XFRA:7AB1 Resolute Forest Products Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

 

  ¨ 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 Duke Street, Suite 5000; Montreal, Quebec; Canada H3C 2M1

 

(Address of principal executive offices) (Zip Code)

(514) 875-2515

 

(Registrant’s telephone number, including area code)

AbitibiBowater Inc.

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  þ               Accelerated filer ¨   Non-accelerated filer ¨    Smaller reporting company  ¨
   

(Do not check if a smaller

    reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ   No ¨

As of August 7, 2012, there were 99,309,942 shares of Resolute Forest Products Inc. common stock outstanding.

 

 

 


Table of Contents

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 Six Months Ended June 30, 2012 and 2011

   1

Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June  30, 2012 and 2011

   2

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

   3

Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2012

   4

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

   5

Notes to Unaudited Interim Consolidated Financial Statements

   6

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

   28

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   45

Item 4. Controls and Procedures

   45

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

   45

Item 1A. Risk Factors

   45

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

   45

Item 6. Exhibits

   46

SIGNATURES

   47


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RESOLUTE FOREST PRODUCTS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in millions, except per share amounts)

 

                                          
     

Three Months Ended

June 30,

         

Six Months Ended

June 30,

 
      2012      2011            2012      2011  

Sales

   $     1,168              $     1,200                 $     2,222              $     2,385          

Costs and expenses:

              

Cost of sales, excluding depreciation, amortization and cost of timber harvested

     885                911                   1,721                1,833          

Depreciation, amortization and cost of timber harvested

     58                55                   115                109          

Distribution costs

     133                141                   254                274          

Selling, general and administrative expenses

     41                40                   73                77          

Closure costs, impairment and other related charges

     88                4                   93                17          

Net gain on disposition of assets

     (1)               (3)                    (24)               (4)         

Operating (loss) income

     (36)               52                   (10)               79          

Interest expense

     (18)               (28)                  (34)               (58)         

Other (expense) income, net

     (10)               (2)                    3                17          

(Loss) income before income taxes

     (64)               22                   (41)               38          

Income tax (provision) benefit

     (1)               39                     9                53          

Net (loss) income including noncontrolling interests

     (65)               61                   (32)               91          

Net loss attributable to noncontrolling interests

     45                –                     35                –          

Net (loss) income attributable to Resolute Forest
Products Inc.

   $ (20)             $ 61                   $ 3              $ 91          

Net (loss) income per share attributable to Resolute Forest Products Inc. common shareholders:

              

Basic

   $ (0.20)             $ 0.63                 $ 0.03              $ 0.94          

Diluted

     (0.20)               0.63                     0.03                0.94          

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

              

Basic

     98.9                97.1                   98.0                97.1          

Diluted

     98.9                97.1                     98.0                97.1          

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)

 

                                          
     

Three Months Ended

June 30,

         

Six Months Ended

June 30,

 
       2012       2011             2012        2011   

Net (loss) income including noncontrolling interests

   $ (65)          $     61                $ (32)          $     91     

Other comprehensive income (loss):

              

Change in unamortized prior service costs and credits, net of tax of $0 for both the three and six months ended June 30, 2012

     9             –                    11             –     

Change in unamortized actuarial gains and losses, net of tax of $0 for both the three and six months ended June 30, 2012

     (19)            –                (21)            –     

Foreign currency translation

     (5)            (3)                 (2)            19     

Other comprehensive (loss) income, net of tax

     (15)            (3)                 (12)            19     

Comprehensive (loss) income including noncontrolling interests

     (80)            58                  (44)            110     

Less: Comprehensive loss (income) attributable to noncontrolling interests:

              

Net loss

         45             –                35             –     

Change in unamortized actuarial gains and losses, net of tax of $0 for both the three and six months ended June 30, 2012

     5             –                5             –     

Foreign currency translation

     3             –                  3             (5)    

Comprehensive loss (income) attributable to noncontrolling interests

     53             –                  43             (5)    

Comprehensive (loss) income attributable to Resolute Forest Products Inc.

   $ (27)          $ 58                $ (1)          $ 105     

See accompanying notes to unaudited interim consolidated financial statements.

 

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RESOLUTE FOREST PRODUCTS INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in millions, except per share amount)

 

      June 30,
2012  
   December 31,
 2011

Assets

         

Current assets:

         

Cash and cash equivalents

     $       510            $         369        

Accounts receivable, net:

         

Trade

       572              582        

Other

       109              168        

Inventories, net

       512              475        

Assets held for sale

       80              7        

Deferred income tax assets

       110              109        

Other current assets

       66              59        

Total current assets

       1,959              1,769        

Fixed assets, net

       2,500              2,502        

Amortizable intangible assets, net

       70              18        

Deferred income tax assets

       1,755              1,749        

Other assets

       189              260        

Total assets

     $ 6,473            $ 6,298        

Liabilities and equity

         

Current liabilities:

         

Accounts payable and accrued liabilities

     $ 549            $ 544        

Short-term bank debt

       21              –        

Current portion of long-term debt

       77              –        

Liabilities associated with assets held for sale

       63              –        

Total current liabilities

       710              544        

Long-term debt, net of current portion

       624              621        

Pension and other postretirement benefit obligations

       1,520              1,524        

Deferred income tax liabilities

       73              75        

Other long-term liabilities

       56              57        

Total liabilities

       2,983              2,821        

Commitments and contingencies

         

Equity:

         

Resolute Forest Products Inc. shareholders’ equity:

         

Common stock, $0.001 par value. 116.9 shares issued and 98.8 shares outstanding as of June 30, 2012; 114.1 shares issued and 97.1 shares outstanding as of December 31, 2011

       –              –        

Additional paid-in capital

       3,726              3,687        

Retained earnings

       44              41        

Accumulated other comprehensive loss

       (315)              (311)       

Treasury stock at cost, 18.1 shares and 17.0 shares as of June 30, 2012 and December 31, 2011, respectively

       (12)              –        

Total Resolute Forest Products Inc. shareholders’ equity

       3,443              3,417        

Noncontrolling interests

       47              60        

Total equity

       3,490              3,477        

Total liabilities and equity

     $ 6,473            $ 6,298        

See accompanying notes to unaudited interim consolidated financial statements.

 

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RESOLUTE FOREST PRODUCTS INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Unaudited, in millions)

 

      Resolute Forest Products Inc. Shareholders’ Equity                 
      Common
Stock
     Additional
Paid-In
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Loss
    

Treasury

Stock

     Non-controlling
Interests
    Total
Equity
 

Balance as of December 31, 2011

   $ –             $ 3,687           $ 41             $ (311)                 $ –             $ 60               $3,477        

Share-based compensation costs for equity-classified awards

     –               3             –               –                     –               –                3        

Net income (loss)

     –               –             3               –                     –               (35)              (32)       

Acquisition of Fibrek Inc. (2.8 shares) (Note 2)

     –               36             –               –                     –               31               67        

Purchases of treasury stock (1.1 shares) (Note 15)

     –               –             –               –                     (12)              –                (12)       

Dividend paid to noncontrolling interest

     –               –             –               –                     –               (1)              (1)       

Other comprehensive loss, net of tax

     –               –             –               (4)                   –               (8)              (12)       

Balance as of June 30, 2012

   $ –             $ 3,726           $ 44             $ (315)                 $ (12)            $ 47               $3,490        

As of December 31, 2010, the balance of noncontrolling interests was $278 million. During the six months ended June 30, 2011, amounts attributable to noncontrolling interests consisted of dividends and distribution paid of $19 million, acquisition of a noncontrolling interest of $105 million, disposition of a noncontrolling interest of $99 million and other comprehensive income of $5 million, net of tax, which resulted in a balance of noncontrolling interests of $60 million as of June 30, 2011.

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)

 

      Six Months Ended
June 30,
      2012    2011

Cash flows from operating activities:

         

Net (loss) income including noncontrolling interests

     $ (32)            $     91     

Adjustments to reconcile net (loss) income including noncontrolling interests to net cash provided by operating activities:

         

Share-based compensation

       3               1     

Depreciation, amortization and cost of timber harvested

       115               109     

Closure costs, impairment and other related charges

       93               16     

Write-downs of inventory

       7               1     

Deferred income taxes

       (3)              (53)    

Net pension contributions

       (35)              (62)    

Net gain on disposition of assets

       (24)              (4)    

Gain on translation of foreign currency denominated deferred income taxes

       (6)              (47)    

Loss on translation of foreign currency denominated pension and other postretirement benefit obligations

       5               33     

Premium related to debt redemptions

       –               (11)    

Dividends received from equity method investees in excess of income

       –               3     

Changes in working capital:

         

Accounts receivable

       75               (53)    

Inventories

       8               (8)    

Other current assets

       2               18     

Accounts payable and accrued liabilities

       (36)              (20)    

Other, net

       1               1     

Net cash provided by operating activities

       173               15     

Cash flows from investing activities:

         

Cash invested in fixed assets

       (58)              (32)    

Disposition of investment in ACH Limited Partnership

       –               296     

Disposition of other assets

       26               8     

Acquisition of Fibrek Inc., net of cash acquired (Note 2)

       (24)              –     

Proceeds from insurance settlement

       –               4     

Decrease (increase) in restricted cash

       76               (3)    

Increase in deposit requirements for letters of credit, net

       (7)              (7)    

Net cash provided by investing activities

       13               266     

Cash flows from financing activities:

         

Purchases of treasury stock

       (12)              –     

Dividends and distribution to noncontrolling interests

       (1)              (19)    

Acquisition of noncontrolling interest

       (17)              (15)    

Payments of long-term debt

       (15)              (269)    

Net cash used in financing activities

       (45)              (303)    

Net increase (decrease) in cash and cash equivalents

       141               (22)    

Cash and cash equivalents:

         

Beginning of period

       369               319     

End of period

     $     510             $ 297     

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 and affiliates, either individually or collectively, unless otherwise indicated, referred to as “Resolute Forest Products,” “we,” “our,” “us” or the “Company”) is incorporated in Delaware. We are a global leader in the forest products industry, with a diverse range of products, including newsprint, coated and specialty papers, market pulp and wood products. We own or operate pulp and paper mills and wood products facilities in the United States, Canada and South Korea.

On November 7, 2011, we began doing business as Resolute Forest Products. At the annual meeting of shareholders on May 23, 2012, the shareholders approved an amendment to our certificate of incorporation to change our corporate name from AbitibiBowater Inc. to Resolute Forest Products Inc., effective May 24, 2012. The ticker symbol for our common stock was changed from “ABH” to “RFP” on the New York Stock Exchange on May 24, 2012 and on the Toronto Stock Exchange on May 28, 2012.

Financial statements

Our interim consolidated financial statements are unaudited and have been prepared in accordance with the requirements of the United States Securities and Exchange Commission (the “SEC”) for interim reporting. Under those rules, certain footnotes and other financial information that are normally required by United States generally accepted accounting principles (“U.S. GAAP”) may be condensed or omitted. In our opinion, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the unaudited interim consolidated financial statements have been made. All amounts are expressed in U.S. dollars, unless otherwise indicated. The results for the interim period ended June 30, 2012 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, 2011, filed with the SEC on February 29, 2012. Certain prior period amounts in our Consolidated Balance Sheets, Consolidated Statements of Cash Flows and footnotes have been reclassified to conform to the 2012 presentation. The reclassifications had no effect on total assets, cash and cash equivalents or net cash provided by operating activities.

Note 2. Acquisition of Fibrek Inc.

Overview

On December 15, 2011, we announced an offer to purchase all of the issued and outstanding shares of Fibrek Inc. (“Fibrek”), a producer and marketer of virgin and recycled kraft pulp, operating three mills. On May 2, 2012, we acquired a controlling interest in Fibrek and began consolidating the results of operations, financial position and cash flows of Fibrek in our consolidated financial statements.

The acquisition of Fibrek will allow us to grow our overall market pulp segment, and our virgin kraft pulp capacity in particular, providing a better overall balance to our product offering. We believe that the integration of Fibrek’s Saint-Felicien, Quebec mill will result in certain operational synergies as it will operate as an integrated facility, with chips supplied from our regional sawmills.

Our acquisition of Fibrek has been achieved in stages. In connection with the offer, between April 11, 2012 and April 25, 2012, we had acquired approximately 48.8% of the then outstanding Fibrek shares. On May 2, 2012, we acquired additional shares of Fibrek, after which we owned a controlling interest in Fibrek (approximately 50.1% of the then outstanding Fibrek shares) and Fibrek became a consolidated subsidiary. We subsequently acquired additional shares of Fibrek and, as of May 17, 2012, the offer expiry date, we owned approximately 74.6% of the then outstanding Fibrek shares. As aggregate consideration for all of the Fibrek shares we purchased, we distributed approximately 2.8 million newly-issued shares of our common stock and Cdn$53 million ($53 million, based on the exchange rates in effect on each of the dates we acquired the shares of Fibrek) in cash.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

On July 31, 2012, we completed the second step transaction for the remaining 25.4% of the outstanding Fibrek shares. We distributed aggregate additional consideration of approximately 0.5 million shares and Cdn$10 million ($10 million, based on the exchange rate in effect on July 31, 2012). The remaining portion of the consideration, approximately 0.4 million shares and Cdn$8 million ($8 million, based on the exchange rate in effect on July 31, 2012), will only be distributed or paid out upon settlement or judicial determination of the fair value of claims by dissenting shareholders of Fibrek.

Initial investment

As noted above, we held an equity interest in Fibrek before we obtained control of Fibrek on May 2, 2012 (the “acquisition date”). We accounted for our initial equity investment in Fibrek as an available for sale investment since we had no ability to exert significant influence over Fibrek at any time prior to acquiring a controlling interest on May 2, 2012.

Acquisition of controlling interest

The acquisition of a controlling interest in Fibrek on May 2, 2012 was accounted for as a business combination in accordance with the acquisition method of accounting pursuant to Financial Accounting Standards Board Accounting Standards Codification 805, “Business Combinations,” which requires recording identifiable assets acquired and liabilities assumed at fair value (except for deferred income taxes and pension and other postretirement benefit (“OPEB”) plan obligations). Additionally, on the acquisition date, we remeasured our initial equity investment in Fibrek at the acquisition-date fair value. The acquisition-date fair value of our previously-held equity interest in Fibrek was $58 million, resulting in a loss of $1 million, which was recorded in “Other (expense) income, net” in our Consolidated Statements of Operations for the three and six months ended June 30, 2012.

In connection with the acquisition, we also assumed $121 million of Fibrek’s outstanding indebtedness. For additional information, see Note 11, “Long-Term Debt.”

The following summarizes the fair value as of the acquisition date of all of the consideration transferred through May 2, 2012 to acquire our controlling interest in Fibrek:

 

(Unaudited, in millions)        

Cash

       $     36   

Common stock issued (1.9 million shares)

         24   
         $ 60   

The acquisition-date fair value of our common stock issued as part of the consideration transferred for Fibrek was determined based on the closing market price of our common stock on the acquisition date.

The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The purchase price allocation is preliminary and subject to refinement during the allocation period, which is not expected to last beyond a year from the date of the acquisition to allow for the finalization of the gathering and review of all pertinent information.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

The following summarizes our preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed:

 

(Unaudited, in millions)        

Cash and cash equivalents

   $ 12   

Accounts receivable

     60   

Inventories

     63   

Other current assets

     2   

Current assets acquired

     137   

Fixed assets

     161   

Amortizable intangible assets

     52   

Other assets

     1   

Total assets acquired

   $     351   

Accounts payable and accrued liabilities

   $ 70   

Short-term bank debt

     36   

Current portion of long-term debt

     2   

Current liabilities assumed

     108   

Long-term debt, net of current portion

     83   

Pension and other postretirement benefit obligations

     39   

Other long-term liabilities

     1   

Total liabilities assumed

   $ 231   

Net assets acquired

     120   

Fair value of the consideration transferred, including our previously-held interest of $58 million

     60   

Fair value of noncontrolling interest

     60   
     $ 120   

The fair value of the consideration transferred plus the fair value of the noncontrolling interest approximated the fair value of the net assets acquired. Therefore, no goodwill or gain was recognized at the acquisition date. The acquisition-date fair value of our noncontrolling interest in Fibrek was determined based on the market price we paid for Fibrek’s common stock on the acquisition date.

We identified amortizable intangible assets related to energy contracts, which have a weighted-average amortization period of approximately 23 years. The fair value of the amortizable intangible assets was determined based on the discounted cash flow method.

Due to the timing of the completion of the acquisition, certain assumptions and estimates were used in determining the preliminary purchase price allocation disclosed above. Those assumptions and estimates primarily relate to the amounts allocated to fixed assets and amortizable intangible assets as work is still ongoing to determine the fair value of those assets as of the acquisition date. Therefore, the amounts disclosed above may change as the purchase price allocation is finalized. The purchase price allocation is expected to be finalized in the third quarter of 2012.

Fibrek’s results of operations have been included in our consolidated financial statements beginning on the acquisition date and are included in the market pulp segment. The amount of Fibrek’s sales and net income included in our Consolidated Statements of Operations for both the three and six months ended June 30, 2012 were $74 million and $2 million, respectively. Additionally, “Selling, general and administrative expenses” in our Consolidated Statements of Operations for the three and six months ended June 30, 2012 included $3 million and $7 million, respectively, of transaction costs associated with the acquisition of our controlling interest in Fibrek.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

The following unaudited pro forma information for the three and six months ended June 30, 2012 and 2011 represents our results of operations as if the acquisition of Fibrek had occurred on January 1, 2011. This pro forma information does not purport to be indicative of the results that would have occurred for the periods presented or that may be expected in the future.

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Unaudited, in millions except per share data)    2012           2011           2012           2011       

Sales

   $ 1,212            $ 1,353            $ 2,387            $ 2,672        

Net (loss) income attributable to Resolute Forest Products Inc.

     (16)             69              3              103        

Basic net (loss) income per share attributable to Resolute Forest Products Inc.

     (0.16)             0.69              0.03              1.03        

Diluted net (loss) income per share attributable to Resolute Forest Products Inc.

     (0.16)             0.69              0.03              1.03        

The unaudited pro forma net (loss) income attributable to Resolute Forest Products Inc. for the three and six months ended June 30, 2012 excludes $7 million and $18 million, respectively, of our and Fibrek’s transaction costs associated with the acquisition.

Acquisition of noncontrolling interest

Subsequent to the May 2, 2012 acquisition date and prior to June 30, 2012, we acquired additional shares of Fibrek, which we accounted for as equity transactions whereby we adjusted the carrying amount of the noncontrolling interest in Fibrek to reflect the change in our ownership interest in Fibrek. As consideration for this additional equity interest in Fibrek, we distributed approximately 0.9 million newly-issued shares of our common stock and Cdn$17 million ($17 million, based on the exchange rates in effect on each of the dates we acquired the shares of Fibrek) in cash. Transaction costs of approximately $1 million associated with the acquisition of noncontrolling interest in Fibrek were recorded in “Additional paid-in capital” in our Consolidated Balance Sheet as of June 30, 2012.

Note 3. Closure Costs, Impairment and Other Related Charges

Closure costs, impairment and other related charges for the three and six months ended June 30, 2012 and 2011 were comprised of the following:

 

      Three Months Ended
June 30,
   Six Months Ended
June 30,
(Unaudited, in millions)    2012         2011         2012         2011     

Accelerated depreciation

     $         –          $         3            $         –             $         4       

Impairment of assets held for sale

       70            –              70               –       

Impairment of long-lived assets

       –            –              –               7       

Severance and other costs

       18            1              23               6       
       $ 88           $ 4            $ 93             $ 17       

Accelerated depreciation

During the three months ended June 30, 2011, we recorded accelerated depreciation charges of $1 million related to the permanent closure of a de-inking line at our Alma, Quebec paper mill and $2 million related to the permanent closure of a paper machine and a thermomechanical pulp line at our Baie-Comeau, Quebec paper mill. During the six months ended June 30, 2011, we also recorded accelerated depreciation charges of $1 million as a result of the decision to cease paperboard production at our Coosa Pines, Alabama paper mill.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Impairment of assets held for sale

In June 2012, we announced the indefinite idling of our Mersey newsprint mill in Nova Scotia. During the three months ended June 30, 2012, we recorded long-lived asset impairment charges of $70 million (including a $7 million writedown of an asset retirement obligation for environmental liabilities) related to the assets held for sale for our interest in Bowater Mersey Paper Company Limited (our “Mersey operations”) to reduce the carrying value of our net assets to fair value less costs to sell.

Impairment of long-lived assets

During the six months ended June 30, 2011, we recorded long-lived asset impairment charges of $7 million as a result of the decision to cease paperboard production at our Coosa Pines paper mill to reduce the carrying value of the assets to their estimated fair value, which was determined based on the assets’ estimated salvage values.

Severance and other costs

During the three months ended June 30, 2012, we recorded $9 million of severance costs and $7 million for a pension plan curtailment loss as a result of the indefinite idling of our Mersey newsprint mill, $2 million for a pension plan settlement loss related to a workforce reduction at our Mersey operations in the fourth quarter of 2011, a $1 million pension plan curtailment loss related to a workforce reduction at our Baie-Comeau paper mill in the first quarter of 2012 and a $1 million credit adjustment for severance costs. During the six months ended June 30, 2012, we also recorded $2 million of severance costs and a $2 million pension curtailment loss as a result of a workforce reduction at our Baie-Comeau paper mill, as well as a $1 million credit adjustment for severance costs and a $2 million pension curtailment loss related to the permanent closure in December 2011 of a paper machine at our Kenogami, Quebec paper mill.

As a result of the decision to cease paperboard production at our Coosa Pines paper mill, during the three months ended June 30, 2011, we recorded $1 million of severance costs and during the six months ended June 30, 2011, we also recorded $2 million of severance costs and a $3 million OPEB plan curtailment loss.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Note 4. Assets Held for Sale, Liabilities Associated with Assets Held for Sale and Net Gain on Disposition of Assets

Assets held for sale and liabilities associated with assets held for sale

Assets held for sale as of June 30, 2012 and December 31, 2011 were comprised of the following:

 

(Unaudited, in millions)    June 30,
2012
   December 31,
2011

Cash and cash equivalents

     $ 5          $ –     

Accounts receivable, net

       24             –     

Inventories, net

       11             –     

Other current assets

       1             –     

Fixed assets, net

       39            7    
       $     80           $     7     

Liabilities associated with assets held for sale as of June 30, 2012 and December 31, 2011 were comprised of the following:

 

(Unaudited, in millions)    June 30,
2012
   December 31,
2011

Accounts payable and accrued liabilities

     $ 26          $     –     

Pension and other postretirement benefit obligations

       37            –    
       $     63           $     –     

As of June 30, 2012, we held for sale our Mersey operations and a parcel of land. We expect to complete the sale of these assets within the next twelve months for amounts that equal or exceed their individual carrying values.

As of December 31, 2011, we held for sale our Petit Saguenay, Quebec sawmill and certain parcels of land.

The assets held for sale are carried in our Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 at the lower of carrying value or fair value less costs to sell.

Net gain on disposition of assets

During the three months ended June 30, 2012, we sold our Petit Saguenay sawmill, our recycling division’s assets located in Phoenix, Arizona and various other assets for proceeds of less than $1 million, resulting in a net gain on disposition of assets of approximately $1 million. During the six months ended June 30, 2012, we also sold a portion of our Mersey timberlands and various other assets for proceeds of $26 million, resulting in a net gain on disposition of assets of $23 million.

During the three months ended June 30, 2011, we sold our investment in ACH Limited Partnership (“ACH”) and various other assets for cash proceeds of $299 million, resulting in a net gain on disposition of assets of $3 million. Additionally, during the six months ended June 30, 2011, we sold our Kenora, Ontario paper mill and various other assets for proceeds of $5 million, resulting in a net gain on disposition of assets of $1 million.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Note 5. Other (Expense) Income, Net

Other (expense) income, net for the three and six months ended June 30, 2012 and 2011 was comprised of the following:

 

      Three Months Ended
June 30,
        Six Months Ended
June 30,
(Unaudited, in millions)    2012    2011         2012   2011

Foreign exchange (loss) gain

     $     (9)             $ 2          $ 3       $     30       

Post-emergence costs (1)

       (3)               (11 )          (5 )       (22)      

Income (loss) from equity method investments

       1               (1 )          2         (1)      

Net gains on extinguishment of debt (Note 11)

       –               4                    4       

Interest income

       2               1            3         1       

Acquisition-related loss (Note 2)

       (1)                          (1 )       –       

Miscellaneous income

       –               3              1         5       
       $     (10)             $ (2 )          $     3       $     17       

 

(1) 

Primarily represents ongoing legal and other professional fees for the resolution and settlement of disputed creditor claims, as well as costs for other post-emergence activities associated with the creditor protection proceedings, from which we emerged on December 9, 2010.

Note 6. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss as of June 30, 2012 and December 31, 2011 was comprised of the following:

 

(Unaudited, in millions)   

June 30,

2012

   December 31,
2011

Unamortized prior service costs (1)

     $           9              $ (2)          

Unamortized actuarial losses (2)

           (325)               (309)          

Foreign currency translation (3)

       1                –           
       $ (315)             $         (311)          

 

(1) 

Net of deferred income taxes of zero as of both June 30, 2012 and December 31, 2011.

(2) 

Net of deferred income tax benefit of $127 million as of both June 30, 2012 and December 31, 2011. Net of unamortized actuarial losses of $13 million and $8 million attributable to noncontrolling interests as of June 30, 2012 and December 31, 2011, respectively.

(3) 

No tax effect was recorded for foreign currency translation since the investment in foreign net assets is deemed indefinitely invested. Net of noncontrolling interests of $1 million of foreign exchange losses and $2 million of foreign exchange gains as of June 30, 2012 and December 31, 2011, respectively.

Note 7. Net (Loss) Income Per Share

The weighted-average number of common shares outstanding used to calculate basic and diluted net (loss) income per share attributable to Resolute Forest Products Inc. common shareholders was 98.9 million and 98.0 million for the three and six months ended June 30, 2012, respectively, and 97.1 million for both the three and six months ended June 30, 2011.

No adjustments to net (loss) income attributable to Resolute Forest Products Inc. common shareholders were necessary to calculate basic and diluted net income per share for all periods presented.

For both the three and six months ended June 30, 2012, the dilutive impact of 0.9 million option shares and 0.4 million equity-classified restricted stock units (“RSUs”) and deferred stock units on the weighted-average number of common shares outstanding used to calculate diluted net loss per share was nominal. For both the three and six months ended June 30, 2011, the dilutive impact of 0.5 million option shares and 0.1 million equity-classified RSUs on the weighted-average number of common shares outstanding used to calculate diluted net income per share was nominal.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Note 8. Inventories, Net

Inventories, net as of June 30, 2012 and December 31, 2011 were comprised of the following:

 

(Unaudited, in millions)    June 30,
2012
   December 31,
2011

Raw materials and work in process

     $      145            $       152          

Finished goods

       196              168          

Mill stores and other supplies

       171              155          
       $ 512            $ 475          

During the three months ended June 30, 2012, we recorded charges of $7 million for write-downs of inventory as a result of the indefinite idling of our Mersey newsprint mill. During the six months ended June 30, 2011, we recorded charges of $1 million for write-downs of inventory as a result of the decision to cease paperboard production at our Coosa Pines paper mill. These charges were included in “Cost of sales, excluding depreciation, amortization and cost of timber harvested” in our Consolidated Statements of Operations.

Note 9. Restricted Cash

In connection with the sale of our investment in Manicouagan Power Company (“MPCo”) in December 2009, we provided certain undertakings and indemnities to Alcoa Canada Ltd., our former partner in MPCo, including an indemnity for potential tax liabilities arising from the transaction. As of June 30, 2012 and December 31, 2011, we maintained a reserve of approximately Cdn$5 million ($5 million, based on the exchange rate in effect on June 30, 2012) and Cdn$83 million ($81 million, based on the exchange rate in effect on December 31, 2011), respectively, to secure those obligations. The decrease in the reserve was primarily due to the release of a tax indemnity in the second quarter of 2012. This reserve was included as restricted cash in “Other assets” in our Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011.

Note 10. Severance Related Liabilities

The activity in our severance related liabilities for the six months ended June 30, 2012 was as follows:

 

(Unaudited, in millions)   

2012

Initiatives

 

2011

Initiatives

  Total

Balance as of December 31, 2011

     $     –       $     11       $     11  

Charges

       13                 13  

Payments

       (3 )       (8 )       (11 )

Transfer to liabilities associated with assets held for sale

       (10 )               (10 )

Balance as of June 30, 2012

     $       $ 3       $ 3  

During the six months ended June 30, 2012, we recorded employee termination costs as a result of the indefinite idling of our Mersey newsprint mill and workforce reductions at our Baie-Comeau paper mill and certain other paper mills. The majority of the remaining severance liability is expected to be paid in 2012.

Employee termination costs incurred in the six months ended June 30, 2012 were included in “Cost of sales, excluding depreciation, amortization and cost of timber harvested,” “Selling, general and administrative expenses” or “Closure costs, impairment and other related charges” in our Consolidated Statements of Operations. The severance accruals were included in “Accounts payable and accrued liabilities” in our Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Note 11. Long-Term Debt

Overview

Short-term bank debt and long-term debt, including current portion, as of June 30, 2012 and December 31, 2011, was comprised of the following:

 

(Unaudited, in millions)    June 30,
2012
   December 31,
2011

10.25% senior secured notes due 2018:

         

Principal amount

     $      586            $       586          

Unamortized premium

       33              35          

Total senior secured notes due 2018

       619              621          

Fibrek debt:

         

8.25% secured term loan

       75              –          

ABL credit facility

       21              –          

PSIF – Investissement Quebec loan

       3              –          

Capital lease obligation

       4              –          

Total Fibrek debt

       103              –          

Total debt

       722              621          

Less: Short-term bank debt (Fibrek ABL credit facility)

       (21)             –          

Less: Current portion of long-term debt

       (77)             –          

Long-term debt, net of current portion

     $ 624            $ 621          

10.25% senior secured notes due 2018

Our 10.25% senior secured notes (the “2018 Notes”) have a maturity date of October 15, 2018. Interest is payable on the notes on April 15 and October 15 of each year until maturity. The fair value of the 2018 Notes was $654 million and $649 million as of June 30, 2012 and December 31, 2011, respectively, and was determined by reference to quoted market prices.

In June 2011, we redeemed $94 million and $85 million of principal amount of the 2018 Notes at a redemption price of 105% and 103%, respectively, of the principal amount, plus accrued and unpaid interest. As a result of these redemptions, during the three months ended June 30, 2011, we recorded net gains on extinguishment of debt of approximately $4 million, which were included in “Other (expense) income, net” in our Consolidated Statements of Operations.

In the second quarter of 2011, we also repaid $90 million of other long-term debt.

ABL Credit Facility

Our senior secured credit facility (the “ABL Credit Facility”), as amended, has a maturity date of October 28, 2016 and provides an asset-based revolving credit facility of up to $600 million at any time, subject to borrowing base availability. As of June 30, 2012, we had no borrowings and $50 million of letters of credit outstanding under the ABL Credit Facility. As of June 30, 2012, we had $472 million of availability under the ABL Credit Facility, which was comprised of $253 million for the U.S. borrowers (Resolute FP US Inc. and AbiBow Recycling LLC) and $219 million for the Canadian borrower (Resolute FP Canada Inc.).

Fibrek Debt

As discussed in Note 2, “Acquisition of Fibrek Inc.,” we assumed Fibrek’s outstanding indebtedness on the acquisition date.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

8.25% secured term loan

Fibrek’s term loan provided for a five-year secured term loan with a principal amount of Cdn$78 million, bearing interest at a rate of 8.25% and was to be repaid in quarterly installments at a rate of approximately 1% per annum of the original principal amount, with the balance due at maturity on July 15, 2015. As of June 30, 2012, the fair value of the term loan approximated its carrying value of $75 million and was determined by discounting the cash flows using current interest rates for financial instruments with similar characteristics and maturities.

On July 18, 2012, the term loan was repaid in full, plus accrued and unpaid interest. The term loan was included in “Current portion of long-term debt” in our Consolidated Balance Sheet as of June 30, 2012.

ABL credit facility

Fibrek’s asset-based revolving credit facility provided for borrowings of up to Cdn$75 million and had a maturity date of July 16, 2014. As of June 30, 2012, Fibrek had Cdn$18 million ($18 million, based on the exchange rate in effect on June 30, 2012) of availability under the facility.

On July 18, 2012, the facility was repaid in full, plus accrued and unpaid interest.

PSIF – Investissement Quebec

On February 23, 2007, Fibrek obtained a Cdn$6 million interest-free loan granted by Investissement Quebec through the Soutien a l’industrie forestiere program (“PSIF”) to support investments made in the forest industry. The loan is payable in monthly installments over a maximum of four years starting December 31, 2010.

Under the loan agreement, Fibrek must comply with certain restrictive covenants, including the requirement to meet certain financial ratios.

As of June 30, 2012, the fair value of the loan approximated its carrying value of $3 million.

Capital lease obligation

Fibrek has a capital lease obligation for a warehouse, which can be renewed for 20 years at Fibrek’s option. Minimal payments are determined by an escalatory price clause.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Note 12. Employee Benefit Plans

Pension and OPEB plans

The components of net periodic benefit cost relating to our pension and OPEB plans for the three and six months ended June 30, 2012 and 2011 were as follows:

 

Pension Plans:

 

                                                           
      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Unaudited, in millions)    2012      2011      2012      2011  

Service cost

     $      9              $     9             $     18            $     18      

Interest cost

     76              83             152            166      

Expected return on plan assets

     (83)             (87)            (167)           (174)     

Curtailments and settlement

     10              –             14            –      
       $    12              $     5             $     17            $     10      

OPEB Plans:

 

                                                           
      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Unaudited, in millions)    2012      2011      2012      2011  

Service cost

     $       –              $    1              $       1            $       2      

Interest cost

     5              5              10            11      

Curtailment

     –              –              –            3      
       $       5              $    6              $     11            $     16      

Events impacting net periodic benefit cost for the three and six months ended June 30, 2012

In June 2012, we announced the indefinite idling of part of our Mersey operations, which will result in the elimination of approximately 176 positions. A curtailment loss of $7 million was included in the net periodic benefit cost of our pension plans for the three months ended June 30, 2012.

In the fourth quarter of 2011, as a result of a workforce reduction at our Mersey operations, approximately 97 positions were eliminated. A settlement loss of $2 million was included in the net periodic benefit cost of our pension plans for the three months ended June 30, 2012.

In March 2012, we announced a workforce reduction at our Baie-Comeau paper mill, which resulted in the elimination of approximately 90 positions. A curtailment loss of $1 million and $3 million was included in the net periodic benefit cost of our pension plans for the three and six months ended June 30, 2012, respectively.

As a result of the permanent closure in December 2011 of a paper machine at our Kenogami paper mill, approximately 112 positions were eliminated. A curtailment loss of $2 million was included in the net periodic benefit cost of our pension plans for the six months ended June 30, 2012.

The cost of these curtailments and settlement was included in “Closure costs, impairment and other related charges” in our Consolidated Statements of Operations for the respective periods.

Event impacting net periodic benefit cost for the six months ended June 30, 2011

In February 2011, as a result of the decision to cease paperboard production at our Coosa Pines paper mill, approximately 137 positions were eliminated. A curtailment loss of $3 million was included in the net periodic benefit cost of our OPEB plans, which was recorded in “Closure costs, impairment and other related charges” in our Consolidated Statements of Operations for the six months ended June 30, 2011.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Defined contribution plans

The expense for our defined contribution plans totaled $5 million and $7 million for the three months ended June 30, 2012 and 2011, respectively, and $11 million for both the six months ended June 30, 2012 and 2011.

Canadian pension funding relief

Based on agreements reached before we emerged from the creditor protection proceedings, the provinces of Quebec and Ontario adopted in 2011 specific regulations, which we refer to as the “funding relief regulations,” to implement funding relief measures with respect to aggregate solvency deficits in our material Canadian registered pension plans, which we refer to as the “affected plans.” These plans represent approximately 80% of our unfunded pension obligations. The funding relief regulations are described in Note 18, “Pension and Other Postretirement Benefit Plans – Canadian pension funding relief,” to our consolidated financial statements for the year ended December 31, 2011. The regulations provide that corrective measures would be required if the aggregate solvency ratio in the affected plans falls below a prescribed level under the target specified by the regulations, as of December 31 in any year through 2014. Thereafter, supplemental contributions would be required if the aggregate solvency ratio in the affected plans falls below a prescribed level under the target specified by the regulations as of December 31 in any year on or after 2015 for the remainder of the period covered by the regulations.

Upon obtaining actuarial valuations, we determined that the aggregate solvency ratio in the affected plans had not met the minimum solvency level prescribed in the regulations, as of December 31, 2011. Accordingly, we must adopt, by March 2013, corrective measures designed to attain the target solvency ratio prescribed in the regulations within five years. The difference between the solvency status as of December 31, 2011 and the target specified under the funding relief regulations represents the portion of the solvency deficit that is subject to corrective measures, and amounts to approximately Cdn$500 million ($500 million, based on the exchange rate in effect on June 30, 2012). The solvency deficit is highly sensitive to changes in interest rates on government treasury securities; a 1% increase in the applicable discount rate, which is correlated to treasury security yields, would decrease the solvency deficit by approximately $450 million and vice versa.

We will work with other plan stakeholders, including employees, retirees, unions and the provincial governments of Quebec and Ontario to develop corrective measures.

Note 13. Income Taxes

The income tax (provision) benefit attributable to (loss) income before income taxes differs from the amounts computed by applying the United States federal statutory income tax rate of 35% for the three and six months ended June 30, 2012 and 2011 as a result of the following:

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Unaudited, in millions)    2012      2011      2012      2011  

(Loss) income before income taxes

     $  (64)           $    22              $  (41)           $  38       

Income tax (provision) benefit:

           

Expected income tax benefit (provision)

     22            (7)             14            (13)      

Changes resulting from:

           

Valuation allowance

     (31)           1              (28)           (1)      

Reorganization-related adjustments

     13            –              10            10       

Adjustment for unrecognized tax benefits

     –            44              4            44       

Foreign exchange

     (4)           3              3            14       

Research and development tax incentives

     1            –              3            –       

State income taxes and foreign tax rate differences

     (1)           –              1            1       

Other, net

     (1)           (2)             2            (2)      
       $    (1)           $    39              $     9            $  53       

The increase in the valuation allowance during the three months ended June 30, 2012 related to costs associated with the indefinite idling of our Mersey operations where we do not recognize tax benefits.

During the three and six months ended June 30, 2012, we recorded favorable reorganization-related adjustments of $13 million and $10 million, respectively.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

During the six months ended June 30, 2012, we recorded benefits of $4 million for previously unrecognized tax benefits, following the conclusion of audits related to prior year research and development tax incentive claims. During the three months ended June 30, 2011, we recognized certain tax benefits related to uncertain tax positions pursuant to FASB ASC 740, “Income Taxes,” as effectively settled, as certain tax authority examinations were completed during the second quarter of 2011.

Note 14. Commitments and Contingencies

Legal matters

We are involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers’ compensation claims, Aboriginal claims and other matters. We periodically review the status of these proceedings with both inside and outside counsel. Although the final outcome of any of these matters is subject to many variables and cannot be predicted with any degree of certainty, we establish reserves for a matter (including legal costs expected to be incurred) when we believe an adverse outcome is probable and the amount can be reasonably estimated. We believe that the ultimate disposition of these matters will not have a material adverse effect on our financial condition, but it could have a material adverse effect on our results of operations in any given quarter or year.

On June 12, 2012, we filed a motion for directives with the Quebec Superior Court in Canada, the court with jurisdiction in our 2010 creditor protection proceedings under the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”), 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 Abitibi-Consolidated Inc. and Bowater Incorporated operations in these provinces, or a declaration that any claim for accelerated reimbursements of deficits arising from a partial wind-up is a barred claim under the creditor protection proceedings. These plans are subject to the funding relief regulations described in Note 12, “Employee Benefit Plans,” and we contend, among other things, that any such declaration, if issued, would be inconsistent with the court’s sanction order confirming the plan of reorganization and the terms of our emergence from the creditor protection proceedings. A partial wind-up would likely shorten the period in which any deficit within those plans would have to be funded. The pension regulators are expected to file contestations to our motion by the end of August 2012.

On March 31, 2010, the Canadian court in the CCAA proceedings dismissed a motion for declaratory judgment brought by the province of Newfoundland and Labrador, awarding costs in our favor, and thus confirmed our position that the five orders the province issued under section 99 of its Environmental Protection Act on November 12, 2009 were subject to the stay of proceedings pursuant to the creditor protection proceedings. The province of Newfoundland and Labrador’s orders could have required us to proceed immediately with the environmental remediation of various sites we formerly owned or operated, some of which the province expropriated in December 2008. The Quebec Court of Appeal denied the province’s request for leave to appeal on May 18, 2010. An appeal of that decision is now pending before the Supreme Court of Canada, which heard the matter on November 16, 2011. If leave to appeal is ultimately granted and the appeal is allowed, we could be required to make additional environmental remediation payments without regard to the creditor protection proceedings, which payments could have a material impact on our results of operations or financial condition.

Information on our commitments and contingencies is presented in Note 20, “Commitments and Contingencies,” included in our consolidated financial statements for the year ended December 31, 2011. Except as updated above, there have been no material developments to the commitments and contingencies described in our consolidated financial statements for the year ended December 31, 2011.

Other

On June 15, 2012, the province of Quebec informed us that it had granted an additional extension of the effective date to require us to transfer property of our Jim-Gray hydroelectric facility and the associated installation to the province for no consideration following the non-renewal of our water power lease on January 1, 2012. As extended, the transfer would be effective as of October 30, 2012. The province’s actions are not consistent with our understanding of the water power lease in question. We continue to evaluate our legal options. At this time, we believe that the remaining useful life of the assets remains unchanged. The carrying value of the hydroelectric assets and the intangible assets associated with the Jim-Gray installation as of June 30, 2012 was approximately $93 million. If we are unable to renew the water rights at this facility, we will reevaluate the remaining useful life of these assets, which may result in accelerated depreciation and amortization charges at that time. Additional information regarding our Jim-Gray hydroelectric facility is presented in Note 4, “Amortizable Intangible Assets, Net,” and Note 12, “Fixed Assets, Net,” included in our consolidated financial statements for the year ended December 31, 2011.

Note 15. Share Capital

On May 22, 2012, our board approved a share repurchase program of up to 10% of our common stock, for an aggregate purchase price of up to $100 million. During the three months ended June 30, 2012, we repurchased 1.1 million shares of our common stock pursuant to this share repurchase program at a cost of $12 million.

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Note 16. Segment Information

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

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, employee termination costs, net gain on disposition of assets and other discretionary charges or credits are not allocated to our segments. We allocate depreciation expense to our segments, although the related fixed assets are not allocated to segment assets. Additionally, all selling, general and administrative expenses, excluding employee termination costs and certain discretionary charges and credits, are allocated to our segments.

Information about certain segment data for the three and six months ended June 30, 2012 and 2011 was as follows:

 

(Unaudited, in millions)   Newsprint     Coated
Papers
    Specialty
Papers
    Market
Pulp (1)
    Wood
Products
    Corporate
and Other
    Consolidated
Total
 

Sales

             

Second quarter 2012

    $    416        $    121        $    288        $    211        $    132           $    –            $    1,168       

Second quarter 2011

    462        132        320        171        115           –            1,200       

First six months 2012

    832        249        560        338        243           –            2,222       

First six months 2011

    891        266        650        347        231           –            2,385       

Depreciation, amortization and cost of timber harvested

             

Second quarter 2012

    $      18        $        9        $      12        $      10        $        9           $    –            $         58       

Second quarter 2011

    17        8        13        7        10           –            55       

First six months 2012

    36        19        24        18        18           –            115       

First six months 2011

    37        17        24        14        17           –            109       

Operating income (loss) (2)

             

Second quarter 2012

    $      32        $        4        $      27        $     (7)        $      12           $   (104 )         $       (36)      

Second quarter 2011

    26        23        11        14        (14)         (8 )         52       

First six months 2012

    53        3        42        (28)        6           (86 )         (10)      

First six months 2011

    45        26        11        37        (17)         (23 )         79       

 

(1) 

Market pulp sales excluded inter-segment sales of $8 million and $11 million for the three months ended June 30, 2012 and 2011, respectively, and $19 million and $26 million for the six months ended June 30, 2012 and 2011, respectively.

 

(2) 

Corporate and other operating loss for the three and six months ended June 30, 2012 and 2011 included the following special items:

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
(Unaudited, in millions)    2012      2011      2012      2011  

Net gain on disposition of assets

     $      1           $    3             $     24          $    4      

Closure costs, impairment and other related charges

     (88)          (4)            (93)         (17)     

Write-downs of inventory

     (7)          –             (7)         (1)     

Employee termination costs

     (1)          (3)            (3)         (7)     

Transaction costs in connection with our acquisition of Fibrek

     (3)          –             (7)         –      
       $   (98)          $   (4)            $    (86)         $ (21)     

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

Note 17. 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 2018 Notes that are fully and unconditionally guaranteed, on a joint and several basis, by all of our 100% owned material U.S. subsidiaries (the “Guarantor Subsidiaries”). The 2018 Notes are not guaranteed by our foreign subsidiaries and our less than 100% owned U.S. subsidiaries (the “Non-guarantor Subsidiaries”).

The following condensed consolidating financial information sets forth the Statements of Operations for the three and six months ended June 30, 2012 and 2011, the Balance Sheets as of June 30, 2012 and December 31, 2011 and the Statements of Cash Flows for the six months ended June 30, 2012 and 2011 for Resolute Forest Products Inc. (the “Parent”), the Guarantor Subsidiaries on a combined basis and the Non-guarantor Subsidiaries 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 elimination entries to eliminate the investments in subsidiaries and intercompany balances and transactions.

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2012

 

(Unaudited, in millions)    Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Sales

     $    –              $    729              $      797              $    (358)             $    1,168        

Costs and expenses:

              

Cost of sales, excluding depreciation, amortization and cost of timber harvested

     –              633              610              (358)             885        

Depreciation, amortization and cost of timber harvested

     –              22              36              –              58        

Distribution costs

     –              38              95              –              133        

Selling, general and administrative expenses

     6              8              27              –              41        

Closure costs, impairment and other related charges

     –              –              88              –              88        

Net gain on disposition of assets

     –              –              (1)             –              (1)       

Operating (loss) income

     (6)             28              (58)             –              (36)       

Interest expense

     (52)             (1)             (4)             39              (18)       

Other income (expense), net

     –              40              (11)             (39)             (10)       

Parent’s equity in income (loss) of subsidiaries

     17              –              –              (17)             –        

(Loss) income before income taxes

     (41)             67              (73)             (17)             (64)       

Income tax benefit (provision)

     21             (15)             (7)             –              (1)       

Net (loss) income including noncontrolling interests

     (20)             52              (80)             (17)             (65)       

Net loss attributable to noncontrolling interests

     –              –              45              –              45        

Net (loss) income attributable to Resolute Forest Products Inc.

   $     (20)             $      52              $      (35)             $    (17)             $    (20)       

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2012

 

(Unaudited, in millions)    Parent     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Sales

   $     –        $    1,445             $     1,531               $(754)              $ 2,222   

Costs and expenses:

             

Cost of sales, excluding depreciation, amortization and cost of timber harvested

            1,287               1,188               (754)                1,721   

Depreciation, amortization and cost of timber harvested

            46               69               –                 115   

Distribution costs

            70               184               –                 254   

Selling, general and administrative expenses

     12        23               38               –                 73   

Closure costs, impairment and other related charges

            –               93               –                 93   

Net gain on disposition of assets

            –               (24)              –                 (24

Operating (loss) income

     (12     19               (17)              –                 (10

Interest expense

     (106     (2)              (5)              79                 (34

Other income, net

            83               (1)              (79)                3   

Parent’s equity in income of subsidiaries

     78        –               –               (78)                  

(Loss) income before income taxes

     (40     100               (23)              (78)                (41

Income tax benefit (provision)

     43        (30)             (4)              –                 9   

Net income (loss) including noncontrolling interests

     3        70               (27)              (78)                (32

Net loss attributable to noncontrolling interests

            –               35               –                 35   

Net income attributable to Resolute Forest Products Inc.

   $ 3        $    70               $        8               $  (78)              $ 3   

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2011

 

(Unaudited, in millions)    Parent     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Sales

   $        $    776               $    788                 $(364)                $    1,200     

Costs and expenses:

             

Cost of sales, excluding depreciation, amortization and cost of timber harvested

            654               621                 (364)                911     

Depreciation, amortization and cost of timber harvested

            22               33                 –                 55     

Distribution costs

            41               100                 –                 141     

Selling, general and administrative expenses

     (1     11               30                 –                 40     

Closure costs, impairment and other related charges

            1               3                 –                 4     

Net gain on disposition of assets

            –               (3)                –                 (3)    

Operating income

     1        47               4                 –                 52     

Interest expense

     (55     (3)              (5)                35                 (28)    

Other income (expense), net

     3        40               (10)                (35)                (2)    

Parent’s equity in income (loss) of subsidiaries

     94        –               –                 (94)                –     

Income (loss) before income taxes

     43        84               (11)                (94)                22     

Income tax benefit

     18        16               5                 –                 39     

Net income (loss) including noncontrolling interests

     61        100               (6)                (94)                61     

Net income attributable to noncontrolling interests

            –               –                 –                 –     

Net income (loss) attributable to Resolute Forest Products Inc.

   $     61        $      100               $       (6)                $  (94)                $         61     

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2011

 

 
(Unaudited, in millions)    Parent     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Sales

     $      –        $    1,568               $    1,553                 $  (736)                $    2,385     

Costs and expenses:

             

Cost of sales, excluding depreciation, amortization and cost of timber harvested

            1,339               1,230                 (736)                1,833     

Depreciation, amortization and cost of timber harvested

            45               64                 –                 109     

Distribution costs

            80               194                 –                 274     

Selling, general and administrative expenses

     1        23               53                 –                 77     

Closure costs, impairment and other related charges

            14               3                 –                 17     

Net gain on disposition of assets

            –               (4)                –                 (4)    

Operating (loss) income

     (1     67               13                 –                 79     

Interest expense

     (111     (5)              (13)                71                 (58)    

Other income, net

     12        68               8                 (71)                17     

Parent’s equity in income of subsidiaries

     158        –               –                 (158)                –     

Income before income taxes

     58        130               8                 (158)                38     

Income tax benefit

     33        3               17                 –                 53     

Net income including noncontrolling interests

     91        133               25                 (158)                91     

Net income attributable to noncontrolling interests

            –               –                 –                 –     

Net income attributable to Resolute Forest Products Inc.

     $    91        $       133               $         25                  $  (158)                $     91     

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

CONDENSED CONSOLIDATING BALANCE SHEET

As of June 30, 2012

 

 
(Unaudited, in millions)    Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Assets

              

Current assets:

              

Cash and cash equivalents

     $            –         $       179           $       331             $          –             $       510     

Accounts receivable, net

             328           353             –             681     

Accounts receivable from affiliates

             3           331             (334)            –     

Inventories, net

             182           330             –             512     

Assets held for sale

             –           80             –             80     

Deferred income tax assets

             27           83             –             110     

Notes and interest receivable from parent

             1,317           –             (1,317)            –     

Note receivable from affiliate

             9           –             (9)            –     

Other current assets

             25           41             –             66     

Total current assets

             2,070           1,549             (1,660)            1,959     

Fixed assets, net

             913           1,587             –             2,500     

Amortizable intangible assets, net

             –           70             –             70     

Deferred income tax assets

             533           1,222             –             1,755     

Note receivable from affiliate

             3           –             (3)            –     

Investments in and advances to consolidated subsidiaries

     5,938         2,058           –             (7,996)            –     

Other assets

             23           58             108             189     

Total assets

     $    5,938         $    5,600           $    4,486             $(9,551)            $    6,473     

Liabilities and equity

              

Current liabilities:

              

Accounts payable and accrued liabilities

     $         13         $       169           $       367             $          –             $       549     

Short-term bank debt

             –           21             –             21     

Current portion of long-term debt

             –           77             –             77     

Liabilities associated with assets held for sale

             –           63             –             63     

Accounts payable to affiliates

     211         –           –             (211)            –     

Notes and interest payable to subsidiaries

     1,317         –           –             (1,317)            –     

Note payable to affiliate

             –           9             (9)            –     

Total current liabilities

     1,541         169           537             (1,537)            710     

Long-term debt, net of current portion

     619         –           5             –             624     

Long-term debt due to affiliate

             –           3             (3)            –     

Pension and other postretirement benefit obligations

             458           1,062             –             1,520     

Deferred income tax liabilities

             –           73             –             73     

Other long-term liabilities

             33           23             –             56     

Total liabilities

     2,160         660           1,703             (1,540)            2,983     

Total equity

     3,778         4,940           2,783             (8,011)            3,490     

Total liabilities and equity

     $    5,938         $    5,600           $    4,486             $(9,551)            $    6,473     

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2011

 

 
(Unaudited, in millions)    Parent      Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Assets

              

Current assets:

              

Cash and cash equivalents

     $            –         $       128           $       241             $          –             $       369     

Accounts receivable, net

             349           401             –             750     

Accounts receivable from affiliates

             70           302             (372)            –     

Inventories, net

             172           303             –             475     

Assets held for sale

             –           7             –             7     

Deferred income tax assets

             27           82             –             109     

Notes and interest receivable from parent

             1,238           –             (1,238)            –     

Note receivable from affiliate

             11           –             (11)            –     

Other current assets

             16           43             –             59     

Total current assets

             2,011           1,379             (1,621)            1,769     

Fixed assets, net

             938           1,564             –             2,502     

Amortizable intangible assets, net

             –           18             –             18     

Deferred income tax assets

             524           1,225             –             1,749     

Note receivable from affiliate

             3           –             (3)            –     

Investments in and advances to consolidated subsidiaries

     5,846         2,055           –             (7,901)            –     

Other assets

             27           128             105             260     

Total assets

     $    5,846         $    5,558           $    4,314             $(9,420)            $    6,298     

Liabilities and equity

              

Current liabilities:

              

Accounts payable and accrued liabilities

     $         15         $       166           $       363             $         –             $       544     

Accounts payable to affiliates

     220         27           –             (247)            –     

Notes and interest payable to subsidiaries

     1,238         –           –             (1,238)            –     

Note payable to affiliate

             –           11             (11)            –     

Total current liabilities

     1,473         193           374             (1,496)            544     

Long-term debt, net of current portion

     621         –           –             –             621     

Long-term debt due to affiliate

             –           3             (3)              

Pension and other postretirement benefit obligations

             475           1,049             –             1,524     

Deferred income tax liabilities

             –           75             –             75     

Other long-term liabilities

             34           23             –             57     

Total liabilities

     2,094         702           1,524             (1,499)            2,821     

Total equity

     3,752         4,856           2,790             (7,921)            3,477     

Total liabilities and equity

     $    5,846         $    5,558           $    4,314             $(9,420)            $    6,298     

 

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RESOLUTE FOREST PRODUCTS INC.

Notes to Unaudited Interim Consolidated Financial Statements

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2012

 

 
(Unaudited, in millions)    Parent     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Net cash provided by operating activities

   $      –        $    75               $      98               $ –       $ 173   

Cash flows from investing activities:

             

Cash invested in fixed assets

            (24)              (34)                      (58

Disposition of assets

            –               26                       26   

Acquisition of Fibrek, net of cash acquired

            –               (24)                      (24

Decrease in restricted cash

            –               76                       76   

Increase in deposit requirements for letters of credit, net

            –               (7)                      (7

Advances from (to) affiliate

     12        –               (12)                        

Net cash provided by (used in) investing activities

     12        (24)              25                       13   

Cash flows from financing activities:

             

Purchases of treasury stock

     (12     –               –                       (12

Dividend to noncontrolling interests

            –               (1)                      (1

Acquisition of noncontrolling interest

            –               (17)                      (17

Payments of long-term debt

            –               (15)                      (15

Net cash used in financing activities

     (12     –               (33)                      (45

Net increase in cash and cash equivalents

            51               90                       141   

Cash and cash equivalents:

             

Beginning of period

            128               241                       369   

End of period

   $        $    179               $    331               $    –       $ 510   
                                             

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2011

 

 
(Unaudited, in millions)    Parent     Guarantor
Subsidiaries
     Non-guarantor
Subsidiaries
     Consolidating
Adjustments
     Consolidated  

Net cash provided by (used in) operating activities

   $        $    69               $    (54)            $       $ 15   

Cash flows from investing activities:

             

Cash invested in fixed assets

            (13)              (19)                      (32

Disposition of investment in ACH

            –               296                       296   

Disposition of other assets

            –               8                       8   

Proceeds from insurance settlement

            –               4                       4   

Increase in restricted cash

            –               (3)                      (3

Increase in deposit requirements for letters of credit, net

            –               (7)                      (7

Advances from (to) affiliate

            150               (150)                        

Net cash provided by investing activities

            137               129                       266   

Cash flows from financing activities:

             

Dividends and distribution to noncontrolling interests

            –               (19)                      (19

Acquisition of noncontrolling interest

            –               (15)                      (15

Payments of long-term debt

            (269)              –                       (269

Net cash used in financing activities

            (269)              (34)                      (303

Net (decrease) increase in cash and cash equivalents

            (63)              41                       (22

Cash and cash equivalents:

             

Beginning of period

            164               155                       319   

End of period

   $     –        $    101               $    196             $     –       $ 297   

 

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Notes to Unaudited Interim Consolidated Financial Statements

 

Note 18. Subsequent Events

The following significant events occurred subsequent to June 30, 2012:

 

   

As discussed in Note 11, “Long-Term Debt,” on July 18, 2012, both Fibrek’s term loan and ABL credit facility were repaid in full, plus accrued and unpaid interest, totaling $97 million.

 

   

As discussed in Note 2, “Acquisition of Fibrek Inc.,” on July 31, 2012, we completed the second step transaction for the remaining 25.4% of the outstanding Fibrek shares. We distributed aggregate additional consideration of approximately 0.5 million shares and Cdn$10 million ($10 million, based on the exchange rate in effect on July 31, 2012). The remaining portion of the consideration, approximately 0.4 million shares and Cdn$8 million ($8 million, based on the exchange rate in effect on July 31, 2012), will only be distributed or paid out upon settlement or judicial determination of the fair value of claims by dissenting shareholders of Fibrek.

 

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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 of financial condition and results of operations (“MD&A”) of Resolute Forest Products Inc. (with its subsidiaries and affiliates, either individually or collectively, unless otherwise indicated, referred to as “Resolute Forest Products,” “we,” “our,” “us” or the “Company”) provides information that we believe is useful in understanding our results of operations, cash flows and financial condition for the three and six months ended June 30, 2012. This discussion should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited interim consolidated financial statements and related notes appearing in Item 1 of this Quarterly Report on Form 10-Q (“Unaudited Interim Consolidated Financial Statements”). On November 7, 2011, we began doing business as Resolute Forest Products. At the annual meeting of shareholders on May 23, 2012, the shareholders approved an amendment to our certificate of incorporation to change our corporate name from AbitibiBowater Inc. to Resolute Forest Products Inc., effective May 24, 2012. The ticker symbol for our common stock was changed from “ABH” to “RFP” on the New York Stock Exchange on May 24, 2012 and on the Toronto Stock Exchange on May 28, 2012.

Cautionary Statements Regarding Forward-Looking Information and Use of Third-Party Data

Statements in this Quarterly Report on Form 10-Q (“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 to continue to reduce costs and increase revenues and profitability, including our cost reduction initiatives; our business outlook; our assessment of market conditions; our liquidity outlook (including the impact of the solvency deficit in certain of our Canadian pension plans), our prospects, growth strategies and strategies for achieving our goals generally, including the strategies described under “Business Strategy and Outlook” below; and the industry in which we operate. 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 risks associated with our acquisition of Fibrek Inc. (“Fibrek”), including that the businesses of Resolute and Fibrek may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected and disruption from the transaction making it more difficult to maintain relationships with customers, employees and suppliers and the risks enumerated under Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the United States Securities and Exchange Commission (the “SEC”) on February 29, 2012 (the “2011 Annual Report”).

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

Market and industry data

Information about industry or general economic conditions contained in this Form 10-Q is derived from third-party sources and certain trade publications (“Third-Party Data”) that we believe are widely accepted and accurate; however, we have not independently verified this information and cannot provide assurances of its accuracy.

Business Strategy and Outlook

We are guided by our vision and values, focusing on safety, profitability, accountability, sustainability and teamwork. As a result of aggressive cost reductions and mill rationalizations, today we compete as a leading, lower-cost North American producer, counting on efficient operations, strong economies of scale and access to competitive sources of energy and fiber. Our corporate strategy includes, on the one hand, a gradual retreat from certain paper grades, and on the other, using our strong financial position to act on opportunities to diversify and grow. That strategy focuses on three core themes: operational excellence, disciplined use of capital and strategic initiatives.

 

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Operational excellence

We aim to improve our performance and margins by: (i) leveraging our lower-cost position, (ii) maintaining a stringent focus on reducing costs and optimizing our diversified asset base, (iii) maximizing the benefits of our access to virgin fiber and managing our exposure to volatile recycled fiber, (iv) pursuing our strategy of not building inventory and (v) capitalizing on our economical access to international markets to compensate for the secular decline in North American newsprint demand.

Corporate initiatives

We make capital management a priority. Building on our focus to reduce manufacturing costs, we will continue our efforts to decrease overhead and spend our capital in a disciplined, strategic and focused manner, concentrated on our most successful sites.

Reducing debt and associated interest charges is one of our primary financial goals. We believe this improves our financial flexibility and supports the implementation of our strategic objectives.

On May 22, 2012, our board approved a share repurchase program of up to 10% of our common stock, for an aggregate purchase price of up to $100 million. During the three months ended June 30, 2012, we repurchased 1.1 million shares of our common stock pursuant to this share repurchase program at a cost of $12 million.

Strategic initiatives

We believe there will be continued consolidation in the paper and forest products industry as we and our competitors continue to explore ways to increase efficiencies and grow into more favorable markets. We believe in taking an opportunistic approach to strategic opportunities, pursuing only those that reduce our cost position, improve our product diversification, provide synergies or allow us to expand into future growth markets.

On December 15, 2011, we announced an offer to purchase all of the issued and outstanding shares of Fibrek, a producer and marketer of virgin and recycled kraft pulp, operating three mills. As of May 17, 2012, the offer expiry date, we had acquired approximately 74.6% of the then outstanding Fibrek shares, and, as aggregate consideration for the shares, we distributed approximately 2.8 million newly-issued shares of our common stock and Cdn$53 million ($53 million, based on the exchange rates in effect on each of the dates we acquired the shares of Fibrek) in cash. On July 31, 2012, we completed the second step transaction for the remaining 25.4% of the outstanding Fibrek shares. We distributed aggregate additional consideration of approximately 0.5 million shares and Cdn$10 million ($10 million, based on the exchange rate in effect on July 31, 2012). The remaining portion of the consideration, approximately 0.4 million shares and Cdn$8 million ($8 million, based on the exchange rate in effect on July 31, 2012), will only be distributed or paid out upon settlement or judicial determination of the fair value of claims by dissenting shareholders of Fibrek. For additional information regarding our acquisition of Fibrek, see Note 2, “Acquisition of Fibrek Inc.,” to our Unaudited Interim Consolidated Financial Statements.

Business and Financial Review

Overview

Through our subsidiaries, we manufacture newsprint, coated and specialty papers, market pulp and wood products. We operate pulp and paper manufacturing facilities in Canada, the United States and South Korea, as well as wood products manufacturing facilities in Canada and hydroelectric facilities in Quebec, Canada.

As discussed further below, newsprint, coated papers and specialty papers, particularly supercalendered high gloss papers and lightweight and directory grades, experienced decreases in North American demand in the first six months of 2012 compared to the same period of 2011. Global shipments of market pulp increased during the first six months of 2012 compared to the same period of 2011, particularly in China, but market pricing fell substantially. Our wood products segment benefited from a significant increase in market pricing in the second quarter of 2012 compared to the second quarter of 2011.

The average value of the Canadian dollar was US$0.99 for both the three and six months ended June 30, 2012 compared to US$1.03 and US$1.02 for the three and six months ended June 30, 2011, respectively.

Fibrek’s results of operations have been included in our Unaudited Interim Consolidated Financial Statements beginning May 2, 2012, which is the date on which we acquired a controlling interest, and are included in the market pulp segment. The amount of Fibrek’s sales, operating income and net income included in our Consolidated Statements of Operations included in our Unaudited Interim Consolidated Financial Statements (“Consolidated Statements of Operations”) for both the three and six months ended June 30, 2012 were $74 million, $1 million and $2 million, respectively.

 

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Consolidated Results of Operations

 

      Three Months Ended June 30,     Six Months Ended June 30,  

(Unaudited, in millions, except per share amounts)

     2012        2011         Change        2012        2011         Change   

Sales

   $   1,168      $   1,200       $ (32   $   2,222      $   2,385       $ (163

Operating (loss) income

     (36     52         (88     (10     79         (89

Net (loss) income attributable to Resolute Forest
Products Inc.

     (20     61         (81     3        91         (88

Net (loss) income per share attributable to Resolute Forest
Products Inc. – basic

     (0.20     0.63         (0.83     0.03        0.94         (0.91

Net (loss) income per share attributable to Resolute Forest Products Inc. – diluted

     (0.20     0.63         (0.83     0.03        0.94         (0.91

Significant items that (unfavorably) favorably impacted operating (loss) income:

              

Product pricing and foreign exchange – excluding Fibrek

        $ (7        $ (9

Shipments – excluding Fibrek

          (99          (228

Sales – Fibrek