and therefore may not be comparable to those of other companies. These non-GAAP measures should not be viewed as substitutes to financial measures determined under GAAP.

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	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018			2019			2018
Net (loss) income including noncontrolling interests	$	(43	)	$	117		$	24		$	199
Interest expense		8			12			24			36
Income tax provision		12			33			52			111
Depreciation and amortization		42			54			124			161
EBITDA	$	19		$	216		$	224		$	507
Foreign exchange (gain) loss		(1	)		—			9			2
Closure costs, impairment and other related charges		—			—			—			1
Reversal of inventory write-downs related to closures		—			—			—			(1	)
Start-up costs		—			—			—			8
Net gain on disposition of assets		(1	)		—			(1	)		(4	)
Non-operating pension and other postretirement benefit credits		(12	)		(13	)		(36	)		(38	)
Other expense (income), net ⁽¹⁾		18			(14	)		13			(6	)
Adjusted EBITDA	$	23		$	189		$	209		$	469


⁽¹⁾	Excludes foreign exchange gains and losses.

The operating results of our Calhoun (Tennessee) tissue operations, previously recorded under “corporate and other,” have been recorded in our tissue segment since April 1, 2018.

Three months ended September 30, 2019 vs. September 30, 2018

Operating (loss) income variance analysis

Sales

Sales decreased by $269 million compared to the year-ago period, to $705 million. After removing the effect of the divestitures of the Catawba (South Carolina) and Fairmont (West Virginia) facilities in the fourth quarter of 2018, sales volume was $27 million lower, mainly due to lower shipments of newsprint, specialty papers, and wood products, partially offset by higher volumes of market pulp. Pricing also contributed to a $111 million decrease in sales, reflecting lower average transaction prices for wood products, market pulp, and newsprint, down by 25%, 20%, and 9%, respectively.

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Cost of sales, excluding depreciation, amortization and distribution costs

Cost of sales, excluding depreciation, amortization and distribution costs, which we refer to as “COS”, improved by $70 million in the quarter. After removing the COS related to the divestitures, the effect of lower volume, and the Canadian dollar fluctuation, COS increased by $49 million, mainly reflecting:


•	unfavorable maintenance costs ($24 million), mainly related to scheduled outages;


•	higher wood fiber costs ($13 million), mostly due to wood shortages;


•	an increase in labor costs ($7 million);


•	higher chemical costs ($5 million); and


•	lower contribution from our hydroelectric facilities ($3 million), due to scheduled maintenance;

partly offset by favorable recycled fiber prices ($5 million).

Depreciation and amortization

Depreciation and amortization was $12 million lower in the quarter, mainly reflecting certain newsprint assets that were fully depreciated at the end of the fourth quarter of 2018, the divestitures of the Catawba and Fairmont facilities, and the increase of the useful lives of certain of our newsprint machinery and equipment.

Selling, general and administrative expenses

Selling, general and administrative expenses (or “SG&A”) improved by $10 million in the quarter, mainly due to lower stock-based compensation expense and lower incentive plan expense, which is based on company performance.

Net (loss) income variance analysis

Interest expense

Interest expense was $4 million lower in the quarter, as we repurchased $225 million in aggregate principal amount of our 5.875% senior unsecured notes due 2023 (or the “2023 Notes”) on January 3, 2019.

Other (expense) income, net

We recorded other expense, net of $17 million in the quarter, compared to other income, net of $14 million in the year-ago period. The difference mainly reflects the $23 million provision related to the Fibrek litigation recorded in the current quarter.

Income taxes

We recorded an income tax provision of $12 million in the period, on a loss before income taxes of $31 million, compared to an expected income tax benefit of $6 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects a valuation allowance related to our U.S. operations ($7 million) where we recognize a valuation allowance against virtually all of our net deferred income tax assets, U.S. tax on non-U.S. earnings ($6 million), and foreign exchange items ($3 million).

In the third quarter of 2018, we recorded an income tax provision of $33 million, on income before income taxes of $150 million, compared to an expected income tax provision of $31 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects U.S. tax on non-U.S. earnings ($28 million), and foreign tax rate differences ($7 million), mostly offset by a valuation allowance reversal related to our U.S. operations ($32 million).

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Nine months ended September 30, 2019 vs. September 30, 2018

Operating income variance analysis

Sales

Sales decreased by $569 million compared to the year-ago period, to $2,255 million. After removing the effect of the divestitures of the Catawba and Fairmont facilities, sales declined by $221 million. Lower volume reduced sales by $91 million, reflecting lower shipments in newsprint, wood products, and specialty papers, while pricing had an unfavorable impact of $142 million. The drop in the average transaction price for wood products and market pulp, down by 26% and 4%, respectively, more than outweighed increases in the average transaction price for specialty papers and newsprint. The inclusion of our Calhoun tissue operations’ results in our tissue segment increased sales by $16 million.

Cost of sales, excluding depreciation, amortization and distribution costs

COS was $233 million lower in the period. After removing the COS related to the divestitures and Calhoun’s tissue operations, as well as the effect of lower volume, and the Canadian dollar fluctuation, COS increased by $131 million, largely reflecting:


•	higher wood fiber costs ($51 million), mainly due to wood shortages;


•	unfavorable maintenance costs ($39 million), largely associated with scheduled outages;


•	higher labor expense ($17 million);


•	lower contribution from our hydroelectric facilities ($5 million) and our cogeneration assets that sell power externally ($3 million), largely due to scheduled maintenance;


•	higher chemical costs ($8 million); and


•	a rise in recycled fiber prices ($3 million);

partly offset by start-up costs incurred in the year-ago period ($7 million) for the Calhoun tissue manufacturing and converting facility.

Distribution costs

After removing the distribution costs related to Calhoun’s tissue operations and divestitures, the effect of lower volume, and the Canadian dollar fluctuation, distribution costs decreased by $6 million, reflecting improved freight rates and transportation optimization, mainly in specialty papers.

Depreciation and amortization

Depreciation and amortization was $37 million lower in the period, mainly reflecting certain newsprint assets that were fully depreciated at the end of the fourth quarter of 2018, the divestitures of the Catawba and Fairmont facilities, and the increase of the useful lives of certain of our newsprint machinery and equipment.

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Selling, general and administrative expenses

SG&A improved by $22 million in the first nine months of the year compared to the same period last year, mainly due to lower incentive plan expense, which is based on company performance, and lower stock-based compensation expense.

Net income variance analysis

Interest expense

Interest expense was $12 million lower in the period, as we repurchased $225 million in aggregate principal amount of our 2023 Notes on January 3, 2019, and we fully repaid borrowings of $144 million under our revolving credit facilities in 2018.

Other (expense) income, net

We recorded other expense, net of $22 million in the first nine months of 2019, compared to other income, net of $4 million in the year-ago period. The difference mostly reflects the $23 million provision related to the Fibrek litigation recorded in the current period.

Income taxes

We recorded an income tax provision of $52 million in the period, on income before income taxes of $76 million, compared to an expected income tax provision of $16 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects a valuation allowance related to our U.S. operations ($18 million), U.S. tax on non-U.S. earnings ($11 million), and state and foreign tax rate differences ($5 million).

In the first nine months of 2018, we recorded an income tax provision of $111 million, on income before income taxes of $310 million, compared to an expected income tax provision of $65 million based on the U.S. federal statutory income tax rate of 21%. The difference mainly reflects U.S. tax on non-U.S. earnings ($53 million), foreign tax rate differences ($19 million), and foreign exchange items ($12 million), partly offset by a valuation allowance reversal related to our U.S. operations ($40 million).

Segment Earnings

We manage our business based on the products we manufacture. Our reportable segments correspond to our principal product lines: market pulp, tissue, wood products, newsprint, and specialty papers.

We do not allocate any of the income or loss items following “operating (loss) income” in our Consolidated Statements of Operations to our segments because those items are reviewed separately by management. Similarly, we do not allocate to the segments: closure costs, impairment and other related charges; inventory write-downs related to closures; start-up costs; gains and losses on disposition of assets; as well as other discretionary charges or credits.

We allocate depreciation and amortization expense to our segments, although the related fixed assets and amortizable intangible assets are not allocated to segment assets. Additionally, all SG&A are allocated to our segments, with the exception of certain discretionary charges and credits, which we present under “corporate and other.”

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MARKET PULP

Highlights



	Three Months Ended September 30,					Nine Months Ended September 30,
(Unaudited, in millions, except where otherwise stated)	2019			2018		2019		2018
Sales	$	201		$	288	$	621	$	809
Operating (loss) income ⁽¹⁾		(12	)		57		57		131
EBITDA ⁽²⁾		(5	)		64		74		153
(In thousands of metric tons)
Shipments		320			367		863		1,082
Downtime		16			26		39		54



	September 30,
(Unaudited, in thousands of metric tons)	2019		2018
Finished goods inventory		74		116


⁽¹⁾	Net (loss) income including noncontrolling interests is equal to operating (loss) income in this segment.


⁽²⁾	EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above.



	Three Months Ended September 30,					Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018		2019		2018
Net (loss) income including noncontrolling interests	$	(12	)	$	57	$	57	$	131
Depreciation and amortization		7			7		17		22
EBITDA		(5	)		64		74		153

Industry trends

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World demand for chemical pulp was largely unchanged in the first nine months of the year compared to the year-ago period, as the decrease of 9.4% in Western Europe was mostly offset by China, up by 5.9%, while North America was unchanged. World capacity grew by 0.9% over the same period.

World demand for softwood pulp grew by 4.6% in the first nine months of the year, with increases in shipments to China and North America of 15.5% and 1.7%, respectively, while Western Europe was down by 5.9%. The operating rate was 93%.

In the same period, demand for hardwood pulp dropped by 2.8%, with shipments to Western Europe and North America down by 11.6% and 2.0%, respectively, while China was up by 0.5%. The operating rate was 86%, reflecting elevated producer inventory levels.

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Three months ended September 30, 2019 vs. September 30, 2018

Operating (loss) income variance analysis

Sales

Sales were $87 million lower, or 30%, to $201 million in the quarter. After removing the effect of the divestitures of the Catawba and Fairmont facilities, sales volume contributed to a $28 million increase in sales, mainly reflecting steps taken in the current quarter to reduce finished goods inventory. Consequently, finished goods inventory fell to 74,000 metric tons at quarter-end. Challenging global market conditions also weighed on the average transaction price, which decreased by $159 per metric ton this quarter.

Cost of sales, excluding depreciation, amortization and distribution costs

Manufacturing costs increased by $17 million after adjusting for the effect of higher volume, the divestitures, and the Canadian dollar fluctuation, reflecting:


•	unfavorable maintenance costs ($13 million), mainly related to scheduled outages;


•	higher wood fiber costs ($8 million) due to wood shortages; and


•	higher chemical costs ($4 million);

partly offset by:


•	favorable recycled fiber prices ($5 million); and


•	higher contribution from our cogeneration assets in Saint-Félicien (Quebec) that sell power externally ($3 million), due to the extended outage in the year-ago period.

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Nine months ended September 30, 2019 vs. September 30, 2018

Operating income variance analysis

Sales

Sales were $188 million lower, or 23%, to $621 million in the first nine months of the year, primarily due to lower production capacity resulting from the divestitures of the Catawba and Fairmont facilities. After removing the effect of these divestitures, sales volume was $12 million higher, mainly in the third quarter of 2019. Pricing also reduced sales by $23 million. The average transaction price declined by $27 per metric ton, as price increases realized across all grades in 2018 eroded with weaker global pulp markets.

Cost of sales, excluding depreciation, amortization and distribution costs

After adjusting for the effect of higher volume, the divestitures, and the Canadian dollar fluctuation, manufacturing costs increased by $48 million, reflecting:


•	higher wood fiber costs ($24 million), mostly due to wood shortages;


•	unfavorable maintenance costs ($19 million), largely associated with scheduled outages;


•	higher chemical costs ($5 million); and


•	a rise in recycled fiber prices ($3 million);

partly offset by higher contribution from our cogeneration assets in Saint-Félicien that sell power externally ($3 million), due to the extended outage in the year-ago period.

Depreciation and amortization

Depreciation and amortization was $5 million lower in the current year, mainly due to the divestitures of the Catawba and Fairmont facilities.

Selling, general and administrative expenses

SG&A improved by $5 million in the first nine months of the year, mainly due to lower incentive plan expense, which is based on company performance, and lower allocated expenses as a result of capacity reductions.

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TISSUE

Highlights



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions, except where otherwise stated)	2019			2018			2019			2018
Sales	$	43		$	38		$	125		$	95
Operating loss ⁽¹⁾		(3	)		(10	)		(15	)		(21	)
EBITDA ⁽²⁾		1			(5	)		(2	)		(10	)
(In thousands of short tons)
Shipments ⁽³⁾		25			23			74			61
Downtime		1			—			2			1



	September 30,
(Unaudited, in thousands of short tons)	2019		2018
Finished goods inventory ⁽³⁾		6		7


⁽¹⁾	Net loss including noncontrolling interests is equal to operating loss in this segment.


⁽²⁾	EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above.


⁽³⁾	Tissue converted products, which are measured in cases, are converted to short tons.



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018			2019			2018
Net loss including noncontrolling interests	$	(3	)	$	(10	)	$	(15	)	$	(21	)
Depreciation and amortization		4			5			13			11
EBITDA		1			(5	)		(2	)		(10	)

Industry trends

Total tissue consumption in the U.S. grew by 2.5% in the first nine months of 2019 compared to the same period last year. U.S. converted tissue products shipments also increased by 2.2% as a result of an increase in away-from-home shipments, up 3.3%,

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and at-home shipments, up 1.7%. U.S. parent roll production showed a growth of 2.7% from the year-ago period. Tissue capacity also increased by 3.3%, contributing to a 93% average industry operating rate, down 0.6% from the year-ago period.

Three months ended September 30, 2019 vs. September 30, 2018

Operating loss variance analysis

Sales

Sales were $5 million higher, or 13%, to $43 million in the quarter, reflecting favorable product mix and the realization of previously announced away-from-home products price increases. Accordingly, the average transaction price rose by $156 per short ton, or 10%.

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Nine months ended September 30, 2019 vs. September 30, 2018

Operating loss variance analysis

The operating results of our Calhoun tissue operations have been recorded in our tissue segment since April 1, 2018. The operating loss of $12 million incurred in the first quarter of 2018 for our Calhoun tissue manufacturing and converting facility was recorded under “corporate and other.”

Sales

Sales were $30 million higher, or 32%, to $125 million in the first nine months of the year. Shipments rose by 13,000 short tons, primarily due to the inclusion of Calhoun’s results in our tissue segment starting on April 1, 2018, and sales volume growth. The average transaction price was $154 per short ton higher, due to favorable product 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 and the COS related to Calhoun’s operations and the divestiture of the Fairmont mill, our manufacturing costs improved by $1 million compared to the year-ago period, mainly due to lower maintenance costs.

Depreciation and amortization

Depreciation and amortization was $2 million higher in the current year, reflecting the inclusion of Calhoun’s results in our tissue segment, partly offset by the reduced carrying value of our Florida assets after the impairment charge taken in the fourth quarter of 2018.

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WOOD PRODUCTS

Highlights



	Three Months Ended September 30,					Nine Months Ended September 30,
(Unaudited, in millions, except where otherwise stated)	2019			2018		2019			2018
Sales	$	146		$	203	$	475		$	666
Operating (loss) income ⁽¹⁾		(4	)		45		(1	)		177
EBITDA ⁽²⁾		4			53		24			200
(In millions board feet)
Shipments ⁽³⁾		429			445		1,341			1,394
Downtime		74			44		168			93



	September 30,
(Unaudited, in millions board feet)	2019		2018
Finished goods inventory ⁽³⁾		122		162


⁽¹⁾	Net (loss) income including noncontrolling interests is equal to operating (loss) income in this segment.


⁽²⁾	EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above.


⁽³⁾	Includes wood pellets measured by mass, converted to board feet using a density-based conversion ratio.



	Three Months Ended September 30,					Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018		2019			2018
Net (loss) income including noncontrolling interests	$	(4	)	$	45	$	(1	)	$	177
Depreciation and amortization		8			8		25			23
EBITDA		4			53		24			200

Industry trends

Average U.S. housing starts were 1.3 million on a seasonally-adjusted basis in the first nine months of 2019, down 1.6% from the same period last year, which reflects a 1.9% decrease in single-family starts, and a 0.7% decrease in multi-family starts. The

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2x4 – Random Length (or “RL”) #1-2 Kiln Dried Great Lakes (or “KD GL”) price dropped by 29.9% in the first nine months of 2019 compared to the year-ago period, and the 2x4x8 Stud KD GL price was down by 26.1%.

Three months ended September 30, 2019 vs. September 30, 2018

Operating (loss) income variance analysis

Sales

Sales were $57 million lower, or 28%, to $146 million in the quarter, as the average transaction price fell by $116 per thousand board feet, or 25%, and shipments decreased by 16 million board feet, reflecting weaker lumber market conditions. Finished goods inventory remained at 122 million board feet during the quarter, as we temporarily curtailed lumber production in the quarter, for a total of 74 million board feet.

Cost of sales, excluding depreciation, amortization and distribution costs

After removing the effect of lower volume and the Canadian dollar fluctuation, manufacturing costs increased by $6 million, mainly reflecting higher maintenance costs ($3 million).

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Nine months ended September 30, 2019 vs. September 30, 2018

Operating (loss) income variance analysis

Sales

Sales were $191 million lower, or 29%, to $475 million in the first nine months of the year, driven by a $124 per thousand board feet decrease in the average transaction price and a 53 million board feet decrease in shipments, as market conditions remained weak in 2019. Despite lower shipments, finished goods inventory remained at a normalized level of 122 million board feet, as we took 75 million board feet of additional downtime compared to the year-ago period, for a total of 168 million board feet in 2019.

Cost of sales, excluding depreciation, amortization and distribution costs

Manufacturing costs increased by $24 million after adjusting for the effect of lower volume and the Canadian dollar fluctuation, mainly reflecting:


•	higher wood fiber costs ($12 million);


•	an increase in labor costs ($6 million); and


•	unfavorable maintenance costs ($5 million).

Selling, general and administrative expenses

SG&A improved by $4 million in the first nine months of the year, mainly due to lower incentive plan expense, which is based on company performance.

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NEWSPRINT

Highlights



	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited, in millions, except where otherwise stated)	2019		2018		2019		2018
Sales	$	180	$	232	$	601	$	660
Operating income ⁽¹⁾		4		32		49		46
EBITDA ⁽²⁾		11		48		71		95
(In thousands of metric tons)
Shipments		314		371		999		1,119
Downtime		71		4		124		18



	September 30,
(Unaudited, in thousands of metric tons)	2019		2018
Finished goods inventory		104		96


⁽¹⁾	Net income including noncontrolling interests is equal to operating income in this segment.


⁽²⁾	EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above.



	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited, in millions)	2019		2018		2019		2018
Net income including noncontrolling interests	$	4	$	32	$	49	$	46
Depreciation and amortization		7		16		22		49
EBITDA		11		48		71		95

Industry trends

North American newsprint demand fell by 13.6% in the first nine months of the year compared to the same period last year. Demand from newspaper publishers fell by 16.2%, while demand from commercial printers declined by 9.0%. Even with the slower pace of demand decline in the third quarter of 2019, the North American shipment-to-capacity ratio dropped to 83%, down from 95% in the year-ago period.

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Global demand for newsprint was down by 10.9% in the first nine months of the year compared to the year-ago period, with North America, Asia, and Western Europe down 13.6%, 12.6%, and 6.5%, respectively. The global operating rate was 82%, compared to 90% in the year-ago period.

Three months ended September 30, 2019 vs. September 30, 2018

Operating income variance analysis

Sales

Newsprint sales decreased by $52 million, or 22%, to $180 million in the third quarter of the year. The average transaction price fell by $56 per metric ton compared to the same quarter last year, and shipments dropped by 57,000 metric tons, reflecting the ongoing structural demand decline. Finished goods inventory remained at 104,000 metric tons at quarter-end, as we took temporary production downtime of 71,000 metric tons this quarter.

Cost of sales, excluding depreciation, amortization and distribution costs

After removing the effect of lower volume, manufacturing costs increased by $9 million, mainly reflecting:


•	unfavorable maintenance costs ($2 million) and steam usage ($2 million), due to planned outages;


•	an increase in wood fiber costs ($3 million), due to wood shortages; and


•	a rise in labor costs ($3 million).

Depreciation and amortization

Depreciation and amortization was $9 million lower in the quarter, reflecting certain assets that were fully depreciated at the end of the fourth quarter of 2018, and the increase of the useful lives of certain of our machinery and equipment.

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Nine months ended September 30, 2019 vs. September 30, 2018

Operating income variance analysis

Sales

Newsprint sales decreased by $59 million, or 9%, to $601 million in the first nine months of the year. Shipments decreased by 120,000 metric tons, largely reflecting reduced production due to ongoing structural demand decline. Despite weaker market fundamentals, the average transaction price was $12 per metric ton higher compared to the first nine months of 2018, reflecting the realization of previously announced price increases in the first half of 2019.

Cost of sales, excluding depreciation, amortization and distribution costs

Manufacturing costs increased by $29 million after adjusting for the effect of lower volume and the Canadian dollar fluctuation, reflecting:


•	an increase in wood fiber costs ($8 million), due to wood shortages;


•	unfavorable maintenance costs ($7 million), largely planned;


•	unfavorable labor costs ($6 million);


•	higher power and steam costs ($4 million); and


•	lower contribution from our cogeneration assets that sell power externally ($4 million), largely due to scheduled maintenance.

Depreciation and amortization

Depreciation and amortization was $27 million lower in the first nine months of the year, reflecting certain assets that were fully depreciated at the end of the fourth quarter of 2018, and the increase of the useful lives of certain of our machinery and equipment.

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SPECIALTY PAPERS

Highlights



	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited, in millions, except where otherwise stated)	2019		2018		2019		2018
Sales	$	135	$	213	$	433	$	594
Operating income ⁽¹⁾		4		26		34		23
EBITDA⁽²⁾		15		38		66		59
(In thousands of short tons)
Shipments		185		289		577		843
Downtime		17		1		43		16



	September 30,
(Unaudited, in thousands of short tons)	2019		2018
Finished goods inventory		49		78


⁽¹⁾	Net income including noncontrolling interests is equal to operating income in this segment.


⁽²⁾	EBITDA, a non-GAAP financial measure, is reconciled below. For more information on the calculation and reasons we include this measure, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above.



	Three Months Ended September 30,				Nine Months Ended September 30,
(Unaudited, in millions)	2019		2018		2019		2018
Net income including noncontrolling interests	$	4	$	26	$	34	$	23
Depreciation and amortization		11		12		32		36
EBITDA		15		38		66		59

Industry trends

North American demand for uncoated mechanical papers contracted by 14.9% in the first nine months of 2019, compared to the year-ago period. Poor market fundamentals, grade switching, and consumer inventory destocking led to a 20.1% decline in demand for standard grades, while demand for supercalendered grades dropped by 9.3%. Compared to the first nine months of 2018, the shipment-to-capacity ratio for all uncoated mechanical papers decreased from 92% to 83%.

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Three months ended September 30, 2019 vs. September 30, 2018

Operating income variance analysis

Sales

Specialty paper sales decreased by $78 million, or 37%, to $135 million in the third quarter of the year. The average transaction price was essentially unchanged, while sales volumes were down by 104,000 short tons, mainly resulting from the Catawba mill divestiture.

Cost of sales, excluding depreciation, amortization and distribution costs

Manufacturing costs increased by $17 million after adjusting for the effect of lower volume, the Catawba mill divestiture, and the Canadian dollar fluctuation, mainly reflecting:


•	higher maintenance costs ($6 million) and lower contribution from our hydroelectric facilities ($3 million) and our cogeneration assets that sell power externally ($2 million), largely due to scheduled outages; and


•	higher wood fiber costs ($3 million), mostly as a result of wood shortages.

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Nine months ended September 30, 2019 vs. September 30, 2018

Operating income variance analysis

Sales

Specialty paper sales decreased by $161 million, or 27%, to $433 million in the first nine months of the year. While the average transaction price increased by $46 per short ton compared to the same period last year, shipments decreased by 266,000 short tons, mainly due to the Catawba mill divestiture.

Cost of sales, excluding depreciation, amortization and distribution costs

After removing the impact of lower volume, the Catawba mill divestiture, and the Canadian dollar fluctuation, manufacturing costs increased by $34 million, mainly due to:


•	higher maintenance costs ($10 million), in part due to planned outages;


•	higher wood fiber costs ($7 million), mostly due to wood shortages;


•	lower contribution from our hydroelectric facilities ($5 million) and our cogeneration assets that sell power externally ($2 million), largely due to scheduled maintenance;


•	an increase in labor costs ($4 million); and


•	higher chemical costs ($3 million).

Distribution costs

After removing the distribution costs related to the Catawba mill divestiture, the effect of lower volume, and the Canadian dollar fluctuation, distribution costs decreased by $5 million, reflecting improved freight rates and transportation optimization.

Depreciation and amortization

Depreciation and amortization was $4 million lower in the current year, mainly due to the divestiture of the Catawba facility.

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Selling, general and administrative expenses

SG&A improved by $6 million in the first nine months of the year, mainly due to lower incentive plan expense, which is based on company performance, and lower allocated expenses as a result of capacity reductions.

Corporate and Other

Highlights



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018			2019			2018
Cost of sales, excluding depreciation, amortization and distribution costs	$	—		$	(1	)	$	(7	)	$	(10	)
Depreciation and amortization		(5	)		(6	)		(15	)		(20	)
Selling, general and administrative expenses		(3	)		(8	)		(17	)		(25	)
Closure costs, impairment and other related charges		—			—			—			(1	)
Net gain on disposition of assets		1			—			1			4
Operating loss	$	(7	)	$	(15	)	$	(38	)	$	(52	)
Interest expense		(8	)		(12	)		(24	)		(36	)
Non-operating pension and other postretirement benefit credits		12			13			36			38
Other (expense) income, net		(17	)		14			(22	)		4
Income tax provision		(12	)		(33	)		(52	)		(111	)
Net loss including noncontrolling interests	$	(32	)	$	(33	)	$	(100	)	$	(157	)

The table below shows the reconciliation of net loss including noncontrolling interests to EBITDA and adjusted EBITDA, which are non-GAAP financial measures. For more information on the calculation and reasons we include these measures, see note 1 under “Results of Operations – Consolidated Results – Selected Financial Information” above.



	Three Months Ended September 30,						Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018			2019			2018
Net loss including noncontrolling interests	$	(32	)	$	(33	)	$	(100	)	$	(157	)
Interest expense		8			12			24			36
Income tax provision		12			33			52			111
Depreciation and amortization		5			6			15			20
EBITDA	$	(7	)	$	18		$	(9	)	$	10
Foreign exchange (gain) loss		(1	)		—			9			2
Closure costs, impairment and other related charges		—			—			—			1
Reversal of inventory write-downs related to closures		—			—			—			(1	)
Start-up costs		—			—			—			8
Net gain on disposition of assets		(1	)		—			(1	)		(4	)
Non-operating pension and other postretirement benefit credits		(12	)		(13	)		(36	)		(38	)
Other expense (income), net ⁽¹⁾		18			(14	)		13			(6	)
Adjusted EBITDA	$	(3	)	$	(9	)	$	(24	)	$	(28	)


⁽¹⁾	Excludes foreign exchange gains and losses.

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Three months ended September 30, 2019 vs. September 30, 2018

Selling, general and administrative expenses

SG&A improved by $5 million in the quarter, mainly due to lower stock-based compensation expense.

Nine months ended September 30, 2019 vs. September 30, 2018

Depreciation and amortization

Depreciation and amortization was $5 million lower in the current year, mostly attributable to the inclusion of Calhoun’s results in our tissue segment since April 1, 2018.

Selling, general and administrative expenses

SG&A improved by $8 million in the first nine months of the year, mainly due to lower stock-based compensation expense.

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

We rely on cash and cash equivalents, net cash provided by operations, and our revolving credit facilities to fund our operations, make pension contributions, and finance our working capital, capital expenditures, and duty cash deposits. In addition, from time to time we may use available cash to reduce debt and to return capital to shareholders, including through share repurchases or special dividends. As of September 30, 2019, we had cash and cash equivalents of $69 million and availability of $497 million under our revolving credit facilities.

Based on our current projections, we expect to have sufficient financial resources available to finance our business plan, make pension contributions, meet working capital and duty cash deposit requirements, and maintain an appropriate level of capital spending.

Based on market conditions, we may seek to retire, repay or refinance our outstanding indebtedness, including under the 2023 Notes and credit facilities, through redemptions, prepayments, open market purchases or individually negotiated transactions, as we continue to focus on reducing costs and enhancing our flexibility.

Five-year extension of ABL Credit Facility

On May 14, 2019, we entered into an amendment to the credit agreement dated May 22, 2015, for a senior secured asset-based revolving credit facility (or the “ABL Credit Facility”). The amended credit agreement provides for an extension of the maturity date to May 14, 2024, with an aggregate lender commitment of $500 million at any time outstanding, subject to borrowing base availability based on specified advance rates, eligibility criteria and customary reserves. The amended aggregate lender commitment amount represents a voluntary reduction of $100 million. For more information, see Note 7, “Long-Term Debt – ABL Credit Facility,” to our Consolidated Financial Statements.

Senior Secured Credit Facility

On October 28, 2019, we entered into an amended and restated senior secured credit facility (or the “Senior Secured Credit Facility”) for up to $360 million, replacing our existing $185 million senior secured credit facility. The Senior Secured Credit Facility provides a term loan facility of up to $180 million with a delayed draw period of up to three years, and the choice of maturities of six to ten years from the date of drawing, and a six-year revolving credit facility of up to $180 million with a maturity date of October 28, 2025 (or the “Revolving Credit Facility”). There is also an uncommitted option to increase the Senior Secured Credit Facility by up to an additional $360 million, subject to certain terms and conditions. On October 28, 2019, we repaid our existing $46 million term loan by borrowing under the Revolving Credit Facility. For more information, see Note 7, “Long-Term Debt – Senior Secured Credit Facility,” to our Consolidated Financial Statements.

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Flow of Funds

Summary of cash flows

A summary of cash flows for the nine months ended September 30, 2019 and 2018, was as follows:



	Nine Months Ended September 30,
(Unaudited, in millions)	2019			2018
Net cash provided by operating activities	$	120		$	351
Net cash used in investing activities		(119	)		(147	)
Cash used in financing activities		(239	)		(145	)
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	$	(237	)	$	58

Nine months ended September 30, 2019 vs. September 30, 2018

Net cash provided by operating activities

We generated $120 million of cash from operating activities in the first nine months of 2019, compared to $351 million in the year-ago period. The decrease is primarily attributable to lower profitability, partially offset by lower interest payments and pension contributions.

Net cash used in investing activities

We used $119 million of cash in investing activities in the current period, which included:


•	$82 million in capital expenditures; and


•	$46 million of countervailing and anti-dumping duty cash deposits on softwood lumber;

offset in part by the full refund of countervailing duty cash deposits on uncoated groundwood paper of $6 million.

In the year-ago period, net cash used in investing activities was $147 million, or $28 million higher, reflecting capital expenditures of $94 million and net countervailing and anti-dumping duty cash deposits of $55 million.

Cash used in financing activities

In 2019, we repurchased $225 million in aggregate principal amount of our 2023 Notes, as well as $12 million of shares, as described below. This compares to repayments of $144 million under our revolving credit facilities in the first nine months of 2018.

Share Repurchase Program

During the nine months ended September 30, 2019, we repurchased 1.8 million shares, at a cost of $12 million under our $150 million share repurchase program, which was launched in 2012. There remains $12 million under the program as of September 30, 2019.

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RESOLUTE FOREST PRODUCTS INC.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosures about market risk is disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2018 Annual Report. There have been no material changes in our exposure to market risk as previously disclosed in our 2018 Annual Report.


ITEM 4.	CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures:

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a–15(e) and 15d–15(e) of the Securities Exchange Act of 1934, as of September 30, 2019. Based on that evaluation, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date in recording, processing, summarizing and timely reporting information required to be disclosed in our reports to the SEC.

(b) Changes in Internal Control over Financial Reporting:

In connection with the evaluation of internal control over financial reporting, there were no changes during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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RESOLUTE FOREST PRODUCTS INC.


PART II.	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

In addition to the legal proceedings presented under Part I, Item 3, “Legal Proceedings,” in our 2018 Annual Report, see the description of our material pending legal proceedings in Note 10, “Commitments and Contingencies – Legal matters,” to our Consolidated Financial Statements, which is incorporated in this “Item 1 – Legal Proceedings” by reference.


ITEM 1A.	RISK FACTORS

In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors set forth under Part I, Item 1A, “Risk Factors” in our 2018 Annual Report, which could materially affect our business, financial condition or future results. There have been no material changes to the risk factors previously disclosed in our 2018 Annual Report.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information about our stock repurchases for the three months ended September 30, 2019:



Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
July 1 to July 31		1,106,120	$	6.79		1,106,120	$	11,987,575
August 1 to August 31		—		—		—		11,987,575
September 1 to September 30		—		—		—		11,987,575
Total		1,106,120	$	6.79		1,106,120	$	11,987,575


⁽¹⁾	$150 million share repurchase program launched in 2012.

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RESOLUTE FOREST PRODUCTS INC.


ITEM 6.	EXHIBITS



Exhibit No.		Description

10.1		Amended and Restated Credit Agreement, dated as of October 28, 2019, among Resolute Forest Products Inc., certain U.S. subsidiaries of Resolute Forest Products Inc. as borrowers and guarantors, various lenders, and American AgCredit, FLCA, as administrative agent and collateral agent (incorporated by reference from Exhibit 10.1 to Resolute Forest Products Inc.’s Current Report on Form 8-K filed October 30, 2019, SEC file No. 001-33776).

†10.2		Form of Resolute Forest Products 2019 Equity Incentive Plan Cash Settled Restricted Stock Unit Agreement.

†10.3		Form of Resolute Forest Products 2019 Equity Incentive Plan Stock Settled Performance Stock Unit Agreement.

†10.4		Form of Resolute Forest Products 2019 Equity Incentive Plan Stock Settled Restricted Stock Unit Agreement.

31.1		Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Senior Vice President and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Senior Vice President and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document.

101.SCH*		XBRL Taxonomy Extension Schema Document.

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.



†	This is a management contract or compensatory plan or arrangement.
*	Interactive data files furnished with this Form 10-Q, which represent the following materials from this Form 10-Q formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive (Loss) Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Changes in Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Interim Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the inline XBRL document.

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RESOLUTE FOREST PRODUCTS INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.



RESOLUTE FOREST PRODUCTS INC.

By		/s/ Remi G. Lalonde
		Remi G. Lalonde
		Senior Vice President and Chief Financial Officer

By		/s/ Hugues Dorban
		Hugues Dorban
		Vice President and Chief Accounting Officer

Date: November 12, 2019