Resolute reports loss of US$588 million
Oct. 31, 2013, Montreal - Resolute Forest Products today reported a net loss of $588 million for the quarter ended September 30, 2013, or $6.22 per share, on sales of $1.1 billion. The company's quarterly results were significantly affected by a $619 million non-recurring, non-cash income tax charge to reduce the value of deferred income tax assets on its balance sheet.
Excluding total special items of $617 million, net income in the quarter was $29 million, or $0.31 per share. This compares to net income of $13 million, or $0.13 per diluted share, excluding $24 million of special items, in the third quarter ended September 30, 2012. Before adjusting for special items, net income in that quarter was $37 million, or $0.38 per diluted share, on sales of $1.2 billion. Adjusted EBITDA was $104 million in the quarter, compared to $96 million in the year-ago period.
"Again this quarter, our continued asset optimization efforts helped to maximize our earnings power despite challenging market conditions," said Richard Garneau, president and chief executive officer. "Improvements in volume, transaction price and costs led to the best quarter our pulp segment has seen in two years, which helped to offset the effects of weaker pricing for lumber and excess supply in paper grades."
Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are reconciled below.
Consolidated Quarterly Operating Income Variance Against Year-Ago Period
Compared to the year-ago period, sales in the quarter declined 2%, or $23 million, to $1.1 billion, primarily as a result of lower pricing ($33 million), mainly in newsprint, and currency fluctuations, offset in part by an increase in volume ($17 million).
The Company recorded operating income of $36 million this quarter, a $5 million improvement over the third quarter of 2012. This reflects a $26 million improvement to pulp and paper manufacturing costs - the benefit of asset optimization initiatives and external power sales from new cogeneration facilities - and a weaker Canadian dollar, offset in part by the lower pricing, largely in newsprint, and higher wood products costs.
Downtime was 90,000 metric tons lower in the pulp and paper segments this quarter, mainly as a result of the extensive downtime taken in 2012 to improve the operational and environmental performance of the newly acquired Saint-Félicien, Québec, pulp mill.
Segment Operating Income Variance Against Prior Quarter
Operating income in the newsprint segment was $13 million in the third quarter, a $3 million improvement over the second quarter. Newsprint sales rose 3% in the quarter as a result of a 20,000 metric ton increase in shipments, with export sales representing 45% of total newsprint sales, consistent with the first half of the year. After falling $40 since the end of last year, average transaction price has now been stable for two straight quarters. The Company maintained its lower cost advantage in the quarter, reporting operating cost per unit (the "delivered cost") down 1%, to $589 per metric ton, in line with the new low reported in the previous quarter. The Company generated EBITDA of $50 per metric ton of newsprint shipped, compared to an average of $52 in the four previous quarters, despite the falling prices.
Operating income was $17 million in the quarter, compared to breakeven in the previous quarter. Sales rose 2% this quarter due mainly to a 5,000 short ton increase in shipments. Average transaction price was also up $4. Delivered cost fell 7% compared to the second quarter, which included costs and inefficiencies associated with the annual maintenance at our Calhoun, Tennessee, mill. EBITDA was $79 per short ton shipped in the quarter, compared to an average of $61 in the four previous quarters.
The market pulp segment generated operating income of $21 million in the quarter, $11 million higher than in the second quarter. Sales grew by 2%, to $269 million, on a 2% increase in shipments and a $5 per metric ton increase in average transaction price. This follows increases of 5% in shipments and $27 per metric ton, respectively, in the second quarter. Delivered cost was down 4%, due mainly to better efficiency at mills in the U.S. southeast, in part from the second quarter annual maintenance at Calhoun. EBITDA in the segment was $85 per metric ton shipped in the quarter, compared to an average of $23 in the four previous quarters.
Operating income in the wood products segment fell to breakeven in the quarter, down $16 million sequentially. The 3% increase in sales over the second quarter reflects a 21% increase in shipments offset by a $62 per thousand board feet reduction in lumber prices. Finished goods inventory fell 28% due to the company's efforts to reduce the buildup caused by lower than expected demand in May and June, which included scheduled downtime at most sawmills during peak vacation periods. The drop in pricing reduced EBITDA to $22 per thousand board feet shipped, compared to an average of $63 in the four previous quarters.
The coated paper segment generated an operating loss of $3 million in the quarter, down from operating income of $2 million in the second quarter. Sales slipped 4% on a 6% reduction in shipments, as seasonal demand improvement did not materialize to the degree expected. Delivered cost rose 7% in the quarter, mostly because of the absorption of fixed costs over lower volume and seasonally higher power and wood costs, reducing EBITDA to $51 per short ton shipped, compared to an average of $83 in the four previous quarters.
Corporate & Finance
Based on the application of accounting standards, including a review of historical earnings, the company reduced the carrying value of deferred income tax assets on the balance sheet by $619 million, representing the portion related to its U.S. operations. The reduction is a non-recurring, non-cash adjustment, recorded as an income tax charge.
"This reduction in no way affects our underlying tax attributes nor hinders our ability to use them," said Jo-Ann Longworth, senior vice president and chief financial officer. "We have over $1.6 billion of U.S. net operating loss carryforwards available to use against future earnings."
The carrying value of the total net deferred income tax asset recorded on the Company's balance sheet as of the end of the third quarter was therefore reduced to $1,346 million, from $1,961 million in the previous quarter.
Mr. Garneau added: "Building on the encouraging developments this quarter, we see the pulp segment maintaining its positive momentum into the fourth quarter, but the timing of worldwide capacity increases makes 2014 somewhat more uncertain. Wood products should experience better overall pricing in the fourth quarter, based on the gradual increase in lumber prices from the lows late in June. Costs will remain under pressure, however, given lower wood allocation and the additional burdens imposed on producers with the province of Québec's newly-implemented forest tenure system. As recent history demonstrates, our leaner and efficient operating platform is a key competitive advantage to face challenging market conditions. While the seasonal demand surge for coated and specialty papers failed to materialize as expected, and while conditions could change in newsprint, we nonetheless expect to see sequential volume growth in newsprint and supercalender grades in the fourth quarter before we enter seasonal lows. But we see continued pressure for coated paper as the market struggles to adjust to lower operating rates due to lower demand, grade switching and higher imports."