UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20182019
OR
☐ | 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 001-33164
DOMTAR CORPORATION
(Exact name of registrant as specified in its charter)
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234 Kingsley Park Drive, Fort Mill, SC 29715
(Address of principal executive offices)
(zip code)
(803) 802-7500
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
At October 31, 2018, 62,901,876 shares of the issuer’s common stock were outstanding.
FORM 10-Q
For the Quarterly Period Ended September 30, 2018
INDEX
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ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
DOMTAR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 20-5901152 | |
(State ofIncorporation) | (I.R.S. Employer Identification No.) |
234 Kingsley Park Drive, Fort Mill, SC 29715
(Address of principal executive offices)
(zip code)
(803) 802-7500
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common stock traded on the New York Stock Exchange; trading symbol UFS.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Small reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
At October 31, 2019, 57,273,106 shares of the issuer’s common stock were outstanding.
DOMTAR CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 2019
INDEX
PART I. | 3 | |
ITEM 1. | 3 | |
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS) | 3 | |
4 | ||
5 | ||
7 | ||
8 | ||
9 | ||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 41 |
ITEM 3. | 52 | |
ITEM 4. | 52 | |
PART II | 52 | |
ITEM 1. | 52 | |
ITEM 1A. | 52 | |
ITEM 2. | 53 | |
ITEM 3. | 54 | |
ITEM 4. | 54 | |
ITEM 5. | 54 | |
ITEM 6. | 55 |
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
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| Three months ended |
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| Three months ended |
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| Nine months ended |
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| Nine months ended |
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| Three months ended |
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| Three months ended |
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| Nine months ended |
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| Nine months ended |
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| September 30, |
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| September 30, |
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| September 30, |
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| September 30, |
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| September 30, |
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| September 30, |
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| September 30, |
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| September 30, |
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| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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| (Unaudited) |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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Sales |
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| 1,367 |
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| 1,290 |
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| 4,065 |
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| 3,813 |
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| 1,283 |
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| 1,367 |
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| 3,976 |
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| 4,065 |
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Operating expenses |
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Cost of sales, excluding depreciation and amortization |
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| 1,059 |
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| 1,016 |
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| 3,239 |
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| 3,066 |
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| 1,041 |
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| 1,059 |
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| 3,172 |
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| 3,239 |
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Depreciation and amortization |
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| 75 |
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| 80 |
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| 233 |
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| 239 |
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| 72 |
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| 75 |
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| 219 |
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| 233 |
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Selling, general and administrative |
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| 115 |
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| 116 |
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| 343 |
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| 329 |
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| 94 |
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| 115 |
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| 322 |
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| 343 |
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Impairment of long-lived assets (NOTE 11) |
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| 33 |
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| — |
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| 58 |
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| — |
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Closure and restructuring costs (NOTE 11) |
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| 11 |
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| — |
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| 23 |
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Other operating loss (income), net (NOTE 6) |
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| 4 |
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| (7 | ) |
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| (3 | ) |
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| (6 | ) |
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| 3 |
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| 4 |
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| 4 |
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| (3 | ) | |
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| 1,253 |
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| 1,205 |
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| 3,812 |
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| 3,628 |
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| 1,254 |
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| 1,253 |
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| 3,798 |
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| 3,812 |
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Operating income |
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| 114 |
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| 85 |
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| 253 |
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| 185 |
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| 29 |
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| 114 |
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| 178 |
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| 253 |
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Interest expense, net |
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| 15 |
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| 16 |
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| 47 |
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| 50 |
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| 12 |
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| 15 |
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| 38 |
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| 47 |
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Non-service components of net periodic benefit cost (NOTE 5) |
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| (4 | ) |
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| (4 | ) |
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| (13 | ) |
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| (10 | ) |
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| (2 | ) |
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| (4 | ) |
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| (7 | ) |
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| (13 | ) | |
Earnings before income taxes and equity loss |
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| 103 |
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| 73 |
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| 219 |
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| 145 |
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| 19 |
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| 103 |
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| 147 |
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| 219 |
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Income tax expense (NOTE 7) |
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| 3 |
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| 3 |
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| 22 |
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| 17 |
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Income tax (benefit) expense (NOTE 7) |
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| (1 | ) |
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| 3 |
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| 28 |
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| 22 |
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Equity loss, net of taxes |
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| 1 |
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| — |
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| 1 |
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| — |
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| — |
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| 1 |
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| 1 |
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| 1 |
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Net earnings |
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| 99 |
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| 70 |
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| 196 |
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| 128 |
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| 20 |
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| 99 |
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| 118 |
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| 196 |
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Per common share (in dollars) (NOTE 4) |
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Net earnings |
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Basic |
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| 1.57 |
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| 1.12 |
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| 3.12 |
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| 2.04 |
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| 0.33 |
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| 1.57 |
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| 1.89 |
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| 3.12 |
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Diluted |
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| 1.57 |
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| 1.11 |
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| 3.11 |
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| 2.04 |
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| 0.32 |
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| 1.57 |
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| 1.88 |
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| 3.11 |
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Weighted average number of common shares outstanding (millions) |
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Basic |
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| 62.9 |
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| 62.7 |
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| 62.8 |
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| 62.6 |
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| 61.5 |
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| 62.9 |
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| 62.5 |
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| 62.8 |
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Diluted |
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| 63.2 |
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| 62.9 |
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| 63.1 |
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| 62.8 |
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| 61.7 |
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| 63.2 |
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| 62.7 |
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| 63.1 |
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Cash dividends per common share |
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| 0.44 |
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| 0.42 |
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| 1.29 |
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| 1.25 |
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| 0.46 |
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| 0.44 |
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| 1.33 |
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| 1.29 |
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Net earnings |
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| 99 |
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| 70 |
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| 196 |
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| 128 |
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| 20 |
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| 99 |
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| 118 |
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| 196 |
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Other comprehensive income (loss) (NOTE 10): |
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Net derivative gains (losses) on cash flow hedges: |
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Net gains (losses) arising during the period, net of tax of $(2) and $3, respectively (2017 – $(6) and $(8), respectively) |
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| 7 |
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| 9 |
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| (9 | ) |
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| 11 |
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Less: Reclassification adjustment for gains included in net earnings, net of tax of $(1) and nil, respectively (2017 – $2 and $4, respectively) |
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| — |
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| (2 | ) |
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| (2 | ) |
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| (6 | ) | |||||||||||||||||
Other comprehensive (loss) income (NOTE 12): |
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Net derivative (losses) gains on cash flow hedges: |
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Net (losses) gains arising during the period, net of tax of $4 and $(1), respectively (2018 – $(2) and $3, respectively) |
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| (9 | ) |
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| 7 |
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| 5 |
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| (9 | ) | |||||||||||||||||
Less: Reclassification adjustment for losses (gains) included in net earnings, net of tax of $(1) and $(2), respectively (2018 – $(1) and nil, respectively) |
|
| 3 |
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| — |
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| 5 |
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| (2 | ) | |||||||||||||||||
Foreign currency translation adjustments |
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| 12 |
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|
| 60 |
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| (49 | ) |
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| 142 |
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| (34 | ) |
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| 12 |
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| (12 | ) |
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| (49 | ) | |
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of nil and $(2), respectively (2017 – $(1) and $(3), respectively) |
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| 2 |
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| 2 |
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| 6 |
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| 7 |
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Other comprehensive income (loss) |
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| 21 |
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| 69 |
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| (54 | ) |
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| 154 |
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Comprehensive income |
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| 120 |
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| 139 |
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| 142 |
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| 282 |
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Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) and $(3), respectively (2018 – nil and $(2), respectively) |
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| 2 |
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| 2 |
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| 7 |
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| 6 |
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Other comprehensive (loss) income |
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| (38 | ) |
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| 21 |
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| 5 |
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| (54 | ) | |||||||||||||||||
Comprehensive (loss) income |
|
| (18 | ) |
|
| 120 |
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| 123 |
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|
| 142 |
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The accompanying notes are an integral part of the consolidated financial statements.
DOMTAR CORPORATION
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
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| At |
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| At |
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| September 30, |
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| December 31, |
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| September 30, |
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| December 31, |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| (Unaudited) |
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| (Unaudited) |
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| $ |
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| $ |
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| $ |
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| $ |
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Assets |
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Current assets |
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Cash and cash equivalents |
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| 256 |
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|
| 139 |
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| 98 |
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| 111 |
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Receivables, less allowances of $6 and $7 |
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| 702 |
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| 704 |
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Receivables, less allowances of $8 and $6 |
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| 618 |
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| 670 |
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Inventories (NOTE 8) |
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| 772 |
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| 757 |
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|
| 798 |
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|
| 762 |
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Prepaid expenses |
|
| 33 |
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|
| 33 |
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|
| 33 |
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|
| 24 |
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Income and other taxes receivable |
|
| 17 |
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|
| 24 |
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| 53 |
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|
| 22 |
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Total current assets |
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| 1,780 |
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| 1,657 |
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|
| 1,600 |
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|
| 1,589 |
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Property, plant and equipment, net |
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| 2,621 |
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|
| 2,765 |
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|
| 2,499 |
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| 2,605 |
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Intangible assets, net (NOTE 9) |
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| 607 |
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| 633 |
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Operating lease right-of-use assets (NOTE 9) |
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| 77 |
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|
| — |
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Intangible assets, net (NOTE 10) |
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| 568 |
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|
| 597 |
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Other assets |
|
| 174 |
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| 157 |
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|
| 140 |
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|
| 134 |
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Total assets |
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| 5,182 |
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| 5,212 |
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| 4,884 |
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| 4,925 |
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Liabilities and shareholders' equity |
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Current liabilities |
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Bank indebtedness |
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| 1 |
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|
| — |
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Trade and other payables |
|
| 717 |
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|
| 716 |
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|
| 646 |
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|
| 757 |
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Income and other taxes payable |
|
| 32 |
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|
| 24 |
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|
| 28 |
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|
| 25 |
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Operating lease liabilities due within one year (NOTE 9) |
|
| 26 |
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|
| — |
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Long-term debt due within one year |
|
| 1 |
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|
| 1 |
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|
| 1 |
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|
| 1 |
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Total current liabilities |
|
| 750 |
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|
| 741 |
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|
| 702 |
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|
| 783 |
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Long-term debt |
|
| 1,103 |
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|
| 1,129 |
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|
| 938 |
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|
| 853 |
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Operating lease liabilities (NOTE 9) |
|
| 68 |
|
|
| — |
| ||||||||
Deferred income taxes and other |
|
| 488 |
|
|
| 491 |
|
|
| 479 |
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|
| 476 |
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Other liabilities and deferred credits |
|
| 288 |
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|
| 368 |
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|
| 258 |
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|
| 275 |
|
Commitments and contingencies (NOTE 12) |
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Shareholders' equity (NOTE 11) |
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Common stock $0.01 par value; authorized 2,000,000,000 shares; issued: 65,001,104 and 65,001,104 shares |
|
| 1 |
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|
| 1 |
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Treasury stock $0.01 par value; 2,101,336 and 2,305,419 shares |
|
| — |
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|
| — |
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Commitments and contingencies (NOTE 14) |
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Shareholders' equity (NOTE 13) |
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Common stock $0.01 par value; authorized 2,000,000,000 shares; issued 65,001,104 and 65,001,104 shares |
|
| 1 |
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| 1 |
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Treasury stock $0.01 par value; 5,977,255 and 2,086,535 shares |
|
| — |
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|
| — |
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Additional paid-in capital |
|
| 1,979 |
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|
| 1,969 |
|
|
| 1,842 |
|
|
| 1,981 |
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Retained earnings |
|
| 963 |
|
|
| 849 |
|
|
| 1,058 |
|
|
| 1,023 |
|
Accumulated other comprehensive loss |
|
| (390 | ) |
|
| (336 | ) |
|
| (462 | ) |
|
| (467 | ) |
Total shareholders' equity |
|
| 2,553 |
|
|
| 2,483 |
|
|
| 2,439 |
|
|
| 2,538 |
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Total liabilities and shareholders' equity |
|
| 5,182 |
|
|
| 5,212 |
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|
| 4,884 |
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|
| 4,925 |
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The accompanying notes are an integral part of the consolidated financial statements.
DOMTAR CORPORATION
CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
|
| Issued and outstanding common shares (millions of shares) |
|
| Common stock, at par |
|
| Additional paid-in capital |
|
| Retained earnings |
|
| Accumulated other comprehensive loss |
|
| Total shareholders' equity |
|
| For the three months ended |
| |||||||||||||||||||||||||||
|
| (Unaudited) |
|
| September 30, 2019 |
| ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| Issued and outstanding common shares (millions of shares) |
|
| Common stock, at par |
|
| Additional paid-in capital |
|
| Retained earnings |
|
| Accumulated other comprehensive loss |
|
| Total shareholders' equity |
| |||||||||||
Balance at December 31, 2017 |
|
| 62.7 |
|
|
| 1 |
|
|
| 1,969 |
|
|
| 849 |
|
|
| (336 | ) |
|
| 2,483 |
| ||||||||||||||||||||||||
|
| (Unaudited) |
| |||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||||||||||||||||||||||||
Balance at June 30, 2019 |
|
| 62.9 |
|
|
| 1 |
|
|
| 1,977 |
|
|
| 1,065 |
|
|
| (424 | ) |
|
| 2,619 |
| ||||||||||||||||||||||||
Stock-based compensation, net of tax |
|
| 0.2 |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 196 |
|
|
| — |
|
|
| 196 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20 |
|
|
| — |
|
|
| 20 |
|
Net derivative losses on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses arising during the period, net of tax of $3 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| (9 | ) | ||||||||||||||||||||||||
Less: Reclassification adjustment for gains included in net earnings, net of tax of nil |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| (2 | ) | ||||||||||||||||||||||||
Net losses arising during the period, net of tax of $4 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| (9 | ) | ||||||||||||||||||||||||
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| 3 |
| ||||||||||||||||||||||||
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (49 | ) |
|
| (49 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (34 | ) |
|
| (34 | ) |
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| 6 |
| ||||||||||||||||||||||||
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| 2 |
| ||||||||||||||||||||||||
Stock repurchase |
|
| (3.9 | ) |
|
| — |
|
|
| (137 | ) |
|
| — |
|
|
| — |
|
|
| (137 | ) | ||||||||||||||||||||||||
Cash dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (82 | ) |
|
| — |
|
|
| (82 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (27 | ) |
|
| — |
|
|
| (27 | ) |
Balance at September 30, 2018 |
|
| 62.9 |
|
|
| 1 |
|
|
| 1,979 |
|
|
| 963 |
|
|
| (390 | ) |
|
| 2,553 |
| ||||||||||||||||||||||||
Balance at September 30, 2019 |
|
| 59.0 |
|
|
| 1 |
|
|
| 1,842 |
|
|
| 1,058 |
|
|
| (462 | ) |
|
| 2,439 |
|
|
| For the nine months ended |
| |||||||||||||||||||||
|
| September 30, 2019 |
| |||||||||||||||||||||
|
| Issued and outstanding common shares (millions of shares) |
|
| Common stock, at par |
|
| Additional paid-in capital |
|
| Retained earnings |
|
| Accumulated other comprehensive loss |
|
| Total shareholders' equity |
| ||||||
|
| (Unaudited) |
| |||||||||||||||||||||
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance at December 31, 2018 |
|
| 62.9 |
|
|
| 1 |
|
|
| 1,981 |
|
|
| 1,023 |
|
|
| (467 | ) |
|
| 2,538 |
|
Stock-based compensation, net of tax |
|
| 0.2 |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 118 |
|
|
| — |
|
|
| 118 |
|
Net derivative gains on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains arising during the period, net of tax of $(1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| 5 |
|
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| 5 |
|
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| (12 | ) |
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(3) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| 7 |
|
Stock repurchase |
|
| (4.1 | ) |
|
| — |
|
|
| (145 | ) |
|
| — |
|
|
| — |
|
|
| (145 | ) |
Cash dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (83 | ) |
|
| — |
|
|
| (83 | ) |
Balance at September 30, 2019 |
|
| 59.0 |
|
|
| 1 |
|
|
| 1,842 |
|
|
| 1,058 |
|
|
| (462 | ) |
|
| 2,439 |
|
The accompanying notes are an integral part of the consolidated financial statements.
5
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
|
| For the three months ended |
| |||||||||||||||||||||
|
| September 30, 2018 |
| |||||||||||||||||||||
|
| Issued and outstanding common shares (millions of shares) |
|
| Common stock, at par |
|
| Additional paid-in capital |
|
| Retained earnings |
|
| Accumulated other comprehensive loss |
|
| Total shareholders' equity |
| ||||||
|
| (Unaudited) |
| |||||||||||||||||||||
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance at June 30, 2018 |
|
| 62.9 |
|
|
| 1 |
|
|
| 1,977 |
|
|
| 891 |
|
|
| (411 | ) |
|
| 2,458 |
|
Stock-based compensation, net of tax |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 99 |
|
|
| — |
|
|
| 99 |
|
Net derivative gains on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains arising during the period, net of tax of $(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| 7 |
|
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12 |
|
|
| 12 |
|
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of nil |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| 2 |
|
Cash dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (27 | ) |
|
| — |
|
|
| (27 | ) |
Balance at September 30, 2018 |
|
| 62.9 |
|
|
| 1 |
|
|
| 1,979 |
|
|
| 963 |
|
|
| (390 | ) |
|
| 2,553 |
|
|
| For the nine months ended |
| |||||||||||||||||||||
|
| September 30, 2018 |
| |||||||||||||||||||||
|
| Issued and outstanding common shares (millions of shares) |
|
| Common stock, at par |
|
| Additional paid-in capital |
|
| Retained earnings |
|
| Accumulated other comprehensive loss |
|
| Total shareholders' equity |
| ||||||
|
| (Unaudited) |
| |||||||||||||||||||||
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Balance at December 31, 2017 |
|
| 62.7 |
|
|
| 1 |
|
|
| 1,969 |
|
|
| 849 |
|
|
| (336 | ) |
|
| 2,483 |
|
Stock-based compensation, net of tax |
|
| 0.2 |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 196 |
|
|
| — |
|
|
| 196 |
|
Net derivative losses on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses arising during the period, net of tax of $3 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| (9 | ) |
Less: Reclassification adjustment for gains included in net earnings, net of tax of nil |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| (2 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (49 | ) |
|
| (49 | ) |
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| 6 |
|
Cash dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (82 | ) |
|
| — |
|
|
| (82 | ) |
Balance at September 30, 2018 |
|
| 62.9 |
|
|
| 1 |
|
|
| 1,979 |
|
|
| 963 |
|
|
| (390 | ) |
|
| 2,553 |
|
The accompanying notes are an integral part of the consolidated financial statements.
6
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
|
| For the nine months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 |
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 196 |
|
|
| 128 |
|
|
| 118 |
|
|
| 196 |
|
Adjustments to reconcile net earnings to cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 233 |
|
|
| 239 |
|
|
| 219 |
|
|
| 233 |
|
Deferred income taxes and tax uncertainties |
|
| 3 |
|
|
| (19 | ) |
|
| 1 |
|
|
| 3 |
|
Impairment of long-lived assets |
|
| 58 |
|
|
| — |
| ||||||||
Net gains on disposals of property, plant and equipment |
|
| (4 | ) |
|
| (4 | ) |
|
| — |
|
|
| (4 | ) |
Stock-based compensation expense |
|
| 7 |
|
|
| 6 |
|
|
| 7 |
|
|
| 7 |
|
Equity loss, net |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| 1 |
|
Other |
|
| — |
|
|
| 1 |
| ||||||||
Changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
| (7 | ) |
|
| (28 | ) |
|
| 50 |
|
|
| (7 | ) |
Inventories |
|
| (23 | ) |
|
| (10 | ) |
|
| (34 | ) |
|
| (23 | ) |
Prepaid expenses |
|
| (4 | ) |
|
| (2 | ) |
|
| (4 | ) |
|
| (4 | ) |
Trade and other payables |
|
| (6 | ) |
|
| 11 |
|
|
| (111 | ) |
|
| (6 | ) |
Income and other taxes |
|
| (16 | ) |
|
| 30 |
|
|
| (27 | ) |
|
| (16 | ) |
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense |
|
| (46 | ) |
|
| (33 | ) |
|
| (3 | ) |
|
| (46 | ) |
Other assets and other liabilities |
|
| 3 |
|
|
| 5 |
|
|
| 7 |
|
|
| 3 |
|
Cash flows from operating activities |
|
| 337 |
|
|
| 324 |
|
|
| 282 |
|
|
| 337 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| (111 | ) |
|
| (111 | ) |
|
| (157 | ) |
|
| (111 | ) |
Proceeds from disposals of property, plant and equipment |
|
| 4 |
|
|
| 8 |
|
|
| 1 |
|
|
| 4 |
|
Other |
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| (6 | ) |
Cash flows used for investing activities |
|
| (113 | ) |
|
| (103 | ) |
|
| (156 | ) |
|
| (113 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (81 | ) |
|
| (78 | ) |
|
| (83 | ) |
|
| (81 | ) |
Stock repurchase |
|
| (139 | ) |
|
| — |
| ||||||||
Net change in bank indebtedness |
|
| — |
|
|
| (12 | ) |
|
| 2 |
|
|
| — |
|
Change in revolving credit facility |
|
| — |
|
|
| (50 | ) |
|
| 45 |
|
|
| — |
|
Proceeds from receivables securitization facility |
|
| — |
|
|
| 25 |
|
|
| 150 |
|
|
| — |
|
Repayments of receivables securitization facility |
|
| (25 | ) |
|
| (35 | ) |
|
| (110 | ) |
|
| (25 | ) |
Repayments of long-term debt |
|
| — |
|
|
| (63 | ) |
|
| (1 | ) |
|
| — |
|
Other |
|
| 1 |
|
|
| 1 |
|
|
| (1 | ) |
|
| 1 |
|
Cash flows used for financing activities |
|
| (105 | ) |
|
| (212 | ) |
|
| (137 | ) |
|
| (105 | ) |
Net increase in cash and cash equivalents |
|
| 119 |
|
|
| 9 |
| ||||||||
Net (decrease) increase in cash and cash equivalents |
|
| (11 | ) |
|
| 119 |
| ||||||||
Impact of foreign exchange on cash |
|
| (2 | ) |
|
| 9 |
|
|
| (2 | ) |
|
| (2 | ) |
Cash and cash equivalents at beginning of period |
|
| 139 |
|
|
| 125 |
|
|
| 111 |
|
|
| 139 |
|
Cash and cash equivalents at end of period |
|
| 256 |
|
|
| 143 |
|
|
| 98 |
|
|
| 256 |
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash payments for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
| 48 |
|
|
| 49 |
|
|
| 39 |
|
|
| 48 |
|
Income taxes |
|
| 40 |
|
|
| 18 |
|
|
| 55 |
|
|
| 40 |
|
The accompanying notes are an integral part of the consolidated financial statements.
INDEX FOR NOTES TO CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 |
| |
|
|
|
NOTE 2 |
| |
|
|
|
NOTE 3 | DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT |
|
|
|
|
NOTE 4 |
| |
|
|
|
NOTE 5 |
| |
|
|
|
NOTE 6 |
| |
|
|
|
NOTE 7 |
| |
|
|
|
NOTE 8 |
| |
|
|
|
NOTE 9 |
| |
|
|
|
NOTE 10 |
| 25 |
|
|
|
NOTE 11 |
|
|
|
|
|
NOTE 12 |
|
|
|
|
|
NOTE 13 |
| |
|
|
|
NOTE 14 |
|
|
|
|
|
NOTE 15 |
| |
NOTE 16 | 34 | |
|
|
|
78
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first nine months of the year may not necessarily be indicative of full yearfull-year results. It is suggested that theseThese consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, as filed with the Securities and Exchange Commission. The December 31, 20172018 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
SinceOn January 1, 2018,2019, upon the adoption of ASU 2014-09, as issued by FASB,2016-02, “Revenue from Contracts with CustomersLeases”, the Company’s accounting policy related to revenue recognition isleases became as follows:
REVENUE RECOGNITION
The Company’s revenue is generated from the sale of finished goods to customers. Revenue is recognized at a single point in time when the performance obligation is satisfied which occurs when the control over the goods is transferred to customers. For shipping and handling activities performed after customers obtain control of the goods, the Company elected to account for these activities as fulfillment activities rather than assessing such activities as separate performance obligations. Accordingly, the sale of goods to customers represents a single performance obligation to which the entire transaction price is allocated.
The point in time when the control of goods is transferred to customers is largely dependent on delivery terms. Revenue is recorded at the time of shipment for delivery terms designated free on board (“f.o.b.”) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for goods transferred to customers. Revenue is recognized net of variable consideration in the form of rebates, discounts and other commercial incentives extended to customers. Variable consideration is recognized using the most likely amounts which are based on an analysis of historical experience and current period expectations. The Company includes estimated amounts of variable consideration in revenue to the extent that it is probable that there will not be a significant reversal of recognized revenue when the uncertainty related to that variable consideration is resolved.
For all the Company’s contracts, customer payments are due in less than one year. Accordingly, the Company does not adjust the amount of revenue recognized for the effects of a significant financing component.
Sales taxes, and other similar taxes, collected from customers are excluded from revenue.
8
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING CHANGES IMPLEMENTED
REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The core principal of this guidance is that an entity should recognize revenue, to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration for which the entity is entitled to, in exchange for those goods and services. This new guidance supersedes the revenue recognition requirements found in topic 605.
On January 1, 2018, the Company adopted the standard using the full retrospective method which resulted in a reclassification in the Company’s Consolidated Statement of Earnings and Comprehensive Income for the three and nine months ended September 30, 2017. The previously reported amounts for Sales and Selling, general and administrative expenses were decreased by $2 million and $7 million, respectively, in relation to the reclassification of certain payments made to customers classified as a reduction of Sales under the new standard. These reclassifications are exclusively contained within the Company’s Consolidated Statement of Earnings and Comprehensive Income and do not have a cumulative effect on retained earnings or other components of equity or net assets in the Company’s Consolidated Balance Sheet as of January 1, 2017.
No practical expedients were used in the transition to the new standard as they were not applicable.
RETIREMENT BENEFITS
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires an entity to present the service cost component of the net periodic benefit cost with other employee compensation costs in operating income. Only the service cost components will be eligible for capitalization in assets. The other components of the net periodic benefit cost (i.e. interest expense, expected return on plan assets, amortization of actuarial gains or losses and amortization of prior year service costs) will be presented outside of any subtotal of operating income.
On January 1, 2018, the Company adopted the guidance of this accounting standard update which resulted in a reclassification in the Company’s Consolidated Statement of Earnings and Comprehensive Income for the three and nine months ended September 30, 2017. The previously reported amounts of Cost of sales were increased by $4 million and $11 million, respectively, Selling, general and administrative expenses were decreased by nil and $1 million, respectively, both with a corresponding impact in Non-service components of net periodic benefit cost. The Company utilized a practical expedient included in the accounting standard update which allowed the Company to use amounts previously disclosed in its pension plans and other post-retirement benefits plans note for the prior periods as the estimation basis for applying the required retrospective presentation requirements. In addition, these required retrospective reclassifications resulted in adjustments to the previously reported Operating income within the Company’s reportable operating segment disclosures for the three and nine months ended September 30, 2017.
9
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
| Three months ended September 30, 2017 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As Reported |
|
| Impact of ASU 2014-09 |
|
| Impact of ASU 2017-07 |
|
| As Adjusted |
| ||||
|
| (Unaudited) |
| |||||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Sales |
|
| 1,292 |
|
|
| (2 | ) |
|
| — |
|
|
| 1,290 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| 1,012 |
|
|
| — |
|
|
| 4 |
|
|
| 1,016 |
|
Depreciation and amortization |
|
| 80 |
|
|
| — |
|
|
| — |
|
|
| 80 |
|
Selling, general and administrative |
|
| 118 |
|
|
| (2 | ) |
|
| — |
|
|
| 116 |
|
Other operating income, net |
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
|
| 1,203 |
|
|
| (2 | ) |
|
| 4 |
|
|
| 1,205 |
|
Operating income (loss) |
|
| 89 |
|
|
| — |
|
|
| (4 | ) |
|
| 85 |
|
Interest expense, net |
|
| 16 |
|
|
| — |
|
|
| — |
|
|
| 16 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| (4 | ) |
Earnings before income taxes |
|
| 73 |
|
|
| — |
|
|
| — |
|
|
| 73 |
|
Income tax expense |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
Net earnings |
|
| 70 |
|
|
| — |
|
|
| — |
|
|
| 70 |
|
| Nine months ended September 30, 2017 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As Reported |
|
| Impact of ASU 2014-09 |
|
| Impact of ASU 2017-07 |
|
| As Adjusted |
| ||||
|
| (Unaudited) |
| |||||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Sales |
|
| 3,820 |
|
|
| (7 | ) |
|
| — |
|
|
| 3,813 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| 3,055 |
|
|
| — |
|
|
| 11 |
|
|
| 3,066 |
|
Depreciation and amortization |
|
| 239 |
|
|
| — |
|
|
| — |
|
|
| 239 |
|
Selling, general and administrative |
|
| 337 |
|
|
| (7 | ) |
|
| (1 | ) |
|
| 329 |
|
Other operating income, net |
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| (6 | ) |
|
|
| 3,625 |
|
|
| (7 | ) |
|
| 10 |
|
|
| 3,628 |
|
Operating income (loss) |
|
| 195 |
|
|
| — |
|
|
| (10 | ) |
|
| 185 |
|
Interest expense, net |
|
| 50 |
|
|
| — |
|
|
| — |
|
|
| 50 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| — |
|
|
| (10 | ) |
|
| (10 | ) |
Earnings before income taxes |
|
| 145 |
|
|
| — |
|
|
| — |
|
|
| 145 |
|
Income tax expense |
|
| 17 |
|
|
| — |
|
|
| — |
|
|
| 17 |
|
Net earnings |
|
| 128 |
|
|
| — |
|
|
| — |
|
|
| 128 |
|
10
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.
The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.
DERIVATIVES AND HEDGING
In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship. As long as all other hedge accounting criteria in ASC 815 are met, a hedging relationship in which the hedging derivative instrument is novated would not be discontinued or require redesignation. This clarification applies to both cash flow and fair value hedging relationships.
The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.
CLASSIFICATION OF CASH FLOWS
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows”, which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.
The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.
DERIVATIVES AND HEDGING
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities”, which amends the hedge accounting recognition and presentation requirements in ASC 815. The objectives of the ASU are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.
The Company early adopted the new guidance on January 1, 2018 with no impact on the consolidated financial statements.
11
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
LEASES
In February 2016,At inception of an arrangement, the FASB issued ASU 2016-02, “Leases”, which requires lesseesCompany determines whether the arrangement contains a lease. A lease conveys the right to recognizecontrol the use of identified property, plant, or equipment (asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the Company has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.
For each lease arrangement that has an original lease term of more than 12 months, a right-of-use asset and a lease liability are recorded in the Consolidated Balance Sheets. The right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents the obligation to make lease payments arising from the lease. The right-of-use asset and the lease liability are initially recorded at the same amount at the lease commencement date based on the present value of the remaining lease payments discounted using the rate implicit in the lease when readily determined or, in most cases, the Company’s incremental borrowing rate. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The right-of-use asset is tested for impairment in accordance with ASC 360 – “Property, Plant and Equipment”.
The terms of a lease arrangement determine how a lease is classified (operating or finance), the resulting recognition pattern in the Consolidated Statements of Earnings and Comprehensive Income (Loss) and the classification in the Consolidated Balance Sheets.
Finance lease expense is represented by the interest on the lease liability determined using the effective interest method and the amortization of the finance lease right-of-use asset calculated using the straight-line method over the estimated useful life of the identified asset. Finance lease related balances are included in the Consolidated Balance Sheets in Property, plant and equipment, net, Long-term debt due within one year and Long-term debt.
Operating lease expense is recorded on a straight-line basis over the lease term by adding interest expense determined using the effective interest method to the amortization of the right-of-use asset. Operating lease related balances are included in the Consolidated Balance Sheets in Operating lease right-of-use assets, Operating lease liabilities due within one year and Operating lease liabilities. Operating lease right-of-use assets are reduced by previously recognized liabilities relating to unfavorable terms of leases acquired as part of a business combination and impairments.
For operating lease arrangements with lease and non-lease components, the Company accounts for the lease and non-lease components as a single lease component.
9
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2.
_________________
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING CHANGES IMPLEMENTED
LEASES
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize right-of-use assets and lease liabilities for all of their operating leases with a lease term greater than 12 months while continuing to recognize expenses in the Consolidated Statement of Earnings and Comprehensive Income (Loss) in a manner similar to currentprevious accounting standards. The accounting for lessors remains largely unchanged from existing guidance. EnhancedUnder the new standard, disclosures will also beare required to givemeet the objective of enabling users of financial statement users the abilitystatements to assess the amount, timing and uncertainty of cash flows arising from leases. For a more complete discussion of the standard, see Note 1 “Basis of Presentation”.
As a lessee, Domtar’s variousThe Company elected to initially apply the new leases under existing guidancestandard as of January 1, 2019 with certain available practical expedients which are classifieddiscussed below. NaN cumulative-effect adjustments on retained earnings were necessary as of January 1, 2019. The most significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting for finance leases that areremains substantially unchanged.
In transitioning to the new standard, the Company elected to use the practical expedient package. Accordingly, the Company did not recorded onreassess the balance sheet but are recordedfollowing:
• | Whether existing or expired contracts are, or contained, a lease (including executory contracts). |
• | The lease classification of existing or expired leases previously made by management. |
• | Whether initial direct costs for existing leases would qualify under the new standard. |
Furthermore, the Company elected to use the hindsight practical expedient in determining the statementlease term and assessing impairment of earnings as expense is incurred. Uponthe right-of-use assets.
For all comparative periods prior to the adoption of the new guidance, lease expense will generally be recognized on a straight-line basis over the lease term and the Company will be required to record substantially all leases on the Consolidated Balance Sheets as a right-of-use asset and a lease liability.
While the precise amount of the right-of-use asset and lease liability will not be known until closer to the adoption date, management estimates the amount to be less than 5% of both total assets and total liabilities. This estimate is based on the Company’s Consolidated Balance Sheet and lease portfolio, both as of September 30, 2018. The adoption of the guidance will likely have an insignificant impact on the Company’s Consolidated Statements of Earnings and Comprehensive Income.
The Company will adopt the new lease guidance on January 1, 2019 and, if required, recognize a cumulative-effect adjustment to the retained earnings as of that date. Upon adoption,standard, the Company will continue to report comparative periods presentedoperating leases in the consolidated financial statements under current GAAP (ASCASC 840 Leases)“Leases” and provide the related required disclosures under ASC 840disclosures.
COMPREHENSIVE INCOME
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, regarding the reclassification of certain income tax effects reported in accumulated comprehensive income (loss) in response to the U.S. Tax Cuts and Jobs Acts (“U.S. Tax Reform”) enacted on December 22, 2017. For businesses, one of the main provisions of the U.S. Tax Reform was the reduction in the corporate federal income tax rate to 21% from 35%. Under current income tax accounting requirements, an entity was required to remeasure applicable U.S. deferred tax assets and deferred tax liabilities at the 21% tax rate effective on the U.S. Tax Reform enactment date. This remeasurement was required to be recognized in an entity’s income tax provision in its income statement. However, certain of these deferred tax assets and deferred tax liabilities relate to income tax effects initially recognized at the 35% tax rate through other comprehensive income (loss) on items reported within accumulated other comprehensive income (loss) on an entity’s balance sheet. Consequently, an entity’s financial statements will reflect an inconsistency between the deferred tax assets and deferred tax liabilities measured at 21% and the related income tax effects in accumulated other comprehensive income (loss) recorded at 35%. Accordingly, this guidance provides a one-time option to remeasure the income tax effects within accumulated other comprehensive income (loss) at the 21% income tax rate. The impact from this remeasurement is to be recorded directly in retained earnings on an entity’s balance sheet.
This guidance became effective for all periods presented under ASC 840.the Company on January 1, 2019. The Company has decided not to elect this option, as permitted in the new guidance.
10
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
FUTURE ACCOUNTING CHANGES
IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. Under the guidance, implementation costs for cloud computing arrangements (“CCA”) should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software and expensed over the term of the hosting arrangement. The ASU also provides the following guidance on presentation and disclosure:
Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted CCA service, if any (generally as an “other asset”).
• | Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted CCA service, if any (generally as an “other asset”). |
The amortization of capitalized implementation costs should be presented in the same statement of earnings line item as the fees associated with the hosted CCA service. Accordingly, the amortization of capitalized implementation costs should not be included with depreciation or amortization expense related to property, plant, and equipment or intangible assets.
• | The amortization of capitalized implementation costs should be presented in the same statement of earnings line item as the fees associated with the hosted CCA service. Accordingly, the amortization of capitalized implementation costs should not be included with depreciation or amortization expense related to property, plant, and equipment or intangible assets. |
Cash flows related to capitalized implementation costs should be presented as operating activities, consistent with the presentation of cash flows for the fees related to the hosted CCA service.
• | Cash flows related to capitalized implementation costs should be presented as operating activities, consistent with the presentation of cash flows for the fees related to the hosted CCA service. |
Entities are required to disclose the nature of the hosting arrangements that are service contracts and significant judgments made when applying the guidance. Additionally, companies are required to provide quantitative disclosures, including amounts capitalized, amortized, and impaired.
• | Entities are required to disclose the nature of the hosting arrangements that are service contracts and significant judgments made when applying the guidance. Additionally, companies are required to provide quantitative disclosures, including amounts capitalized, amortized, and impaired. |
This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
While the Company is still evaluating the impact of adopting the new standard, it does not expect this new guidance to have a material impact on the consolidated financial statements.
1211
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
________________
DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
HEDGING PROGRAMS
The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, and interest rates. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.
Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The ineffective portion of the qualifying instrument is immediately recognized to earnings. The amount of ineffectiveness recognized was immaterial for all periods presented. The Company does not hold derivative financial instruments for trading purposes.
CREDIT RISK
The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of September 30, 2018, one2019, 2 of Domtar’s Pulp and Paper segment customers located in the U.S. represented 14% or $87 million, and 11% or $75$70 million, (December 31, 2017 – 12% or $83 million)respectively, of the Company’s receivables.receivables (December 31, 2018 – 1 Pulp and Paper segment customer located in the U.S. represented 10% or $67 million).
The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.
INTEREST RATE RISK
The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, bank indebtedness, revolving credit facility and securitization, term loan and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.
COST RISK
Cash flow hedges:
The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next 4551 months.
1312
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 20182019 to hedge forecasted purchases:
Commodity |
| Notional contractual quantity under derivative contracts MMBTU(2) |
|
| Notional contractual value under derivative contracts (in millions of dollars) |
| Percentage of forecasted purchases under derivative contracts |
|
| Notional contractual quantity under derivative contracts MMBtu(2) |
|
| Notional contractual value under derivative contracts (in millions of dollars) |
| Percentage of forecasted purchases under derivative contracts |
| ||||||||||||
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 (1) |
|
| 3,275,000 |
|
|
| $ | 10 |
|
|
| 48% |
| |||||||||||||||
2019 |
|
| 11,430,000 |
|
|
| $ | 34 |
|
|
| 45% |
| |||||||||||||||
2019 (1) |
|
| 3,915,000 |
|
|
| $ | 12 |
|
|
| 53% |
| |||||||||||||||
2020 |
|
| 8,880,000 |
|
|
| $ | 27 |
|
|
| 35% |
|
|
| 11,165,000 |
|
|
| $ | 34 |
|
|
| 40% |
| ||
2021 |
|
| 3,920,000 |
|
|
| $ | 12 |
|
|
| 16% |
|
|
| 9,270,000 |
|
|
| $ | 27 |
|
|
| 33% |
| ||
2022 |
|
| 2,070,000 |
|
|
| $ | 6 |
|
|
| 8% |
|
|
| 9,270,000 |
|
|
| $ | 25 |
|
|
| 33% |
| ||
2023 |
|
| 4,210,000 |
|
|
| $ | 11 |
|
|
| 15% |
|
(1) | Represents the remaining three months of |
(2) |
|
The natural gas derivative contracts were fully effective as of September 30, 2018. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income for the three and nine months ended September 30, 2018 resulting from hedge ineffectiveness (three and nine months ended September 30, 2017 – nil).2019.
FOREIGN CURRENCY RISK
Cash flow hedges:
The Company has manufacturing operations in the United States, Canada and Europe. As a result, it is exposed to movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and European currencies. The Company’s European subsidiaries are also exposed to movements in foreign currency exchange rates on transactions denominated in a currency other than their Euro functional currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates.
14
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian subsidiary over the next 24 months. Derivatives are also currently used to hedge a portion of forecasted sales in British pounds and Norwegian krone and a portion of forecasted purchases in U.S. dollars and Swedish krona by its European subsidiaries over the next 5 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.
The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of September 30, 20182019 to hedge forecasted purchases and sales:
|
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|
|
|
| ||||||||
| ||||||||||||||
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|
|
|
| |||||||||
|
|
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|
|
| |||||||||
| ||||||||||||||
|
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||
| ||||||||||||||
|
|
|
|
|
|
Currency exposure hedged |
| Business Segment |
| Year of maturity |
| Notional contractual value |
| Percentage of forecasted net exposures under contracts |
|
| Average Protection rate |
| Average Obligation rate | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD/USD |
| Pulp and Paper |
| 2019 (1) |
| 174 CAD |
| 77% |
|
| 1 USD = 1.2945 |
| 1 USD = 1.3152 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD/USD |
| Pulp and Paper |
| 2020 |
| 557 CAD |
| 62% |
|
| 1 USD = 1.2966 |
| 1 USD = 1.3155 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD/USD |
| Pulp and Paper |
| 2021 |
| 237 CAD |
| 26% |
|
| 1 USD = 1.3185 |
| 1 USD = 1.3185 |
(1)RepresentsRepresents the remaining three months of 20182019
The foreign exchange derivative contracts were fully effective as of September 30, 2018. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income for the three and nine months ended September2019.
13
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 resulting from hedge ineffectiveness (three and nine months ended September 30, 2017 – nil).2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
FAIR VALUE MEASUREMENT
The accounting standards for fair value measurements and disclosures, establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.
| Level 1 | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 | Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. |
15
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (b) below) at September 30, 20182019 and December 31, 2017,2018, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Fair Value of financial instruments at: |
| September 30, 2018 |
|
| Quoted prices in active markets for identical assets (Level 1) |
|
| Significant observable inputs (Level 2) |
|
| Significant unobservable inputs (Level 3) |
|
| Balance sheet classification |
| September 30, 2019 |
|
| Quoted prices in active markets for identical assets (Level 1) |
|
| Significant observable inputs (Level 2) |
|
| Significant unobservable inputs (Level 3) |
|
| Balance sheet classification | ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
| ||||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| — |
| (a) | Prepaid expenses |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Prepaid expenses |
Natural gas swap contracts |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Prepaid expenses | ||||||||||||||||||
Currency derivatives |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Other assets |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| (a) | Other assets |
Total Assets |
|
| 7 |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
| (a) | Trade and other payables |
|
| 8 |
|
|
| — |
|
|
| 8 |
|
|
| — |
| (a) | Trade and other payables |
Natural gas swap contracts |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Trade and other payables |
|
| 7 |
|
|
| — |
|
|
| 7 |
|
|
| — |
| (a) | Trade and other payables |
Currency derivatives |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
Natural gas swap contracts |
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
|
| 7 |
|
|
| — |
|
|
| 7 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
Total Liabilities |
|
| 13 |
|
|
| — |
|
|
| 13 |
|
|
| — |
|
|
|
|
| 24 |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation - liability awards |
|
| 10 |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
| Trade and other payables |
|
| 6 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
| Trade and other payables |
Stock-based compensation - liability awards |
|
| 20 |
|
|
| 20 |
|
|
| — |
|
|
| — |
|
| Other liabilities and deferred credits |
|
| 16 |
|
|
| 16 |
|
|
| — |
|
|
| — |
|
| Other liabilities and deferred credits |
Long-term debt |
|
| 1,130 |
|
|
| — |
|
|
| 1,130 |
|
|
| — |
| (b) | Long-term debt |
|
| 960 |
|
|
| — |
|
|
| 960 |
|
|
| — |
| (b) | Long-term debt |
The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $7$14 million at September 30, 2018,2019, of which a loss of $1$7 million will be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at September 30, 2018.2019.
1614
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The net cumulative gainloss recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $1$8 million at September 30, 2018,2019, of which a gainloss of $1$6 million will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at September 30, 2018.2019.
Fair Value of financial instruments at: |
| December 31, 2017 |
|
| Quoted prices in active markets for identical assets (Level 1) |
|
| Significant observable inputs (Level 2) |
|
| Significant unobservable inputs (Level 3) |
|
| Balance sheet classification |
| December 31, 2018 |
|
| Quoted prices in active markets for identical assets (Level 1) |
|
| Significant observable inputs (Level 2) |
|
| Significant unobservable inputs (Level 3) |
|
| Balance sheet classification | ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
| ||||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 16 |
|
|
| — |
|
|
| 16 |
|
|
| — |
| (a) | Prepaid expenses | ||||||||||||||||||
Currency derivatives |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
| (a) | Other assets |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Prepaid expenses |
Natural gas swap contracts |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Other assets |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Prepaid expenses |
Total Assets |
|
| 21 |
|
|
| — |
|
|
| 21 |
|
|
| — |
|
|
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| — |
| (a) | Trade and other payables |
|
| 19 |
|
|
| — |
|
|
| 19 |
|
|
| — |
| (a) | Trade and other payables |
Natural gas swap contracts |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Trade and other payables |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Trade and other payables |
Currency derivatives |
|
| 11 |
|
|
| — |
|
|
| 11 |
|
|
| — |
| (a) | Other liabilities and deferred credits | ||||||||||||||||||
Natural gas swap contracts |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
Total Liabilities |
|
| 12 |
|
|
| — |
|
|
| 12 |
|
|
| — |
|
|
|
|
| 37 |
|
|
| — |
|
|
| 37 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation - liability awards |
|
| 6 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
| Trade and other payables |
|
| 6 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
| Trade and other payables |
Stock-based compensation - liability awards |
|
| 20 |
|
|
| 20 |
|
|
| — |
|
|
| — |
|
| Other liabilities and deferred credits |
|
| 17 |
|
|
| 17 |
|
|
| — |
|
|
| — |
|
| Other liabilities and deferred credits |
Long-term debt |
|
| 1,216 |
|
|
| — |
|
|
| 1,216 |
|
|
| — |
| (b) | Long-term debt |
|
| 858 |
|
|
| — |
|
|
| 858 |
|
|
| — |
| (b) | Long-term debt |
(a) | Fair value of the Company’s derivatives are classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows: |
| - | For currency derivatives: Fair value is measured using techniques derived from the Black-Scholes pricing model. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques. |
| - | For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates. |
(b) | Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at September 30, |
Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.
1715
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
EARNINGS PER COMMON SHARE
The following table provides the reconciliation between basic and diluted earnings per common share:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Net earnings |
| $ | 99 |
|
| $ | 70 |
|
| $ | 196 |
|
| $ | 128 |
|
| $ | 20 |
|
| $ | 99 |
|
| $ | 118 |
|
| $ | 196 |
|
Weighted average number of common shares outstanding (millions) |
|
| 62.9 |
|
|
| 62.7 |
|
|
| 62.8 |
|
|
| 62.6 |
|
|
| 61.5 |
|
|
| 62.9 |
|
|
| 62.5 |
|
|
| 62.8 |
|
Effect of dilutive securities (millions) |
|
| 0.3 |
|
|
| 0.2 |
|
|
| 0.3 |
|
|
| 0.2 |
|
|
| 0.2 |
|
|
| 0.3 |
|
|
| 0.2 |
|
|
| 0.3 |
|
Weighted average number of diluted common shares outstanding (millions) |
|
| 63.2 |
|
|
| 62.9 |
|
|
| 63.1 |
|
|
| 62.8 |
|
|
| 61.7 |
|
|
| 63.2 |
|
|
| 62.7 |
|
|
| 63.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per common share (in dollars) |
| $ | 1.57 |
|
| $ | 1.12 |
|
| $ | 3.12 |
|
| $ | 2.04 |
|
| $ | 0.33 |
|
| $ | 1.57 |
|
| $ | 1.89 |
|
| $ | 3.12 |
|
Diluted net earnings per common share (in dollars) |
| $ | 1.57 |
|
| $ | 1.11 |
|
| $ | 3.11 |
|
| $ | 2.04 |
|
| $ | 0.32 |
|
| $ | 1.57 |
|
| $ | 1.88 |
|
| $ | 3.11 |
|
The following table provides the securities that could potentially dilute basic earnings per common share in the future, but were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Options |
|
| 201,599 |
|
|
| 312,893 |
|
|
| 201,599 |
|
|
| 419,161 |
|
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Options to purchase common shares |
|
| 398,869 |
|
|
| 201,599 |
|
|
| 325,757 |
|
|
| 201,599 |
|
1816
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and nine months ended September 30, 2018,2019, the pension expense was $10 million and $33 million, respectively (2018 – $18 million and $40 million, respectively (2017 – $9 million and $30 million, respectively).
DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. who are not grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension plans to certain senior management employees.
Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||
|
| September 30, 2018 |
|
| September 30, 2018 |
|
| September 30, 2019 |
|
| September 30, 2019 |
| ||||||||||||||||||||
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Service cost |
|
| 8 |
|
|
| — |
|
|
| 25 |
|
|
| 1 |
|
|
| 6 |
|
|
| — |
|
|
| 21 |
|
|
| 1 |
|
Interest expense |
|
| 14 |
|
|
| 1 |
|
|
| 41 |
|
|
| 2 |
|
|
| 14 |
|
|
| — |
|
|
| 41 |
|
|
| 1 |
|
Expected return on plan assets |
|
| (22 | ) |
|
| — |
|
|
| (65 | ) |
|
| — |
|
|
| (19 | ) |
|
| — |
|
|
| (59 | ) |
|
| — |
|
Amortization of net actuarial loss |
|
| 2 |
|
|
| — |
|
|
| 6 |
|
|
| — |
| ||||||||||||||||
Amortization of net actuarial loss (gain) |
|
| 2 |
|
|
| — |
|
|
| 7 |
|
|
| (1 | ) | ||||||||||||||||
Amortization of prior year service costs |
|
| 1 |
|
|
| — |
|
|
| 4 |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
Net periodic benefit cost |
|
| 3 |
|
|
| 1 |
|
|
| 11 |
|
|
| 2 |
|
|
| 4 |
|
|
| — |
|
|
| 14 |
|
|
| 1 |
|
Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||
|
| September 30, 2017 |
|
| September 30, 2017 |
|
| September 30, 2018 |
|
| September 30, 2018 |
| ||||||||||||||||||||
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Service cost |
|
| 8 |
|
|
| 1 |
|
|
| 23 |
|
|
| 2 |
|
|
| 8 |
|
|
| — |
|
|
| 25 |
|
|
| 1 |
|
Interest expense |
|
| 13 |
|
|
| — |
|
|
| 38 |
|
|
| 2 |
|
|
| 14 |
|
|
| 1 |
|
|
| 41 |
|
|
| 2 |
|
Expected return on plan assets |
|
| (20 | ) |
|
| — |
|
|
| (60 | ) |
|
| — |
|
|
| (22 | ) |
|
| — |
|
|
| (65 | ) |
|
| — |
|
Amortization of net actuarial loss |
|
| 2 |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
Amortization of prior year service costs |
|
| 1 |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 4 |
|
|
| (1 | ) |
Net periodic benefit cost |
|
| 4 |
|
|
| 1 |
|
|
| 11 |
|
|
| 4 |
|
|
| 3 |
|
|
| 1 |
|
|
| 11 |
|
|
| 2 |
|
1917
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 5. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statement of Earnings and Comprehensive Income.Income (Loss).
For the three and nine months ended September 30, 2018,2019, the Company contributed $7 million and $14 million, respectively (2018 – $48 million and $55 million, respectively (2017 – $38 million and $44 million, respectively) to the pension plans and $1 million and $3 million, respectively (2017(2018 – nil$1 million and $2$3 million, respectively) to the other post-retirement benefit plans.
2018
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
OTHER OPERATING LOSS (INCOME), NET
Other operating loss (income), net is an aggregate of both recurring and occasionalnon-recurring loss or income items and, as a result, can fluctuate from period to period. The Company’s other operating loss (income), net includes the following:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Gain on sale of property, plant and equipment |
|
| — |
|
|
| (4 | ) |
|
| (4 | ) |
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4 | ) |
Reversal of contingent consideration |
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| (2 | ) | ||||||||||||||||
Bad debt expense |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| 1 |
|
Environmental provision |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| 2 |
|
|
| 1 |
|
|
| 2 |
|
|
| 2 |
|
|
| 2 |
|
Foreign exchange loss (gain) |
|
| 2 |
|
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| 1 |
|
|
| 2 |
|
|
| 3 |
|
|
| (1 | ) |
Other |
|
| — |
|
|
| (1 | ) |
|
| (1 | ) |
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| (1 | ) |
Other operating loss (income), net |
|
| 4 |
|
|
| (7 | ) |
|
| (3 | ) |
|
| (6 | ) |
|
| 3 |
|
|
| 4 |
|
|
| 4 |
|
|
| (3 | ) |
2119
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
INCOME TAXES
For the third quarter of 2018,2019, the Company’s income tax expensebenefit was $1 million, consisting of a current income tax benefit of $3 million and a deferred income tax expense of $2 million. This compares to an income tax expense of $3 million in the third quarter of 2018, consisting of a current income tax benefit of $5 million and a deferred income tax expense of $8 million. This compares to an income tax expense of $3 million in the third quarter of 2017, consisting of a current income tax expense of $10 million and a deferred income tax benefit of $7 million. The Company made income tax payments, net of refunds, of $15$5 million during the third quarter of 2019. The effective tax rate was -5% compared with an effective tax rate of 3% in the third quarter of 2018. The effective tax rate was 3% compared with an effective tax rate of 4% infor the third quarter of 2017.2019 was favorably impacted by additional R&D tax credits in the U.S. and Spain. The effective tax rate for the third quarter of 2018 was favorably impacted by the income tax effects of the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform”),Reform, including the benefit related to an additional an pension contribution, and the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. The effective tax rate for the third quarter of 2017 was favorably impacted byas well as the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. The effective tax rates for both the third quarter of 20182019 and 2017the third quarter of 2018 were favorably impacted by the finalization of certain estimates in connection with the filing of the Company’s 20172018 and 20162017 income tax returns, respectively.
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate and then making adjustments for discrete items arising in that quarter. In each interim quarter the Company updates its estimate of the annual effective tax rate and, if the estimated annual tax rate changes, makes a cumulative adjustment in that quarter. The effective tax rate for the third quarter of 2019 was favorably impacted by such an adjustment.
For the first nine months of 2018,2019, the Company’s income tax expense amountedwas $28 million, consisting of a current income tax expense of $27 million and a deferred income tax expense of $1 million. This compares to an income tax expense of $22 million in the first nine months of 2018, consisting of a current income tax expense of $19 million and a deferred income tax expense of $3 million. This compares to an income tax expense of $17 million in the first nine months of 2017, consisting of a current income tax expense of $36 million and a deferred income tax benefit of $19 million. The Company made income tax payments, net of refunds, of $40$55 million during the first nine months of 2019. The effective tax rate was 19% compared to an effective tax rate of 10% in the first nine months of 2018. The effective tax rate was 10% compared to an effective tax rate of 12% infor the first nine months of 2017.2019 was favorably impacted by the recognition of additional R&D credits in the U.S. and Spain and by an enacted law change in the state of Arkansas, which were mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. The effective tax rate for the first nine months of 2018 was favorably impacted by the income tax effects of the U.S. Tax Reform, including the benefit related to an additional pension contribution, the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations, as well as by enacted law changes in Sweden and several U.S. states. The effective tax raterates for both the first nine months of 20182019 and 2017the first nine months of 2018 were favorably impacted by the finalization of certain estimates in connection with the filing of the Company’s 20172018 and 20162017 income tax returns, respectively.
On December 22, 2017,During the SEC staff issued Staff Accounting Bulletin No. 118second quarter of 2019, the Internal Revenue Service (the “IRS”) proposed additional Global Intangible Low-Taxed Income (“SAB 118”GILTI”) to addressregulations, which are still pending approval. While the application in situations where a registrantCompany is still evaluating the impact, it does not expect those proposed regulations to have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. SAB 118 provides guidance which allows companies to use a measurement period, similar to that used in business combinations, to account for the impacts of the U.S. Tax Reform. The U.S. Tax Reform provides for a mandatory one-time deemed repatriation taxmaterial impact on the Company’s undistributed foreign earnings and profits. The Company recorded a provisional repatriation tax amount of $46 million in its consolidated financial statements as of December 31, 2017. As of September 30, 2018, the Company has finalized its U.S. tax returns for the 2017 tax year which include a repatriation tax amount of $39 million. The difference between the provisional amount and the final amount is included as a benefit to income tax expense in the third quarter of 2018 and favorably impacts the effective tax rate for both the third quarter and the first nine months of 2018.statements.
2220
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
INVENTORIES
The following table presents the components of inventories:
|
| September 30, |
|
| December 31, |
| September 30, |
|
| December 31, | ||
|
| 2018 |
|
| 2017 |
| 2019 |
|
| 2018 | ||
|
| $ |
|
| $ |
| $ |
|
| $ | ||
Work in process and finished goods |
|
| 397 |
|
| 399 |
|
| 423 |
|
| 410 |
Raw materials |
|
| 145 |
|
| 135 |
|
| 143 |
|
| 126 |
Operating and maintenance supplies |
|
| 230 |
|
| 223 |
|
| 232 |
|
| 226 |
|
|
| 772 |
|
| 757 |
|
| 798 |
|
| 762 |
21
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 9.
_________________
LEASES
In the normal course of business, the Company enters into operating and finance leases mainly for manufacturing and warehousing facilities, corporate offices, motor vehicles, mobile equipment and manufacturing equipment.
While the Company’s lease payments are generally fixed over the lease term, some leases may include price escalation terms that are fixed at the lease commencement date.
The Company has remaining lease terms ranging from 1 year to 14 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.
During the second quarter of 2019, the Company recorded $9 million of impairment of operating lease right-of-use assets under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss).
The components of lease expense were as follows:
|
|
|
|
|
| For the three months ended |
|
| For the nine months ended |
|
| ||
|
|
|
|
|
| September 30, |
|
| September 30, |
|
| ||
|
|
|
|
|
| 2019 |
|
| 2019 |
|
| ||
|
|
|
|
|
| $ |
|
| $ |
|
| ||
Operating lease expense |
| 8 |
|
|
| 22 |
|
| |||||
|
|
|
|
|
|
|
|
| |||||
Finance lease expense: |
|
|
|
|
|
|
|
| |||||
Amortization of right-of-use assets |
| 1 |
|
|
| 1 |
|
| |||||
Interest on lease liabilities |
| — |
|
|
| — |
|
| |||||
Total finance lease expense |
| 1 |
|
|
| 1 |
|
|
For the three and nine months ended September 30, 2018, total operating lease expense amounted to $8 million and $22 million, respectively.
Supplemental cash flow information related to leases was as follows:
For the nine months ended | |||||||||||
September 30, | |||||||||||
2019 | |||||||||||
$ | |||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash flows from operating leases | 23 | ||||||||||
Operating cash flows from finance leases | 1 | ||||||||||
Financing cash flows from finance leases | 1 | ||||||||||
Right-of-use assets obtained in exchange for lease liabilities: | |||||||||||
Operating leases | 24 | ||||||||||
Finance leases | — |
22
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 9. LEASES (CONTINUED)
Supplemental balance sheet information related to leases was as follows:
September 30, | |||||||||||
2019 | |||||||||||
$ | |||||||||||
Operating leases | |||||||||||
Operating leases right-of-use assets | 77 | ||||||||||
Lease liabilities due within one year | 26 | ||||||||||
Operating lease liabilities | 68 | ||||||||||
94 | |||||||||||
Finance leases | |||||||||||
Property, plant and equipment | 14 | ||||||||||
Accumulated depreciation | (6 | ) | |||||||||
8 | |||||||||||
Long-term debt due within one year | 1 | ||||||||||
Long-term debt | 9 | ||||||||||
10 | |||||||||||
Weighted-average remaining lease term | |||||||||||
Operating leases | 5 years | ||||||||||
Finance leases | 10.2 years | ||||||||||
Weighted-average discount rate | |||||||||||
Operating leases | 4.5 | % | |||||||||
Finance leases | 6.7 | % |
23
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
Maturities of lease liabilities at September 30, 2019 were as follows:
|
|
|
| Operating leases |
|
| Finance leases |
| ||
|
|
|
| $ |
|
| $ |
| ||
|
| 2019 (1) |
|
| 8 |
|
|
| — |
|
|
| 2020 |
|
| 26 |
|
|
| 2 |
|
|
| 2021 |
|
| 22 |
|
|
| 2 |
|
|
| 2022 |
|
| 16 |
|
|
| 2 |
|
|
| 2023 |
|
| 12 |
|
|
| 1 |
|
|
| Thereafter |
|
| 22 |
|
|
| 7 |
|
|
| Total lease payments |
|
| 106 |
|
|
| 14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less: Imputed interest |
|
| 12 |
|
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease liabilities |
|
| 94 |
|
|
| 10 |
|
(1) | Represents the remaining three months of 2019. |
As of September 30, 2019, the Company has an additional $3 million of operating leases, primarily for office space and manufacturing equipment, which have not yet commenced. These operating leases will commence between 2019 and 2020, with terms between 3 and 5 years.
Maturities of lease commitments at December 31, 2018 were as follows:
|
|
|
| Operating leases |
|
| Capital leases |
| ||
|
|
|
| $ |
|
| $ |
| ||
|
| 2019 |
|
| 26 |
|
|
| 2 |
|
|
| 2020 |
|
| 21 |
|
|
| 2 |
|
|
| 2021 |
|
| 17 |
|
|
| 2 |
|
|
| 2022 |
|
| 12 |
|
|
| 1 |
|
|
| 2023 |
|
| 10 |
|
|
| 1 |
|
|
| Thereafter |
|
| 17 |
|
|
| 7 |
|
|
| Total lease payments |
|
| 103 |
|
|
| 15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less: Imputed interest |
| N/A |
|
|
| 4 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total lease liabilities |
| N/A |
|
|
| 11 |
|
24
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 10.
_________________
INTANGIBLE ASSETS
The following table presents the components of intangible assets:
|
|
|
| September 30, 2018 |
|
| December 31, 2017 |
|
|
|
| September 30, 2019 |
|
| December 31, 2018 |
| ||||||||||||||||||||||||||||||||||||
|
| Estimated useful lives (in years) |
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
|
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
|
| Estimated useful lives (in years) |
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
|
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
| ||||||||||||
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||||||
Definite-lived intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water rights |
| 40 |
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
| 40 |
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
Customer relationships |
| 10 – 40 |
|
| 386 |
|
|
| (91 | ) |
|
| 295 |
|
|
| 392 |
|
|
| (79 | ) |
|
| 313 |
|
| 10 – 40 |
|
| 375 |
|
|
| (103 | ) |
|
| 272 |
|
|
| 384 |
|
|
| (94 | ) |
|
| 290 |
|
Technology |
| 7 – 20 |
|
| 8 |
|
|
| (4 | ) |
|
| 4 |
|
|
| 8 |
|
|
| (4 | ) |
|
| 4 |
|
| 7 – 20 |
|
| 8 |
|
|
| (5 | ) |
|
| 3 |
|
|
| 8 |
|
|
| (4 | ) |
|
| 4 |
|
Non-Compete |
| 9 |
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
| 9 |
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
License rights |
| 12 |
|
| 28 |
|
|
| (12 | ) |
|
| 16 |
|
|
| 29 |
|
|
| (11 | ) |
|
| 18 |
|
| 12 |
|
| 29 |
|
|
| (15 | ) |
|
| 14 |
|
|
| 28 |
|
|
| (13 | ) |
|
| 15 |
|
|
|
|
|
| 426 |
|
|
| (109 | ) |
|
| 317 |
|
|
| 433 |
|
|
| (96 | ) |
|
| 337 |
|
|
|
|
| 416 |
|
|
| (125 | ) |
|
| 291 |
|
|
| 424 |
|
|
| (113 | ) |
|
| 311 |
|
Indefinite-lived intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water rights |
|
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
Trade names |
|
|
|
| 240 |
|
|
| — |
|
|
| 240 |
|
|
| 245 |
|
|
| — |
|
|
| 245 |
|
|
|
|
| 230 |
|
|
| — |
|
|
| 230 |
|
|
| 238 |
|
|
| — |
|
|
| 238 |
|
License rights |
|
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
Catalog rights |
|
|
|
| 40 |
|
|
| — |
|
|
| 40 |
|
|
| 41 |
|
|
| — |
|
|
| 41 |
|
|
|
|
| 37 |
|
|
| — |
|
|
| 37 |
|
|
| 38 |
|
|
| — |
|
|
| 38 |
|
Total |
|
|
|
| 716 |
|
|
| (109 | ) |
|
| 607 |
|
|
| 729 |
|
|
| (96 | ) |
|
| 633 |
|
|
|
|
| 693 |
|
|
| (125 | ) |
|
| 568 |
|
|
| 710 |
|
|
| (113 | ) |
|
| 597 |
|
Amortization expense related to intangible assets for the three and nine months ended September 30, 20182019 was $4$5 million and $14 million, respectively (2017(2018 – $4 million and $14 million, respectively).
Amortization expense for the next five years related to intangible assets is expected to be as follows:
|
| 2018 |
| 2019 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
| ||||
|
| $ |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Amortization expense related to intangible assets |
| 21 (1) |
|
| 21 |
|
|
| 21 |
|
|
| 21 |
|
|
| 20 |
|
|
| 2019 |
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 |
| ||||
|
| $ |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Amortization expense related to intangible assets |
| 21 (1) |
|
| 21 |
|
|
| 21 |
|
|
| 20 |
|
|
| 20 |
|
| (1) | Represents twelve months of amortization |
2425
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
Ashdown, Arkansas mill and Port Huron, Michigan mill
On September 27, 2019, the Company’s Board of Directors approved the decision to permanently shut down 2 paper machines, which was announced on October 3, 2019. The closures will take place at the Ashdown, Arkansas pulp and paper mill and the Port Huron, Michigan paper mill. These measures will reduce the Company’s annual uncoated freesheet paper capacity by approximately 204,000 short tons, and will result in a workforce reduction of approximately 100 employees.
The Ashdown mill will continue to operate 1 paper machine with an annual uncoated freesheet paper production capacity of 200,000 short tons. Additionally, the mill operates a fluff pulp machine with the flexibility to produce softwood pulp depending on market conditions. As a result of the closure of the paper machine, the mill will produce an incremental 70,000 ADMT of softwood and fluff pulp, which will ramp up over the next 12 months.
The closure of the Port Huron paper machine will take effect by mid-November. The Port Huron mill will continue to produce a variety of technical and specialty papers for a broad range of customers utilizing 3 machines with a total annual production capacity of 95,000 short tons.
During the third quarter of 2019, the Company recorded $32 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). Additionally, the Company recorded $1 million of severance and termination costs and $4 million of inventory obsolescence, under Closure and restructuring costs.
Waco, Texas facility
On November 1, 2018, the Company announced a margin improvement plan within the Personal Care Division. As part of this plan, the Board of Directors approved the permanent closure of its Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of its manufacturing assets and a workforce reduction across the division. The Waco, Texas facility ceased operations during the second quarter of 2019.
For the three and nine months ended September 30, 2019, the Company recorded $1 million of accelerated depreciation and $26 million of accelerated depreciation and impairment of operating lease right-of-use assets, respectively, under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). For the three and nine months ended September 30, 2019, the Company also recorded $1 million and $5 million, respectively, of severance and termination costs; $1 million and $2 million, respectively, of inventory obsolescence; and $4 million and $11 million, respectively, of asset relocation and other costs, under Closure and restructuring costs.
26
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 12.
_________________
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
The following table presents the changes in Accumulated other comprehensive loss by component(1) for the nine months ended September 30, 20182019 and the year ended December 31, 2017:2018:
|
| Net derivative gains (losses) on cash flow hedges |
|
| Pension items(2) |
|
| Post-retirement benefit items(2) |
|
| Foreign currency items |
|
| Total |
|
| Net derivative gains (losses) on cash flow hedges |
|
| Pension items(2) |
|
| Post-retirement benefit items(2) |
|
| Foreign currency items |
|
| Total |
| ||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||||
Balance at December 31, 2016 |
|
| 11 |
|
|
| (221 | ) |
|
| (11 | ) |
|
| (278 | ) |
|
| (499 | ) | ||||||||||||||||||||
Natural gas swap contracts |
|
| (5 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (5 | ) | |||||||||||||||||||||||
Currency options |
|
| 11 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 11 |
| |||||||||||||||||||||||
Net (gain) loss |
| N/A |
|
|
| (6 | ) |
|
| 17 |
|
| N/A |
|
|
| 11 |
| ||||||||||||||||||||||
Foreign currency items |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 146 |
|
|
| 146 |
| |||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
|
| 6 |
|
|
| (6 | ) |
|
| 17 |
|
|
| 146 |
|
|
| 163 |
| ||||||||||||||||||||
Amounts reclassified from Accumulated other comprehensive loss |
|
| (9 | ) |
|
| 9 |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Net current period other comprehensive (loss) income |
|
| (3 | ) |
|
| 3 |
|
|
| 17 |
|
|
| 146 |
|
|
| 163 |
| ||||||||||||||||||||
Balance at December 31, 2017 |
|
| 8 |
|
|
| (218 | ) |
|
| 6 |
|
|
| (132 | ) |
|
| (336 | ) |
|
| 8 |
|
|
| (218 | ) |
|
| 6 |
|
|
| (132 | ) |
|
| (336 | ) |
Natural gas swap contracts |
|
| (1 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (1 | ) |
|
| 1 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 1 |
| ||||||
Currency options |
|
| (6 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (6 | ) |
|
| (12 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (12 | ) | ||||||
Foreign exchange forward contracts |
|
| (2 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (2 | ) |
|
| (19 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (19 | ) | ||||||
Net (gain) loss |
| N/A |
|
|
| (23 | ) |
|
| 6 |
|
| N/A |
|
|
| (17 | ) | ||||||||||||||||||||||
Foreign currency items |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (49 | ) |
|
| (49 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (91 | ) |
|
| (91 | ) | ||||||
Other comprehensive loss before reclassifications |
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| (49 | ) |
|
| (58 | ) | ||||||||||||||||||||
Other comprehensive (loss) income before reclassifications |
|
| (30 | ) |
|
| (23 | ) |
|
| 6 |
|
|
| (91 | ) |
|
| (138 | ) | ||||||||||||||||||||
Amounts reclassified from Accumulated other comprehensive loss |
|
| (2 | ) |
|
| 7 |
|
|
| (1 | ) |
|
| — |
|
|
| 4 |
|
|
| (2 | ) |
|
| 10 |
|
|
| (1 | ) |
|
| — |
|
|
| 7 |
|
Net current period other comprehensive (loss) income |
|
| (11 | ) |
|
| 7 |
|
|
| (1 | ) |
|
| (49 | ) |
|
| (54 | ) |
|
| (32 | ) |
|
| (13 | ) |
|
| 5 |
|
|
| (91 | ) |
|
| (131 | ) |
Balance at September 30, 2018 |
|
| (3 | ) |
|
| (211 | ) |
|
| 5 |
|
|
| (181 | ) |
|
| (390 | ) | ||||||||||||||||||||
Balance at December 31, 2018 |
|
| (24 | ) |
|
| (231 | ) |
|
| 11 |
|
|
| (223 | ) |
|
| (467 | ) | ||||||||||||||||||||
Natural gas swap contracts |
|
| (8 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (8 | ) | |||||||||||||||||||||||
Currency options |
|
| 4 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 4 |
| |||||||||||||||||||||||
Foreign exchange forward contracts |
|
| 9 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 9 |
| |||||||||||||||||||||||
Foreign currency items |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (12 | ) |
|
| (12 | ) | |||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| (7 | ) | ||||||||||||||||||||
Amounts reclassified from Accumulated other comprehensive loss |
|
| 5 |
|
|
| 8 |
|
|
| (1 | ) |
|
| — |
|
|
| 12 |
| ||||||||||||||||||||
Net current period other comprehensive income (loss) |
|
| 10 |
|
|
| 8 |
|
|
| (1 | ) |
|
| (12 | ) |
|
| 5 |
| ||||||||||||||||||||
Balance at September 30, 2019 |
|
| (14 | ) |
|
| (223 | ) |
|
| 10 |
|
|
| (235 | ) |
|
| (462 | ) |
(1) | All amounts are after tax. Amounts in parentheses indicate losses. |
(2) | The accrued benefit obligation is actuarially determined on an annual basis as of December 31. |
2527
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 10.12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)
The following table presentstables present reclassifications out of Accumulated other comprehensive loss:loss for the three and nine months ended September 30, 2019 and 2018:
Details about Accumulated other comprehensive loss components |
| Amounts reclassified from Accumulated other comprehensive loss(1) |
|
|
| Amounts reclassified from Accumulated other comprehensive loss(1) |
| ||||||||||
|
| For the three months ended |
|
|
| For the three months ended |
| ||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 |
|
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||
|
| $ |
|
| $ |
|
|
| $ |
|
| $ |
| ||||
Net derivative losses on cash flow hedge |
|
|
|
|
|
|
|
|
| ||||||||
Net derivative gains on cash flow hedge |
|
|
|
|
|
|
|
| |||||||||
Natural gas swap contracts |
|
| — |
|
|
| 1 |
| (2) |
|
| 2 |
|
|
| — |
|
Currency options and forwards |
|
| 1 |
|
|
| (5 | ) | (2) |
|
| 2 |
|
|
| 1 |
|
Total before tax |
|
| 1 |
|
|
| (4 | ) |
|
|
| 4 |
|
|
| 1 |
|
Tax (expense) benefit |
|
| (1 | ) |
|
| 2 |
|
| ||||||||
Tax expense |
|
| (1 | ) |
|
| (1 | ) | |||||||||
Net of tax |
|
| — |
|
|
| (2 | ) |
|
|
| 3 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
| 2 |
|
|
| 2 |
| (3) |
|
| 2 |
|
|
| 2 |
|
Amortization of prior year service cost |
|
| 1 |
|
|
| 1 |
| (3) |
|
| 1 |
|
|
| 1 |
|
Total before tax |
|
| 3 |
|
|
| 3 |
|
|
|
| 3 |
|
|
| 3 |
|
Tax expense |
|
| (1 | ) |
|
| (1 | ) |
|
|
| (1 | ) |
|
| (1 | ) |
Net of tax |
|
| 2 |
|
|
| 2 |
|
|
|
| 2 |
|
|
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of other post-retirement benefit items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
| — |
|
|
| — |
| (3) |
|
| — |
|
|
| — |
|
Amortization of prior year service cost |
|
| — |
|
|
| — |
| (3) |
|
| — |
|
|
| — |
|
Total before tax |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
Tax benefit |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
Net of tax |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
26
28
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 10.12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)
|
| Amounts reclassified from Accumulated other comprehensive loss(1) |
|
|
| Amounts reclassified from Accumulated other comprehensive loss(1) |
| ||||||||||
|
| For the nine months ended |
|
|
| For the nine months ended |
| ||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 |
|
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||
|
| $ |
|
| $ |
|
|
| $ |
|
| $ |
| ||||
Net derivatives losses on cash flow hedge |
|
|
|
|
|
|
|
|
| ||||||||
Net derivatives gains (losses) on cash flow hedge |
|
|
|
|
|
|
|
| |||||||||
Natural gas swap contracts |
|
| — |
|
|
| — |
| (2) |
|
| 2 |
|
|
| — |
|
Currency options and forwards |
|
| (2 | ) |
|
| (10 | ) | (2) |
|
| 5 |
|
|
| (2 | ) |
Total before tax |
|
| (2 | ) |
|
| (10 | ) |
|
|
| 7 |
|
|
| (2 | ) |
Tax benefit |
|
| — |
|
|
| 4 |
|
| ||||||||
Tax expense |
|
| (2 | ) |
|
| — |
| |||||||||
Net of tax |
|
| (2 | ) |
|
| (6 | ) |
|
|
| 5 |
|
|
| (2 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
| 6 |
|
|
| 6 |
| (3) |
|
| 7 |
|
|
| 6 |
|
Amortization of prior year service cost |
|
| 4 |
|
|
| 4 |
| (3) |
|
| 4 |
|
|
| 4 |
|
Total before tax |
|
| 10 |
|
|
| 10 |
|
|
|
| 11 |
|
|
| 10 |
|
Tax expense |
|
| (3 | ) |
|
| (3 | ) |
|
|
| (3 | ) |
|
| (3 | ) |
Net of tax |
|
| 7 |
|
|
| 7 |
|
|
|
| 8 |
|
|
| 7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of other post-retirement benefit items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
| — |
|
|
| — |
| (3) |
|
| (1 | ) |
|
| — |
|
Amortization of prior year service cost |
|
| (1 | ) |
|
| — |
| (3) |
|
| — |
|
|
| (1 | ) |
Total before tax |
|
| (1 | ) |
|
| — |
|
|
|
| (1 | ) |
|
| (1 | ) |
Tax benefit |
|
| — |
|
|
| — |
|
|
|
| — |
|
|
| — |
|
Net of tax |
|
| (1 | ) |
|
| — |
|
|
|
| (1 | ) |
|
| (1 | ) |
(1) | Amounts in parentheses indicate losses. |
(2) | These amounts are included in Cost of Sales in the Consolidated Statements of Earnings and Comprehensive |
(3) | These amounts are included in the computation of net periodic benefit cost (see Note 5 “Pension Plans and Other Post-Retirement Benefit Plans” for more details). |
2729
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
SHAREHOLDERS’ EQUITY
DIVIDENDS
On January 29, 2018,February 19, 2019, May 8, 20182019, and August 7, 2018,6, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.435, $0.455, and $0.455 per share, respectively, to be paid to holders of the Company’s common stock. Dividends of $27 million,aggregating $28 million were paid on each of April 15, 2019, and July 16, 2019, and dividends aggregating $27 million were paid on April 16, 2018, July 16, 2018 and October 15, 2018, respectively,2019, to shareholders of record on April 2, 2018,2019, July 3, 20182, 2019, and October 2, 2018,2019, respectively.
On November 6, 2018,5, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.435$0.455 per share to be paid to holders of the Company’s common stock. This dividend is to be paid on January 15, 2019,2020, to shareholders of record on January 2, 2019.2020.
STOCK REPURCHASE PROGRAM
The Company’s Board of Directors has authorized a stock repurchase program (the “Program”) of up to $1.3 billion. At September 30, 2019, the Company had approximately $178 million of remaining availability under the Program. On November 5, 2019, the Company’s Board of Directors approved an increase to the Program from $1.3 billion to $1.6 billion. Under the Program, the Company is authorized to repurchase, from time to time, shares of its outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock in part to reduce the dilutive effects of stock options and awards, and to improve shareholders’ returns.
The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company may enter into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements would require the Company to make up-front payments to the counterparty financial institutions, which would result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.
During the first nine months of 2019, the Company repurchased 4,076,723 shares at an average price of $35.47 for a total cost of $145 million.
During the first nine months of 2018, and 2017, there were no0 shares repurchased under the Program.
Since the inception of the Program, the Company has repurchased 24,853,827 shares at an average price of $39.33 for a total cost of $977 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.
2830
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities. The Company may also incur substantial costs in relation to enforcement actions (including orders requiring corrective measures, installation of pollution control equipment or other remedial actions) as a result of violations of, or liabilities under, environmental laws and regulations applicable to its past and present properties. The Company’s ongoing efforts to identify potential environmental concerns that may be associated with such properties may result in additional environmental costs and liabilities which cannot be reasonably estimated at this time.
In connection with contamination of a site bordering Burrard Inlet in North Vancouver, on February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan International Ltd. and the Company, in order to define and implement an action plan to address soil, sediment and groundwater issues. Construction began in January 2017 and is expected to bewas completed in the first quarter of 2019. The Company previously recorded an environmental reserve to address its estimated exposure. The possible cost in excess
A former owner of the reserveCompany’s Dryden, Ontario manufacturing site (the "Dryden Property") operated a chlor-alkali plant during the 1960s and 1970s, during which time, mercury and other pollutants were used and discharged into the natural environment. In conjunction with the sale and redevelopment of the Dryden Property, the Province of Ontario (the “Province”) provided a broad indemnity (the "Indemnity") in 1985 to the then purchaser of the Dryden Property and its successors and assigns with respect to the discharge of any pollutant, including mercury, by the historical operators of the Dryden Property. This Indemnity was subsequently assigned to the Company in connection with its 2007 purchase of the Dryden Property.
As the current owner of the Dryden Property, Domtar is actively engaged with the Province with respect to the management of the historical contamination.
The Province has challenged whether certain owners of the Dryden Property prior to Domtar can benefit from the Indemnity in relation to the historic contamination. The Province was unsuccessful in the lower courts and has appealed to the Supreme Court of Canada, whose decision is pending.
The Province may also challenge whether Domtar has the benefit of the Indemnity. Should it be determined that Domtar does not consideredhave the benefit of the Indemnity, Domtar may be exposed to befuture costs that could have a material for this matter.financial impact on the Company’s results of operations and financial condition.
The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:
|
| September 30, |
| |
|
| $ |
| |
Balance at beginning of year |
|
|
| |
Additions and other changes | 3 |
| ||
Environmental spending |
|
| ( | ) |
Effect of foreign currency exchange rate change |
|
|
|
|
Balance at end of period |
|
| 35 |
|
The U.S. Environmental Protection Agency (the “EPA”) and/or various state agencies have notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund”, and similar state laws with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a number of operating sites, due to possible soil, sediment or groundwater contamination.
31
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Climate change regulation
Various national and local laws and regulations relating to climate change have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments. The Company does not expect
On July 8, 2019, the EPA published a final rule to be disproportionately affected by these measures compared with other pulp and paper producers located in these jurisdictions.
The EPA Clean Power Plan regulation is being litigated and has been stayed. The EPA has proposed to repeal and replace the Clean Power Plan in accordanceand replace it with President Trump’s Executive Order issued on March 28, 2017. The proposed replacement rule, entitled the “Affordable Clean Energy” (“ACE”) rule, was published on August 31, 2018, andrule. Unlike the EPA plans to finalizeClean Power Plan, which would have required significant changes across the rule in the first part of 2019.entire power sector, ACE would requireonly requires states to develop plans imposing standards of performance mandatingfor efficiency improvements at all fossil fuel-firedcoal-fired electric utility boilers.generating units. The litigation overrule was immediately challenged in the Clean Power Plan remains held in abeyance byU.S. Court of Appeals for the D.C. circuit while the EPA completes its rulemaking process.Circuit. Regardless of the outcome for the Clean Power Plan and ACE, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.
The Government of Canada is reviewing national policies to further reduce greenhouse gases (“GHG”) and has announced its intent to impose a cost on carbon emissions. The Company does not expect its facilities to be disproportionately affected by these measures compared with other pulp and paper producers in Canada.
29
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The province of Quebec has a GHGgreenhouse gases (“GHG”) cap-and-trade systems with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The province of Ontario has announced the ending of its GHG cap-and-trade program and is working on an “orderly wind-down”. The Company does not expect its facilities to be disproportionately affected by these activitiesmeasures compared to the other pulp and paper producers located in these provinces.
The Government of Canada has established a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. The Government of Canada will be imposing its carbon pricing program for regulating GHG emissions in Ontario. This regulatory system took effect in Ontario on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario recently finalized its own GHG Emission Performance Standards regulation. The Ontario Government is in discussions with the Canadian Government to replace the federal program in Ontario with its provincial program. Additional environmental costs may result from this effort which cannot be reasonably estimated at this time.
CONTINGENCIES
In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at September 30, 2018,2019, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
INDEMNIFICATIONS
In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At September 30, 2018,2019, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no0 provision has been recorded. These indemnifications have not yielded a significant expense in the past.
Pension Plans
The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At September 30, 2018,2019, the Company has not0t recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.
3032
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
SEGMENT DISCLOSURES
The Company’s two2 reportable segments described below also represent its two2 operating segments. Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies. The following summary briefly describes the operations included in each of the Company’s reportable segments:
Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.
• | Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp. |
Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.
• | Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent hygiene products. |
An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||||||
SEGMENT DATA |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| September 30, 2019 |
|
| September 30, 2018 |
|
| September 30, 2019 |
|
| September 30, 2018 |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Sales by segment (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Sales by segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Pulp and Paper |
|
| 1,146 |
|
|
| 1,054 |
|
|
| 3,369 |
|
|
| 3,126 |
|
|
| 1,071 |
|
|
| 1,146 |
|
|
| 3,314 |
|
|
| 3,369 |
|
Personal Care |
|
| 237 |
|
|
| 251 |
|
|
| 746 |
|
|
| 736 |
|
|
| 227 |
|
|
| 237 |
|
|
| 711 |
|
|
| 746 |
|
Total for reportable segments |
|
| 1,383 |
|
|
| 1,305 |
|
|
| 4,115 |
|
|
| 3,862 |
|
|
| 1,298 |
|
|
| 1,383 |
|
|
| 4,025 |
|
|
| 4,115 |
|
Intersegment sales |
|
| (16 | ) |
|
| (15 | ) |
|
| (50 | ) |
|
| (49 | ) |
|
| (15 | ) |
|
| (16 | ) |
|
| (49 | ) |
|
| (50 | ) |
Consolidated sales |
|
| 1,367 |
|
|
| 1,290 |
|
|
| 4,065 |
|
|
| 3,813 |
|
|
| 1,283 |
|
|
| 1,367 |
|
|
| 3,976 |
|
|
| 4,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication papers |
|
| 639 |
|
|
| 597 |
|
|
| 1,904 |
|
|
| 1,798 |
|
|
| 635 |
|
|
| 639 |
|
|
| 1,963 |
|
|
| 1,904 |
|
Specialty and packaging papers |
|
| 181 |
|
|
| 167 |
|
|
| 536 |
|
|
| 486 |
|
|
| 159 |
|
|
| 181 |
|
|
| 490 |
|
|
| 536 |
|
Market pulp |
|
| 310 |
|
|
| 275 |
|
|
| 879 |
|
|
| 793 |
|
|
| 262 |
|
|
| 310 |
|
|
| 812 |
|
|
| 879 |
|
Absorbent hygiene products |
|
| 237 |
|
|
| 251 |
|
|
| 746 |
|
|
| 736 |
|
|
| 227 |
|
|
| 237 |
|
|
| 711 |
|
|
| 746 |
|
Consolidated sales |
|
| 1,367 |
|
|
| 1,290 |
|
|
| 4,065 |
|
|
| 3,813 |
|
|
| 1,283 |
|
|
| 1,367 |
|
|
| 3,976 |
|
|
| 4,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp and Paper |
|
| 58 |
|
|
| 63 |
|
|
| 180 |
|
|
| 190 |
|
|
| 56 |
|
|
| 58 |
|
|
| 171 |
|
|
| 180 |
|
Personal Care |
|
| 17 |
|
|
| 17 |
|
|
| 53 |
|
|
| 49 |
|
|
| 16 |
|
|
| 17 |
|
|
| 48 |
|
|
| 53 |
|
Consolidated depreciation and amortization |
|
| 75 |
|
|
| 80 |
|
|
| 233 |
|
|
| 239 |
| ||||||||||||||||
Total for reportable segments |
|
| 72 |
|
|
| 75 |
|
|
| 219 |
|
|
| 233 |
| ||||||||||||||||
Impairment of long-lived assets - Pulp and Paper |
|
| 32 |
|
|
| — |
|
|
| 32 |
|
|
| — |
| ||||||||||||||||
Impairment of long-lived assets - Personal Care |
|
| 1 |
|
|
| — |
|
|
| 26 |
|
|
| — |
| ||||||||||||||||
Consolidated depreciation and amortization and impairment of long-lived assets |
|
| 105 |
|
|
| 75 |
|
|
| 277 |
|
|
| 233 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Pulp and Paper |
|
| 135 |
|
|
| 89 |
|
|
| 290 |
|
|
| 181 |
|
|
| 31 |
|
|
| 135 |
|
|
| 237 |
|
|
| 290 |
|
Personal Care |
|
| (3 | ) |
|
| 8 |
|
|
| 7 |
|
|
| 37 |
|
|
| 2 |
|
|
| (3 | ) |
|
| (24 | ) |
|
| 7 |
|
Corporate |
|
| (18 | ) |
|
| (12 | ) |
|
| (44 | ) |
|
| (33 | ) |
|
| (4 | ) |
|
| (18 | ) |
|
| (35 | ) |
|
| (44 | ) |
Consolidated operating income |
|
| 114 |
|
|
| 85 |
|
|
| 253 |
|
|
| 185 |
|
|
| 29 |
|
|
| 114 |
|
|
| 178 |
|
|
| 253 |
|
Interest expense, net |
|
| 15 |
|
|
| 16 |
|
|
| 47 |
|
|
| 50 |
|
|
| 12 |
|
|
| 15 |
|
|
| 38 |
|
|
| 47 |
|
Non-service components of net periodic benefit cost |
|
| (4 | ) |
|
| (4 | ) |
|
| (13 | ) |
|
| (10 | ) |
|
| (2 | ) |
|
| (4 | ) |
|
| (7 | ) |
|
| (13 | ) |
Earnings before income taxes and equity loss |
|
| 103 |
|
|
| 73 |
|
|
| 219 |
|
|
| 145 |
|
|
| 19 |
|
|
| 103 |
|
|
| 147 |
|
|
| 219 |
|
Income tax expense |
|
| 3 |
|
|
| 3 |
|
|
| 22 |
|
|
| 17 |
| ||||||||||||||||
Income tax (benefit) expense |
|
| (1 | ) |
|
| 3 |
|
|
| 28 |
|
|
| 22 |
| ||||||||||||||||
Equity loss, net of taxes |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Net earnings |
|
| 99 |
|
|
| 70 |
|
|
| 196 |
|
|
| 128 |
|
|
| 20 |
|
|
| 99 |
|
|
| 118 |
|
|
| 196 |
|
31
33
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 13. SEGMENT DISCLOSURES (CONTINUED)
|
|
|
|
32
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar’s significant 100% owned domestic subsidiaries, including Domtar Paper Company, LLC, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Domtar A.W. LLC, Attends Healthcare Products Inc., EAM Corporation, Associated Hygienic Products LLC and Home Delivery Incontinent Supplies Co., (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt is not guaranteed by certain of Domtar’s foreign and non-significant domestic subsidiaries, all 100% owned, (collectively the “Non-Guarantor Subsidiaries”). A subsidiary’s guarantee may be released in certain customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the indenture have been satisfied.
The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at September 30, 20182019 and December 31, 2017,2018, the Statements of Earnings and Comprehensive Income (Loss) for the three and nine months ended September 30, 20182019 and 20172018 and the Statements of Cash Flows for the nine months ended September 30, 20182019 and 20172018 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method.
|
| For the three months ended |
|
| For the three months ended |
| ||||||||||||||||||||||||||||||||||
|
| September 30, 2018 |
|
| September 30, 2019 |
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| ||
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| ||||||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||||||||||||||||||||||
AND COMPREHENSIVE INCOME (LOSS) |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||||||||||||||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||||
Sales |
|
| — |
|
|
| 1,115 |
|
|
| 559 |
|
|
| (307 | ) |
|
| 1,367 |
|
|
| — |
|
|
| 1,060 |
|
|
| 459 |
|
|
| (236 | ) |
|
| 1,283 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 954 |
|
|
| 412 |
|
|
| (307 | ) |
|
| 1,059 |
|
|
| — |
|
|
| 891 |
|
|
| 386 |
|
|
| (236 | ) |
|
| 1,041 |
|
Depreciation and amortization |
|
| — |
|
|
| 53 |
|
|
| 22 |
|
|
| — |
|
|
| 75 |
|
|
| — |
|
|
| 51 |
|
|
| 21 |
|
|
| — |
|
|
| 72 |
|
Selling, general and administrative |
|
| 4 |
|
|
| 31 |
|
|
| 80 |
|
|
| — |
|
|
| 115 |
|
|
| — |
|
|
| 59 |
|
|
| 35 |
|
|
| — |
|
|
| 94 |
|
Other operating (income) loss, net |
|
| — |
|
|
| (1 | ) |
|
| 5 |
|
|
| — |
|
|
| 4 |
| ||||||||||||||||||||
Impairment of long-lived assets |
|
| — |
|
|
| 33 |
|
|
| — |
|
|
| — |
|
|
| 33 |
| ||||||||||||||||||||
Closure and restructuring costs |
|
| — |
|
|
| 11 |
|
|
| — |
|
|
| — |
|
|
| 11 |
| ||||||||||||||||||||
Other operating loss, net |
|
| — |
|
|
| 1 |
|
|
| 2 |
|
|
| — |
|
|
| 3 |
| ||||||||||||||||||||
|
|
| 4 |
|
|
| 1,037 |
|
|
| 519 |
|
|
| (307 | ) |
|
| 1,253 |
|
|
| — |
|
|
| 1,046 |
|
|
| 444 |
|
|
| (236 | ) |
|
| 1,254 |
|
Operating (loss) income |
|
| (4 | ) |
|
| 78 |
|
|
| 40 |
|
|
| — |
|
|
| 114 |
| ||||||||||||||||||||
Operating income |
|
| — |
|
|
| 14 |
|
|
| 15 |
|
|
| — |
|
|
| 29 |
| ||||||||||||||||||||
Interest expense (income), net |
|
| 15 |
|
|
| 23 |
|
|
| (23 | ) |
|
| — |
|
|
| 15 |
|
|
| 18 |
|
|
| 18 |
|
|
| (24 | ) |
|
| — |
|
|
| 12 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| 1 |
|
|
| (5 | ) |
|
| — |
|
|
| (4 | ) |
|
| — |
|
|
| 1 |
|
|
| (3 | ) |
|
| — |
|
|
| (2 | ) |
(Loss) earnings before income taxes |
|
| (19 | ) |
|
| 54 |
|
|
| 68 |
|
|
| — |
|
|
| 103 |
|
|
| (18 | ) |
|
| (5 | ) |
|
| 42 |
|
|
| — |
|
|
| 19 |
|
Income tax (benefit) expense |
|
| (11 | ) |
|
| — |
|
|
| 14 |
|
|
| — |
|
|
| 3 |
|
|
| (4 | ) |
|
| (2 | ) |
|
| 5 |
|
|
| — |
|
|
| (1 | ) |
Equity loss, net of taxes |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
| ||||||||||||||||||||
Share in earnings of equity accounted investees |
|
| 107 |
|
|
| 53 |
|
|
| — |
|
|
| (160 | ) |
|
| — |
|
|
| 34 |
|
|
| 37 |
|
|
| — |
|
|
| (71 | ) |
|
| — |
|
Net earnings |
|
| 99 |
|
|
| 107 |
|
|
| 53 |
|
|
| (160 | ) |
|
| 99 |
|
|
| 20 |
|
|
| 34 |
|
|
| 37 |
|
|
| (71 | ) |
|
| 20 |
|
Other comprehensive income |
|
| 21 |
|
|
| 21 |
|
|
| 13 |
|
|
| (34 | ) |
|
| 21 |
| ||||||||||||||||||||
Comprehensive income |
|
| 120 |
|
|
| 128 |
|
|
| 66 |
|
|
| (194 | ) |
|
| 120 |
| ||||||||||||||||||||
Other comprehensive loss |
|
| (38 | ) |
|
| (37 | ) |
|
| (33 | ) |
|
| 70 |
|
|
| (38 | ) | ||||||||||||||||||||
Comprehensive (loss) income |
|
| (18 | ) |
|
| (3 | ) |
|
| 4 |
|
|
| (1 | ) |
|
| (18 | ) |
3334
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20182019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14.16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2019 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 3,268 |
|
|
| 1,478 |
|
|
| (770 | ) |
|
| 3,976 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 2,746 |
|
|
| 1,196 |
|
|
| (770 | ) |
|
| 3,172 |
|
Depreciation and amortization |
|
| — |
|
|
| 155 |
|
|
| 64 |
|
|
| — |
|
|
| 219 |
|
Selling, general and administrative |
|
| 7 |
|
|
| 170 |
|
|
| 145 |
|
|
| — |
|
|
| 322 |
|
Impairment of long-lived assets |
|
| — |
|
|
| 58 |
|
|
| — |
|
|
| — |
|
|
| 58 |
|
Closure and restructuring costs |
|
| — |
|
|
| 21 |
|
|
| 2 |
|
|
| — |
|
|
| 23 |
|
Other operating (income) loss, net |
|
| — |
|
|
| (3 | ) |
|
| 7 |
|
|
| — |
|
|
| 4 |
|
|
|
| 7 |
|
|
| 3,147 |
|
|
| 1,414 |
|
|
| (770 | ) |
|
| 3,798 |
|
Operating (loss) income |
|
| (7 | ) |
|
| 121 |
|
|
| 64 |
|
|
| — |
|
|
| 178 |
|
Interest expense (income), net |
|
| 52 |
|
|
| 60 |
|
|
| (74 | ) |
|
| — |
|
|
| 38 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| 1 |
|
|
| (8 | ) |
|
| — |
|
|
| (7 | ) |
(Loss) earnings before income taxes and equity loss |
|
| (59 | ) |
|
| 60 |
|
|
| 146 |
|
|
| — |
|
|
| 147 |
|
Income tax (benefit) expense |
|
| (13 | ) |
|
| 12 |
|
|
| 29 |
|
|
| — |
|
|
| 28 |
|
Equity loss, net of taxes |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Share in earnings of equity accounted investees |
|
| 164 |
|
|
| 116 |
|
|
| — |
|
|
| (280 | ) |
|
| — |
|
Net earnings |
|
| 118 |
|
|
| 164 |
|
|
| 116 |
|
|
| (280 | ) |
|
| 118 |
|
Other comprehensive income (loss) |
|
| 5 |
|
|
| 11 |
|
|
| (8 | ) |
|
| (3 | ) |
|
| 5 |
|
Comprehensive income |
|
| 123 |
|
|
| 175 |
|
|
| 108 |
|
|
| (283 | ) |
|
| 123 |
|
|
| For the three months ended |
| |||||||||||||||||
|
| September 30, 2018 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 1,115 |
|
|
| 559 |
|
|
| (307 | ) |
|
| 1,367 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 954 |
|
|
| 412 |
|
|
| (307 | ) |
|
| 1,059 |
|
Depreciation and amortization |
|
| — |
|
|
| 53 |
|
|
| 22 |
|
|
| — |
|
|
| 75 |
|
Selling, general and administrative |
|
| 4 |
|
|
| 31 |
|
|
| 80 |
|
|
| — |
|
|
| 115 |
|
Other operating (income) loss, net |
|
| — |
|
|
| (1 | ) |
|
| 5 |
|
|
| — |
|
|
| 4 |
|
|
|
| 4 |
|
|
| 1,037 |
|
|
| 519 |
|
|
| (307 | ) |
|
| 1,253 |
|
Operating (loss) income |
|
| (4 | ) |
|
| 78 |
|
|
| 40 |
|
|
| — |
|
|
| 114 |
|
Interest expense (income), net |
|
| 15 |
|
|
| 23 |
|
|
| (23 | ) |
|
| — |
|
|
| 15 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| 1 |
|
|
| (5 | ) |
|
| — |
|
|
| (4 | ) |
(Loss) earnings before income taxes |
|
| (19 | ) |
|
| 54 |
|
|
| 68 |
|
|
| — |
|
|
| 103 |
|
Income tax (benefit) expense |
|
| (11 | ) |
|
| — |
|
|
| 14 |
|
|
| — |
|
|
| 3 |
|
Equity loss, net of taxes |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Share in earnings of equity accounted investees |
|
| 107 |
|
|
| 53 |
|
|
| — |
|
|
| (160 | ) |
|
| — |
|
Net earnings |
|
| 99 |
|
|
| 107 |
|
|
| 53 |
|
|
| (160 | ) |
|
| 99 |
|
Other comprehensive income |
|
| 21 |
|
|
| 21 |
|
|
| 13 |
|
|
| (34 | ) |
|
| 21 |
|
Comprehensive income |
|
| 120 |
|
|
| 128 |
|
|
| 66 |
|
|
| (194 | ) |
|
| 120 |
|
35
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2018 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 3,287 |
|
|
| 1,671 |
|
|
| (893 | ) |
|
| 4,065 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 2,840 |
|
|
| 1,292 |
|
|
| (893 | ) |
|
| 3,239 |
|
Depreciation and amortization |
|
| — |
|
|
| 164 |
|
|
| 69 |
|
|
| — |
|
|
| 233 |
|
Selling, general and administrative |
|
| 11 |
|
|
| 99 |
|
|
| 233 |
|
|
| — |
|
|
| 343 |
|
Other operating income, net |
|
| — |
|
|
| (2 | ) |
|
| (1 | ) |
|
| — |
|
|
| (3 | ) |
|
|
| 11 |
|
|
| 3,101 |
|
|
| 1,593 |
|
|
| (893 | ) |
|
| 3,812 |
|
Operating (loss) income |
|
| (11 | ) |
|
| 186 |
|
|
| 78 |
|
|
| — |
|
|
| 253 |
|
Interest expense (income), net |
|
| 47 |
|
|
| 68 |
|
|
| (68 | ) |
|
| — |
|
|
| 47 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| 1 |
|
|
| (14 | ) |
|
| — |
|
|
| (13 | ) |
(Loss) earnings before income taxes |
|
| (58 | ) |
|
| 117 |
|
|
| 160 |
|
|
| — |
|
|
| 219 |
|
Income tax (benefit) expense |
|
| (19 | ) |
|
| 12 |
|
|
| 29 |
|
|
| — |
|
|
| 22 |
|
Equity loss, net of taxes |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Share in earnings of equity accounted investees |
|
| 235 |
|
|
| 130 |
|
|
| — |
|
|
| (365 | ) |
|
| — |
|
Net earnings |
|
| 196 |
|
|
| 235 |
|
|
| 130 |
|
|
| (365 | ) |
|
| 196 |
|
Other comprehensive loss |
|
| (54 | ) |
|
| (54 | ) |
|
| (47 | ) |
|
| 101 |
|
|
| (54 | ) |
Comprehensive income |
|
| 142 |
|
|
| 181 |
|
|
| 83 |
|
|
| (264 | ) |
|
| 142 |
|
36
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| September 30, 2019 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
CONDENSED CONSOLIDATING BALANCE SHEET |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Assets |
|
|
| |||||||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| — |
|
|
| 4 |
|
|
| 99 |
|
|
| (5 | ) |
|
| 98 |
|
Receivables |
|
| — |
|
|
| 148 |
|
|
| 470 |
|
|
| — |
|
|
| 618 |
|
Inventories |
|
| — |
|
|
| 555 |
|
|
| 243 |
|
|
| — |
|
|
| 798 |
|
Prepaid expenses |
|
| 9 |
|
|
| 15 |
|
|
| 9 |
|
|
| — |
|
|
| 33 |
|
Income and other taxes receivable |
|
| 59 |
|
|
| 12 |
|
|
| 27 |
|
|
| (45 | ) |
|
| 53 |
|
Intercompany accounts |
|
| 436 |
|
|
| 465 |
|
|
| 155 |
|
|
| (1,056 | ) |
|
| — |
|
Total current assets |
|
| 504 |
|
|
| 1,199 |
|
|
| 1,003 |
|
|
| (1,106 | ) |
|
| 1,600 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 1,693 |
|
|
| 806 |
|
|
| — |
|
|
| 2,499 |
|
Operating lease right-of-use assets |
|
| — |
|
|
| 63 |
|
|
| 14 |
|
|
| — |
|
|
| 77 |
|
Intangible assets, net |
|
| — |
|
|
| 248 |
|
|
| 320 |
|
|
| — |
|
|
| 568 |
|
Investments in affiliates |
|
| 3,821 |
|
|
| 2,705 |
|
|
| — |
|
|
| (6,526 | ) |
|
| — |
|
Intercompany long-term advances |
|
| 5 |
|
|
| 1 |
|
|
| 1,684 |
|
|
| (1,690 | ) |
|
| — |
|
Other assets |
|
| 20 |
|
|
| 35 |
|
|
| 113 |
|
|
| (28 | ) |
|
| 140 |
|
Total assets |
|
| 4,350 |
|
|
| 5,944 |
|
|
| 3,940 |
|
|
| (9,350 | ) |
|
| 4,884 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness |
|
| 5 |
|
|
| 1 |
|
|
| — |
|
|
| (5 | ) |
|
| 1 |
|
Trade and other payables |
|
| 58 |
|
|
| 371 |
|
|
| 217 |
|
|
| — |
|
|
| 646 |
|
Intercompany accounts |
|
| 245 |
|
|
| 222 |
|
|
| 589 |
|
|
| (1,056 | ) |
|
| — |
|
Income and other taxes payable |
|
| 2 |
|
|
| 45 |
|
|
| 26 |
|
|
| (45 | ) |
|
| 28 |
|
Operating lease liabilities due within one year |
|
| — |
|
|
| 20 |
|
|
| 6 |
|
|
| — |
|
|
| 26 |
|
Long-term debt due within one year |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Total current liabilities |
|
| 310 |
|
|
| 659 |
|
|
| 839 |
|
|
| (1,106 | ) |
|
| 702 |
|
Long-term debt |
|
| 838 |
|
|
| — |
|
|
| 100 |
|
|
| — |
|
|
| 938 |
|
Operating lease liabilities |
|
| — |
|
|
| 59 |
|
|
| 9 |
|
|
| — |
|
|
| 68 |
|
Intercompany long-term loans |
|
| 733 |
|
|
| 956 |
|
|
| 1 |
|
|
| (1,690 | ) |
|
| — |
|
Deferred income taxes and other |
|
| — |
|
|
| 351 |
|
|
| 156 |
|
|
| (28 | ) |
|
| 479 |
|
Other liabilities and deferred credits |
|
| 30 |
|
|
| 98 |
|
|
| 130 |
|
|
| — |
|
|
| 258 |
|
Shareholders' equity |
|
| 2,439 |
|
|
| 3,821 |
|
|
| 2,705 |
|
|
| (6,526 | ) |
|
| 2,439 |
|
Total liabilities and shareholders' equity |
|
| 4,350 |
|
|
| 5,944 |
|
|
| 3,940 |
|
|
| (9,350 | ) |
|
| 4,884 |
|
37
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| December 31, 2018 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
CONDENSED CONSOLIDATING BALANCE SHEET |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| — |
|
|
| — |
|
|
| 111 |
|
|
| — |
|
|
| 111 |
|
Receivables |
|
| — |
|
|
| 146 |
|
|
| 524 |
|
|
| — |
|
|
| 670 |
|
Inventories |
|
| — |
|
|
| 525 |
|
|
| 237 |
|
|
| — |
|
|
| 762 |
|
Prepaid expenses |
|
| 6 |
|
|
| 12 |
|
|
| 6 |
|
|
| — |
|
|
| 24 |
|
Income and other taxes receivable |
|
| 1 |
|
|
| 3 |
|
|
| 18 |
|
|
| — |
|
|
| 22 |
|
Intercompany accounts |
|
| 498 |
|
|
| 392 |
|
|
| 35 |
|
|
| (925 | ) |
|
| — |
|
Total current assets |
|
| 505 |
|
|
| 1,078 |
|
|
| 931 |
|
|
| (925 | ) |
|
| 1,589 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 1,802 |
|
|
| 803 |
|
|
| — |
|
|
| 2,605 |
|
Intangible assets, net |
|
| — |
|
|
| 256 |
|
|
| 341 |
|
|
| — |
|
|
| 597 |
|
Investments in affiliates |
|
| 3,645 |
|
|
| 2,611 |
|
|
| — |
|
|
| (6,256 | ) |
|
| — |
|
Intercompany long-term advances |
|
| 5 |
|
|
| 1 |
|
|
| 1,569 |
|
|
| (1,575 | ) |
|
| — |
|
Other assets |
|
| 18 |
|
|
| 26 |
|
|
| 104 |
|
|
| (14 | ) |
|
| 134 |
|
Total assets |
|
| 4,173 |
|
|
| 5,774 |
|
|
| 3,748 |
|
|
| (8,770 | ) |
|
| 4,925 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
| 52 |
|
|
| 464 |
|
|
| 241 |
|
|
| — |
|
|
| 757 |
|
Intercompany accounts |
|
| 125 |
|
|
| 264 |
|
|
| 536 |
|
|
| (925 | ) |
|
| — |
|
Income and other taxes payable |
|
| 1 |
|
|
| 12 |
|
|
| 12 |
|
|
| — |
|
|
| 25 |
|
Long-term debt due within one year |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Total current liabilities |
|
| 178 |
|
|
| 740 |
|
|
| 790 |
|
|
| (925 | ) |
|
| 783 |
|
Long-term debt |
|
| 793 |
|
|
| — |
|
|
| 60 |
|
|
| — |
|
|
| 853 |
|
Intercompany long-term loans |
|
| 636 |
|
|
| 938 |
|
|
| 1 |
|
|
| (1,575 | ) |
|
| — |
|
Deferred income taxes and other |
|
| — |
|
|
| 335 |
|
|
| 155 |
|
|
| (14 | ) |
|
| 476 |
|
Other liabilities and deferred credits |
|
| 28 |
|
|
| 116 |
|
|
| 131 |
|
|
| — |
|
|
| 275 |
|
Shareholders' equity |
|
| 2,538 |
|
|
| 3,645 |
|
|
| 2,611 |
|
|
| (6,256 | ) |
|
| 2,538 |
|
Total liabilities and shareholders' equity |
|
| 4,173 |
|
|
| 5,774 |
|
|
| 3,748 |
|
|
| (8,770 | ) |
|
| 4,925 |
|
The Company has revised the Receivables balance within the December 31, 2018 Guarantor Subsidiaries column (decreased) and Non-Guarantor Subsidiaries column (increased) by $198 million, respectively, as receivables from third parties for the Guarantor Subsidiaries were netted with intercompany receivables.
38
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2019 |
| |||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| Parent |
|
| Guarantor Subsidiaries |
|
| Non- Guarantor Subsidiaries |
|
| Consolidating Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 118 |
|
|
| 164 |
|
|
| 116 |
|
|
| (280 | ) |
|
| 118 |
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
| (20 | ) |
|
| (122 | ) |
|
| 26 |
|
|
| 280 |
|
|
| 164 |
| |
Cash flows from operating activities |
|
| 98 |
|
|
| 42 |
|
|
| 142 |
|
|
| — |
|
|
| 282 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| — |
|
|
| (92 | ) |
|
| (65 | ) |
|
| — |
|
|
| (157 | ) |
Proceeds from disposals of property, plant and equipment |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Cash flows used for investing activities |
|
| — |
|
|
| (91 | ) |
|
| (65 | ) |
|
| — |
|
|
| (156 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (83 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (83 | ) |
Stock repurchase |
|
| (139 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (139 | ) |
Net change in bank indebtedness |
|
| 5 |
|
|
| 1 |
|
|
| 1 |
|
|
| (5 | ) |
|
| 2 |
|
Change in revolving credit facility |
|
| 45 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 45 |
|
Proceeds from receivables securitization facility |
|
| — |
|
|
| — |
|
|
| 150 |
|
|
| — |
|
|
| 150 |
|
Repayments of receivables securitization facility |
|
| — |
|
|
| — |
|
|
| (110 | ) |
|
| — |
|
|
| (110 | ) |
Repayments of long-term debt |
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
Increase in long-term advances to related parties |
|
| — |
|
|
| — |
|
|
| (127 | ) |
|
| 127 |
|
|
| — |
|
Decrease in long-term advances to related parties |
|
| 75 |
|
|
| 52 |
|
|
| — |
|
|
| (127 | ) |
|
| — |
|
Other |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
Cash flows (used for) provided from financing activities |
|
| (98 | ) |
|
| 53 |
|
|
| (87 | ) |
|
| (5 | ) |
|
| (137 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| — |
|
|
| 4 |
|
|
| (10 | ) |
|
| (5 | ) |
|
| (11 | ) |
Impact of foreign exchange on cash |
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| (2 | ) |
Cash and cash equivalents at beginning of period |
|
| — |
|
|
| — |
|
|
| 111 |
|
|
| — |
|
|
| 111 |
|
Cash and cash equivalents at end of period |
|
| — |
|
|
| 4 |
|
|
| 99 |
|
|
| (5 | ) |
|
| 98 |
|
39
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2018 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 3,287 |
|
|
| 1,671 |
|
|
| (893 | ) |
|
| 4,065 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 2,840 |
|
|
| 1,292 |
|
|
| (893 | ) |
|
| 3,239 |
|
Depreciation and amortization |
|
| — |
|
|
| 164 |
|
|
| 69 |
|
|
| — |
|
|
| 233 |
|
Selling, general and administrative |
|
| 11 |
|
|
| 99 |
|
|
| 233 |
|
|
| — |
|
|
| 343 |
|
Other operating income, net |
|
| — |
|
|
| (2 | ) |
|
| (1 | ) |
|
| — |
|
|
| (3 | ) |
|
|
| 11 |
|
|
| 3,101 |
|
|
| 1,593 |
|
|
| (893 | ) |
|
| 3,812 |
|
Operating (loss) income |
|
| (11 | ) |
|
| 186 |
|
|
| 78 |
|
|
| — |
|
|
| 253 |
|
Interest expense (income), net |
|
| 47 |
|
|
| 68 |
|
|
| (68 | ) |
|
| — |
|
|
| 47 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| 1 |
|
|
| (14 | ) |
|
| — |
|
|
| (13 | ) |
(Loss) earnings before income taxes |
|
| (58 | ) |
|
| 117 |
|
|
| 160 |
|
|
| — |
|
|
| 219 |
|
Income tax (benefit) expense |
|
| (19 | ) |
|
| 12 |
|
|
| 29 |
|
|
| — |
|
|
| 22 |
|
Equity loss, net of taxes |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Share in earnings of equity accounted investees |
|
| 235 |
|
|
| 130 |
|
|
| — |
|
|
| (365 | ) |
|
| — |
|
Net earnings |
|
| 196 |
|
|
| 235 |
|
|
| 130 |
|
|
| (365 | ) |
|
| 196 |
|
Other comprehensive loss |
|
| (54 | ) |
|
| (54 | ) |
|
| (47 | ) |
|
| 101 |
|
|
| (54 | ) |
Comprehensive income |
|
| 142 |
|
|
| 181 |
|
|
| 83 |
|
|
| (264 | ) |
|
| 142 |
|
|
| For the three months ended |
| |||||||||||||||||
|
| September 30, 2017 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 1,059 |
|
|
| 520 |
|
|
| (289 | ) |
|
| 1,290 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 901 |
|
|
| 404 |
|
|
| (289 | ) |
|
| 1,016 |
|
Depreciation and amortization |
|
| — |
|
|
| 58 |
|
|
| 22 |
|
|
| — |
|
|
| 80 |
|
Selling, general and administrative |
|
| 4 |
|
|
| 37 |
|
|
| 75 |
|
|
| — |
|
|
| 116 |
|
Other operating income, net |
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| (7 | ) |
|
|
| 4 |
|
|
| 996 |
|
|
| 494 |
|
|
| (289 | ) |
|
| 1,205 |
|
Operating (loss) income |
|
| (4 | ) |
|
| 63 |
|
|
| 26 |
|
|
| — |
|
|
| 85 |
|
Interest expense (income), net |
|
| 15 |
|
|
| 21 |
|
|
| (20 | ) |
|
| — |
|
|
| 16 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| — |
|
|
| (4 | ) |
(Loss) earnings before income taxes |
|
| (19 | ) |
|
| 42 |
|
|
| 50 |
|
|
| — |
|
|
| 73 |
|
Income tax (benefit) expense |
|
| (4 | ) |
|
| (4 | ) |
|
| 11 |
|
|
| — |
|
|
| 3 |
|
Share in earnings of equity accounted investees |
|
| 85 |
|
|
| 39 |
|
|
| — |
|
|
| (124 | ) |
|
| — |
|
Net earnings |
|
| 70 |
|
|
| 85 |
|
|
| 39 |
|
|
| (124 | ) |
|
| 70 |
|
Other comprehensive income |
|
| 69 |
|
|
| 69 |
|
|
| 61 |
|
|
| (130 | ) |
|
| 69 |
|
Comprehensive income |
|
| 139 |
|
|
| 154 |
|
|
| 100 |
|
|
| (254 | ) |
|
| 139 |
|
34
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
| For the nine months ended |
| ||||||||||||||||||
|
| September 30, 2017 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 3,156 |
|
|
| 1,530 |
|
|
| (873 | ) |
|
| 3,813 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 2,749 |
|
|
| 1,190 |
|
|
| (873 | ) |
|
| 3,066 |
|
Depreciation and amortization |
|
| — |
|
|
| 175 |
|
|
| 64 |
|
|
| — |
|
|
| 239 |
|
Selling, general and administrative |
|
| 8 |
|
|
| 101 |
|
|
| 220 |
|
|
| — |
|
|
| 329 |
|
Other operating income, net |
|
| — |
|
|
| (2 | ) |
|
| (4 | ) |
|
| — |
|
|
| (6 | ) |
|
|
| 8 |
|
|
| 3,023 |
|
|
| 1,470 |
|
|
| (873 | ) |
|
| 3,628 |
|
Operating (loss) income |
|
| (8 | ) |
|
| 133 |
|
|
| 60 |
|
|
| — |
|
|
| 185 |
|
Interest expense (income), net |
|
| 48 |
|
|
| 63 |
|
|
| (61 | ) |
|
| — |
|
|
| 50 |
|
Non-service components of net periodic benefit cost |
|
| — |
|
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| (10 | ) |
(Loss) earnings before income taxes |
|
| (56 | ) |
|
| 70 |
|
|
| 131 |
|
|
| — |
|
|
| 145 |
|
Income tax (benefit) expense |
|
| (13 | ) |
|
| 1 |
|
|
| 29 |
|
|
| — |
|
|
| 17 |
|
Share in earnings of equity accounted investees |
|
| 171 |
|
|
| 102 |
|
|
| — |
|
|
| (273 | ) |
|
| — |
|
Net earnings |
|
| 128 |
|
|
| 171 |
|
|
| 102 |
|
|
| (273 | ) |
|
| 128 |
|
Other comprehensive income |
|
| 154 |
|
|
| 163 |
|
|
| 146 |
|
|
| (309 | ) |
|
| 154 |
|
Comprehensive income |
|
| 282 |
|
|
| 334 |
|
|
| 248 |
|
|
| (582 | ) |
|
| 282 |
|
35
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
| September 30, 2018 |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
CONDENSED CONSOLIDATING BALANCE SHEET |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Assets |
|
|
| |||||||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 172 |
|
|
| 8 |
|
|
| 76 |
|
|
| — |
|
|
| 256 |
|
Receivables |
|
| — |
|
|
| 422 |
|
|
| 280 |
|
|
| — |
|
|
| 702 |
|
Inventories |
|
| — |
|
|
| 518 |
|
|
| 254 |
|
|
| — |
|
|
| 772 |
|
Prepaid expenses |
|
| 9 |
|
|
| 15 |
|
|
| 9 |
|
|
| — |
|
|
| 33 |
|
Income and other taxes receivable |
|
| 57 |
|
|
| 1 |
|
|
| 15 |
|
|
| (56 | ) |
|
| 17 |
|
Intercompany accounts |
|
| 368 |
|
|
| 168 |
|
|
| 54 |
|
|
| (590 | ) |
|
| — |
|
Total current assets |
|
| 606 |
|
|
| 1,132 |
|
|
| 688 |
|
|
| (646 | ) |
|
| 1,780 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 1,789 |
|
|
| 832 |
|
|
| — |
|
|
| 2,621 |
|
Intangible assets, net |
|
| — |
|
|
| 260 |
|
|
| 347 |
|
|
| — |
|
|
| 607 |
|
Investments in affiliates |
|
| 3,622 |
|
|
| 2,669 |
|
|
| — |
|
|
| (6,291 | ) |
|
| — |
|
Intercompany long-term advances |
|
| 5 |
|
|
| 1 |
|
|
| 1,608 |
|
|
| (1,614 | ) |
|
| — |
|
Other assets |
|
| 22 |
|
|
| 31 |
|
|
| 139 |
|
|
| (18 | ) |
|
| 174 |
|
Total assets |
|
| 4,255 |
|
|
| 5,882 |
|
|
| 3,614 |
|
|
| (8,569 | ) |
|
| 5,182 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
| 51 |
|
|
| 436 |
|
|
| 230 |
|
|
| — |
|
|
| 717 |
|
Intercompany accounts |
|
| 129 |
|
|
| 77 |
|
|
| 384 |
|
|
| (590 | ) |
|
| — |
|
Income and other taxes payable |
|
| 2 |
|
|
| 62 |
|
|
| 24 |
|
|
| (56 | ) |
|
| 32 |
|
Long-term debt due within one year |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Total current liabilities |
|
| 182 |
|
|
| 575 |
|
|
| 639 |
|
|
| (646 | ) |
|
| 750 |
|
Long-term debt |
|
| 793 |
|
|
| 299 |
|
|
| 11 |
|
|
| — |
|
|
| 1,103 |
|
Intercompany long-term loans |
|
| 663 |
|
|
| 950 |
|
|
| 1 |
|
|
| (1,614 | ) |
|
| — |
|
Deferred income taxes and other |
|
| — |
|
|
| 351 |
|
|
| 155 |
|
|
| (18 | ) |
|
| 488 |
|
Other liabilities and deferred credits |
|
| 64 |
|
|
| 85 |
|
|
| 139 |
|
|
| — |
|
|
| 288 |
|
Shareholders' equity |
|
| 2,553 |
|
|
| 3,622 |
|
|
| 2,669 |
|
|
| (6,291 | ) |
|
| 2,553 |
|
Total liabilities and shareholders' equity |
|
| 4,255 |
|
|
| 5,882 |
|
|
| 3,614 |
|
|
| (8,569 | ) |
|
| 5,182 |
|
36
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| December 31, 2017 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
CONDENSED CONSOLIDATING BALANCE SHEET |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 3 |
|
|
| 14 |
|
|
| 122 |
|
|
| — |
|
|
| 139 |
|
Receivables |
|
| — |
|
|
| 402 |
|
|
| 302 |
|
|
| — |
|
|
| 704 |
|
Inventories |
|
| — |
|
|
| 522 |
|
|
| 235 |
|
|
| — |
|
|
| 757 |
|
Prepaid expenses |
|
| 5 |
|
|
| 22 |
|
|
| 6 |
|
|
| — |
|
|
| 33 |
|
Income and other taxes receivable |
|
| 7 |
|
|
| 1 |
|
|
| 16 |
|
|
| — |
|
|
| 24 |
|
Intercompany accounts |
|
| 380 |
|
|
| 314 |
|
|
| 45 |
|
|
| (739 | ) |
|
| — |
|
Total current assets |
|
| 395 |
|
|
| 1,275 |
|
|
| 726 |
|
|
| (739 | ) |
|
| 1,657 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 1,870 |
|
|
| 895 |
|
|
| — |
|
|
| 2,765 |
|
Intangible assets, net |
|
| — |
|
|
| 268 |
|
|
| 365 |
|
|
| — |
|
|
| 633 |
|
Investments in affiliates |
|
| 3,892 |
|
|
| 2,609 |
|
|
| — |
|
|
| (6,501 | ) |
|
| — |
|
Intercompany long-term advances |
|
| 6 |
|
|
| 81 |
|
|
| 1,513 |
|
|
| (1,600 | ) |
|
| — |
|
Other assets |
|
| 22 |
|
|
| 24 |
|
|
| 129 |
|
|
| (18 | ) |
|
| 157 |
|
Total assets |
|
| 4,315 |
|
|
| 6,127 |
|
|
| 3,628 |
|
|
| (8,858 | ) |
|
| 5,212 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
| 55 |
|
|
| 424 |
|
|
| 237 |
|
|
| — |
|
|
| 716 |
|
Intercompany accounts |
|
| 244 |
|
|
| 63 |
|
|
| 432 |
|
|
| (739 | ) |
|
| — |
|
Income and other taxes payable |
|
| 1 |
|
|
| 14 |
|
|
| 9 |
|
|
| — |
|
|
| 24 |
|
Long-term debt due within one year |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Total current liabilities |
|
| 300 |
|
|
| 501 |
|
|
| 679 |
|
|
| (739 | ) |
|
| 741 |
|
Long-term debt |
|
| 792 |
|
|
| 300 |
|
|
| 37 |
|
|
| — |
|
|
| 1,129 |
|
Intercompany long-term loans |
|
| 674 |
|
|
| 925 |
|
|
| 1 |
|
|
| (1,600 | ) |
|
| — |
|
Deferred income taxes and other |
|
| — |
|
|
| 356 |
|
|
| 153 |
|
|
| (18 | ) |
|
| 491 |
|
Other liabilities and deferred credits |
|
| 66 |
|
|
| 153 |
|
|
| 149 |
|
|
| — |
|
|
| 368 |
|
Shareholders' equity |
|
| 2,483 |
|
|
| 3,892 |
|
|
| 2,609 |
|
|
| (6,501 | ) |
|
| 2,483 |
|
Total liabilities and shareholders' equity |
|
| 4,315 |
|
|
| 6,127 |
|
|
| 3,628 |
|
|
| (8,858 | ) |
|
| 5,212 |
|
37
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2018 |
| |||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| Parent |
|
| Guarantor Subsidiaries |
|
| Non- Guarantor Subsidiaries |
|
| Consolidating Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 196 |
|
|
| 235 |
|
|
| 130 |
|
|
| (365 | ) |
|
| 196 |
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
| (376 | ) |
|
| 202 |
|
|
| (50 | ) |
|
| 365 |
|
|
| 141 |
| |
Cash flows (used for) provided from operating activities |
|
| (180 | ) |
|
| 437 |
|
|
| 80 |
|
|
| — |
|
|
| 337 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| — |
|
|
| (73 | ) |
|
| (38 | ) |
|
| — |
|
|
| (111 | ) |
Proceeds from disposals of property, plant and equipment |
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
Other |
|
| — |
|
|
| (2 | ) |
|
| (4 | ) |
|
| — |
|
|
| (6 | ) |
Cash flows used for investing activities |
|
| — |
|
|
| (75 | ) |
|
| (38 | ) |
|
| — |
|
|
| (113 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (81 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (81 | ) |
Repayments of receivables securitization facility |
|
| — |
|
|
| — |
|
|
| (25 | ) |
|
| — |
|
|
| (25 | ) |
Increase in long-term advances to related parties |
|
| — |
|
|
| (368 | ) |
|
| (61 | ) |
|
| 429 |
|
|
| — |
|
Decrease in long-term advances to related parties |
|
| 429 |
|
|
| — |
|
|
| — |
|
|
| (429 | ) |
|
| — |
|
Other |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Cash flows provided from (used for) financing activities |
|
| 349 |
|
|
| (368 | ) |
|
| (86 | ) |
|
| — |
|
|
| (105 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| 169 |
|
|
| (6 | ) |
|
| (44 | ) |
|
| — |
|
|
| 119 |
|
Impact of foreign exchange on cash |
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
|
| (2 | ) |
Cash and cash equivalents at beginning of period |
|
| 3 |
|
|
| 14 |
|
|
| 122 |
|
|
| — |
|
|
| 139 |
|
Cash and cash equivalents at end of period |
|
| 172 |
|
|
| 8 |
|
|
| 76 |
|
|
| — |
|
|
| 256 |
|
38
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2017 |
| |||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| Parent |
|
| Guarantor Subsidiaries |
|
| Non- Guarantor Subsidiaries |
|
| Consolidating Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 128 |
|
|
| 171 |
|
|
| 102 |
|
|
| (273 | ) |
|
| 128 |
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
| 43 |
|
|
| (176 | ) |
|
| 56 |
|
|
| 273 |
|
|
| 196 |
| |
Cash flows provided from (used for) operating activities |
|
| 171 |
|
|
| (5 | ) |
|
| 158 |
|
|
| — |
|
|
| 324 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| — |
|
|
| (61 | ) |
|
| (50 | ) |
|
| — |
|
|
| (111 | ) |
Proceeds from disposals of property, plant and equipment |
|
| — |
|
|
| — |
|
|
| 8 |
|
|
| — |
|
|
| 8 |
|
Cash flows used for investing activities |
|
| — |
|
|
| (61 | ) |
|
| (42 | ) |
|
| — |
|
|
| (103 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (78 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (78 | ) |
Net change in bank indebtedness |
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| (12 | ) |
Change in revolving credit facility |
|
| (50 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50 | ) |
Proceeds from receivables securitization facility |
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
| 25 |
|
Repayments of receivables securitization facility |
|
| — |
|
|
| — |
|
|
| (35 | ) |
|
| — |
|
|
| (35 | ) |
Repayments of long-term debt |
|
| (63 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (63 | ) |
Increase in long-term advances to related parties |
|
| — |
|
|
| — |
|
|
| (79 | ) |
|
| 79 |
|
|
| — |
|
Decrease in long-term advances to related parties |
|
| 12 |
|
|
| 67 |
|
|
| — |
|
|
| (79 | ) |
|
| — |
|
Other |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Cash flows (used for) provided from financing activities |
|
| (178 | ) |
|
| 55 |
|
|
| (89 | ) |
|
| — |
|
|
| (212 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (7 | ) |
|
| (11 | ) |
|
| 27 |
|
|
| — |
|
|
| 9 |
|
Impact of foreign exchange on cash |
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| 9 |
|
Cash and cash equivalents at beginning of period |
|
| 17 |
|
|
| 14 |
|
|
| 94 |
|
|
| — |
|
|
| 125 |
|
Cash and cash equivalents at end of period |
|
| 10 |
|
|
| 3 |
|
|
| 130 |
|
|
| — |
|
|
| 143 |
|
39
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
SUBSEQUENT EVENT
On November 1, 2018, the Company announced a margin improvement plan within the Personal Care Division. As part of this plan, the Company’s Board of Directors approved the permanent closure of its Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of its manufacturing assets and a workforce reduction of approximately 214 employees across the division.
The Waco, Texas facility is expected to cease operations in the third quarter of 2019. The aggregate pre-tax earnings charge in connection with this margin improvement plan is estimated to be $57 million, which includes: a) an estimated $29 million in charges relating to accelerated depreciation of the carrying amounts of certain manufacturing equipment and the write-down of related spare parts; b) $10 million of estimated severance and related employee benefits; c) $11 million of estimated relocation and other costs; and d) $7 million of an estimated amount related to the future lease payments at the Waco facility, net of expected sublease revenues. The Company is also expected to incur approximately $5 million of capital expenditures related to certain equipment installation costs. The estimated total charge is expected to be recognized starting in the fourth quarter of 2018 through the third quarter of 2019.
Closure and restructuring costs are based on management’s best estimates. Although the Company does not anticipate significant changes, actual costs may differ from these estimates due to subsequent business developments. As such, additional costs and further impairment charges may be required in future periods.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q. This MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2018.22, 2019. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us��“us” and “our” refer to Domtar Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is determined on the basis of accounting principles generally accepted in the United States.
The information contained on our website, www.domtar.com, is not incorporated by reference into this Form 10-Q and should in no way be construed as a part of this or any other report that we file with or furnish to the SEC.
In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT” refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net earnings (loss), and shipment volumes are based on the three and nine months ended September 30, 20182019 and 2017.2018. The three month and nine month periods are also referred to as the third quarter and first nine months of 20182019 and 2017. Reference2018. References to notes refersrefer to footnotes to the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q.
This MD&A is intended to provide investors with an understanding of our recent performance, financial condition and outlook. Topics discussed and analyzed include:
Recent development
• | Overview |
Overview
• | Highlights for the three month and nine month periods ended September 30, 2019 |
• | Outlook |
• | Consolidated Results of Operations and Segment Review |
• | Liquidity and Capital Resources |
HighlightsIn February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize right-of-use assets and lease liabilities for the three month and nine month periods ended September 30, 2018
Outlook
Consolidated Resultsall of Operations and Segment Review
Liquidity and Capital Resources
On January 1, 2018, we adopted the new accounting standard on revenue from contracts with customers using the full retrospective method, which resulted in a reclassificationtheir operating leases while continuing to recognize expenses in the Company’s Consolidated Statement of Earnings and Comprehensive Income for the three and nine months ended September 30, 2017. The previously reported amounts for Sales and Selling, general and administrative expenses were decreased by $2 million and $7 million, respectively,(Loss) in relationa manner similar to the reclassification of certain payments madeprevious accounting standards. We elected to customers classified as a reduction of Sales underinitially apply the new standard. These reclassifications are exclusively contained within the Company’s Consolidated Statement of Earnings and Comprehensive Income and do not have a cumulative effect on retained earnings or other components of equity or net assets in the Company’s Consolidated Balance Sheetleases standard as of January 1, 2017.
On2019 with certain available practical expedients. No cumulative-effect adjustments on retained earnings were necessary as of January 1, 2018, we adopted2019. The most significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting guidance on improvingfor finance leases remains substantially unchanged. For all comparative periods prior to the presentationadoption of net periodic pension cost and net periodic postretirement benefit costs, which resulted in a reclassificationthe new leases standard, we will continue to report operating leases in the Company’s Consolidated Statement of Earningsconsolidated financial statements under ASC 840 “Leases” and Comprehensive Income forprovide the three and nine months ended September 30, 2017. The previously reported amounts of Cost of sales were increased by $4 million and $11 million, respectively, Selling, general and administrative expenses were decreased by nil and $1 million, respectively, both with a corresponding impact in Non-service components of net periodic benefit cost. We utilized a practical expedient included in the accounting standard update which allowed us to use amounts previously disclosed in our pension plans and other post-retirement benefits plans note for the prior periods as the estimation basis for applying therelated required retrospective presentation requirements. In addition, these required retrospective reclassifications resulted in adjustments to the previously reported Operating income within the Company’s reportable operating segment disclosures for the three and nine months ended September 30, 2017.disclosures.
For more details, refer to Note 2 “Recent Accounting Pronouncements” and Note 9 “Leases” of the financial statements in this Quarterly Report on Form 10-Q.
On November 1, 2018, we announced a margin improvement plan within our Personal Care Division. As part of this plan, our Board of Directors approved the permanent closure of our Waco, Texas, Personal Care manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction of approximately 214 employees across the division.
The Waco, Texas facility is expected to cease operations in the third quarter of 2019. The aggregate pre-tax earnings charge in connection with this margin improvement plan is estimated to be $57 million, which includes: a) an estimated $29 million in charges relating to accelerated depreciation of the carrying amounts of certain manufacturing equipment and the write-down of related spare parts; b) $10 million of estimated severance and related employee benefits; c) $11 million of estimated relocation and other costs; and d) $7 million of an estimated amount related to the future lease payments at the Waco facility, net of expected sublease revenues. We also expect to incur approximately $5 million of capital expenditures related to certain equipment installation costs. The estimated total charge is expected to be recognized starting in the fourth quarter of 2018 through the third quarter of 2019.
Closure and restructuring costs are based on management’s best estimates. Although we do not anticipate significant changes, actual costs may differ from these estimates due to subsequent business developments. As such, additional costs and further impairment charges may be required in future periods.
OVERVIEW
We design, manufacture, market and distribute a wide variety of fiber-based products, including communication papers, specialty and packaging papers, and absorbent hygiene products. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. More than 50% of our pulp production is consumed internally to manufacture paper and other consumer products, with the balance sold as market pulp. We are the largest integrated marketer of uncoated freesheet paper in North America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers, converters and end users. We are also a marketer and producer of a broad line of incontinence care products as well as infant diapers. To learn more, visit www.domtar.com.
We have two reportable segments as described below, which also represent our two operating segments. Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies. The following summary briefly describes the operations included in each of our reportable segments.
Pulp and Paper: Our Pulp and Paper segment consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.
Personal Care: Our Personal Care segment consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.
HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 20182019
Operating income and net earnings increased by 34% and 41%, respectively, from the third quarter of 2017
• | Operating income and net earnings decreased by 75% and 80%, respectively, from the third quarter of 2018 |
Sales increased by 6% from the third quarter of 2017. Net average selling prices for pulp and paper were up from the third quarter of 2017. Our manufactured paper volumes were up while our pulp volumes were down when compared to the third quarter of 2017
• | Sales decreased by 6% from the third quarter of 2018. Net average selling prices for pulp were down while net average selling prices for paper were up from the third quarter of 2018. Our manufactured paper volume was down while our pulp volume was up when compared to the third quarter of 2018. Our Personal Care business had lower volume when compared to third quarter of 2018 |
We paid $28 million in dividends
• | Recognition of a closure and restructuring charge and accelerated depreciation associated with our decision to permanently close two paper machines within our Pulp and Paper segment of $5 million and $32 million, respectively |
• | We repurchased $131 million of our common stock (cash portion) and paid $28 million in dividends |
HIGHLIGHTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2018 2019
Operating income and net earnings increased by 37% and 53%, respectively, from the first nine months of 2017
• | Operating income and net earnings decreased by 30% and 40%, respectively, from the first nine months of 2018 |
Sales increased by 7% from the first nine months of 2017. Net average selling prices for pulp and paper were up from the first nine months of 2017. Our manufactured paper volumes were up while our pulp volumes were down when compared to the first nine months of 2017
• | Sales decreased by 2% from the first nine months of 2018. Net average selling prices for paper were up whereas net average selling prices for pulp were down from the first nine months of 2018. Our manufactured paper volume was down and our Personal Care business had lower volume when compared to the first nine months of 2018 |
• | Recognition of a closure and restructuring charge and accelerated depreciation associated with our decision to permanently close two paper machine within our Pulp and Paper segment in the third quarter of 2019, of $5 million and $32 million, respectively |
We paid $81 million in dividends
• | We repurchased $139 million of our common stock (cash portion) and paid $83 million in dividends |
|
| Three months ended |
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| Nine months ended |
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| Three months ended |
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| Nine months ended |
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| Variance |
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| Variance |
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| Variance |
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FINANCIAL HIGHLIGHTS |
| September 30, 2018 |
|
| September 30, 2017 |
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| $ |
|
| % |
|
| September 30, 2018 |
|
| September 30, 2017 |
|
| $ |
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| % |
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| September 30, 2019 |
|
| September 30, 2018 |
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| $ |
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| % |
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| September 30, 2019 |
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| September 30, 2018 |
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| $ |
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| % |
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(In millions of dollars, unless otherwise noted) |
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Sales |
| $ | 1,367 |
|
| $ | 1,290 |
|
|
| 77 |
|
|
| 6 |
|
| $ | 4,065 |
|
| $ | 3,813 |
|
|
| 252 |
|
|
| 7 |
|
| $ | 1,283 |
|
| $ | 1,367 |
|
|
| (84 | ) |
|
| -6 | % |
| $ | 3,976 |
|
| $ | 4,065 |
|
|
| (89 | ) |
|
| -2 | % | |||||||||||||||
Operating income | Operating income |
| 114 |
|
|
| 85 |
|
|
| 29 |
|
|
| 34 |
|
|
| 253 |
|
|
| 185 |
|
|
| 68 |
|
|
| 37 |
| Operating income |
| 29 |
|
|
| 114 |
|
|
| (85 | ) |
|
| -75 | % |
|
| 178 |
|
|
| 253 |
|
|
| (75 | ) |
|
| -30 | % | |||||||||||||||
Net earnings |
|
| 99 |
|
|
| 70 |
|
|
| 29 |
|
|
| 41 |
|
|
| 196 |
|
|
| 128 |
|
|
| 68 |
|
|
| 53 |
|
|
| 20 |
|
|
| 99 |
|
|
| (79 | ) |
|
| -80 | % |
|
| 118 |
|
|
| 196 |
|
|
| (78 | ) |
|
| -40 | % | |||||||||||||||
Net earnings per common share (in dollars)1: |
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Basic |
| $ | 1.57 |
|
| $ | 1.12 |
|
|
| 0.45 |
|
|
| 40 |
|
| $ | 3.12 |
|
| $ | 2.04 |
|
|
| 1.08 |
|
|
| 53 |
|
| $ | 0.33 |
|
| $ | 1.57 |
|
|
| (1.24 | ) |
|
| -79 | % |
| $ | 1.89 |
|
| $ | 3.12 |
|
|
| (1.23 | ) |
|
| -39 | % | |||||||||||||||
Diluted |
| $ | 1.57 |
|
| $ | 1.11 |
|
|
| 0.46 |
|
|
| 41 |
|
| $ | 3.11 |
|
| $ | 2.04 |
|
|
| 1.07 |
|
|
| 52 |
|
| $ | 0.32 |
|
| $ | 1.57 |
|
|
| (1.25 | ) |
|
| -80 | % |
| $ | 1.88 |
|
| $ | 3.11 |
|
|
| (1.23 | ) |
|
| -40 | % | |||||||||||||||
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| At September 30, 2018 |
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| At December 31, 2017 |
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| At September 30, 2019 |
|
| At December 31, 2018 |
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Total assets |
|
|
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|
|
|
|
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|
|
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| $ | 5,182 |
|
| $ | 5,212 |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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| $ | 4,884 |
|
| $ | 4,925 |
| |||||||||||||||
Total long-term debt, including current portion |
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|
|
|
|
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| $ | 1,104 |
|
| $ | 1,130 |
|
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|
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|
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| $ | 939 |
|
| $ | 854 |
|
1 | See Note 4 “Earnings per Common Share” of the financial statements in this Quarterly Report on Form 10-Q for more information on the calculation of net earnings per common share. |
OUTLOOK
InFor the fourth quarter, we expect lower maintenance costsis expected to be higher while paper is expected to be negatively impacted in Pulppart by a seasonally unfavorable mix. We anticipate some volatility in softwood and Paper. Paper andfluff pulp should continue to realize higher prices following recently announced price increases.markets while Personal Care shouldis expected to benefit from higher volume and our margin improvement efforts while commodity cost inflation is expected to remain at elevated levels.plan and increased sales driven by a stronger order book.
CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW
This section presents a discussion and analysis of our third quarter and first nine months of 20182019 and 20172018 sales, operating income (loss) and other information relevant to the understanding of our results of operations.
As a result of adopting the new accounting standard “Revenue from Contracts with Customers,” we have revised our 2017 segment disclosures to conform to the new guideline. Previously reported numbers for Sales were as follows: $1,054 million for Pulp and Paper, $253 million for Personal Care, and $(15) million for Intersegment sales for the third quarter of 2017 and $3,126 million for Pulp and Paper, $743 million for Personal Care and $(49) million for Intersegment sales for the first nine months of 2017.
As a result of adopting the new accounting guideline “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” we have revised our 2017 segment disclosures to conform to the new guideline. Previously reported numbers for Operating income (loss) were as follows: $93 million for Pulp and Paper, $8 million for Personal Care, and $(12) million for Corporate for the third quarter of 2017 and $192 million for Pulp and Paper, $37 million for Personal Care, and $(34) million for Corporate for the first nine months of 2017.
ANALYSIS OF NET SALES |
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By Business Segment |
| Three months ended |
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| Nine months ended |
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| Three months ended |
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| Nine months ended |
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| Variance |
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| Variance |
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| Variance |
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| Variance |
| ||||||||||||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 |
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| $ |
|
| % |
|
| September 30, 2018 |
|
| September 30, 2017 |
|
| $ |
|
| % |
|
| September 30, 2019 |
|
| September 30, 2018 |
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| $ |
|
| % |
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| September 30, 2019 |
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| September 30, 2018 |
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| $ |
|
| % |
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Pulp and Paper |
| $ | 1,146 |
|
| $ | 1,054 |
|
|
| 92 |
|
| 9 |
|
| $ | 3,369 |
|
| $ | 3,126 |
|
|
| 243 |
|
| 8 |
|
| $ | 1,071 |
|
| $ | 1,146 |
|
|
| (75 | ) |
| -7% |
|
| $ | 3,314 |
|
| $ | 3,369 |
|
|
| (55 | ) |
| -2% |
| ||||
Personal Care |
|
| 237 |
|
|
| 251 |
|
|
| (14 | ) |
| -6 |
|
|
| 746 |
|
|
| 736 |
|
|
| 10 |
|
| 1 |
|
|
| 227 |
|
|
| 237 |
|
|
| (10 | ) |
| -4% |
|
|
| 711 |
|
|
| 746 |
|
|
| (35 | ) |
| -5% |
| ||||
Total for reportable segments |
|
| 1,383 |
|
|
| 1,305 |
|
|
| 78 |
|
| 6 |
|
|
| 4,115 |
|
|
| 3,862 |
|
|
| 253 |
|
| 7 |
|
|
| 1,298 |
|
|
| 1,383 |
|
|
| (85 | ) |
| -6% |
|
|
| 4,025 |
|
|
| 4,115 |
|
|
| (90 | ) |
| -2% |
| ||||
Intersegment sales |
|
| (16 | ) |
|
| (15 | ) |
|
| (1 | ) |
|
|
|
|
|
| (50 | ) |
|
| (49 | ) |
|
| (1 | ) |
|
|
|
|
|
| (15 | ) |
|
| (16 | ) |
|
| 1 |
|
|
|
|
|
|
| (49 | ) |
|
| (50 | ) |
|
| 1 |
|
|
|
|
|
Consolidated |
|
| 1,367 |
|
|
| 1,290 |
|
|
| 77 |
|
| 6 |
|
|
| 4,065 |
|
|
| 3,813 |
|
|
| 252 |
|
| 7 |
|
|
| 1,283 |
|
|
| 1,367 |
|
|
| (84 | ) |
| -6% |
|
|
| 3,976 |
|
|
| 4,065 |
|
|
| (89 | ) |
| -2% |
| ||||
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Shipments |
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Paper - manufactured (in thousands of ST) |
|
| 727 |
|
|
| 722 |
|
|
| 5 |
|
| 1 |
|
|
| 2,250 |
|
|
| 2,165 |
|
|
| 85 |
|
| 4 |
| ||||||||||||||||||||||||||||||||||
Paper – manufactured (in thousands of ST) |
|
| 672 |
|
|
| 727 |
|
|
| (55 | ) |
| -8% |
|
|
| 2,089 |
|
|
| 2,250 |
|
|
| (161 | ) |
| -7% |
| ||||||||||||||||||||||||||||||||||
Communication Papers |
|
| 596 |
|
|
| 597 |
|
|
| (1 | ) |
| - |
|
|
| 1,851 |
|
|
| 1,801 |
|
|
| 50 |
|
| 3 |
|
|
| 563 |
|
|
| 596 |
|
|
| (33 | ) |
| -6% |
|
|
| 1,745 |
|
|
| 1,851 |
|
|
| (106 | ) |
| -6% |
| ||||
Specialty and Packaging |
|
| 131 |
|
|
| 125 |
|
|
| 6 |
|
| 5 |
|
|
| 399 |
|
|
| 364 |
|
|
| 35 |
|
| 10 |
|
|
| 109 |
|
|
| 131 |
|
|
| (22 | ) |
| -17% |
|
|
| 344 |
|
|
| 399 |
|
|
| (55 | ) |
| -14% |
| ||||
Paper - sourced from third parties (in thousands of ST) |
|
| 30 |
|
|
| 29 |
|
|
| 1 |
|
| 3 |
|
|
| 84 |
|
|
| 84 |
|
|
| - |
|
| - |
|
|
| 25 |
|
|
| 30 |
|
|
| (5 | ) |
| -17% |
|
|
| 69 |
|
|
| 84 |
|
|
| (15 | ) |
| -18% |
| ||||
Paper - total (in thousands of ST) |
|
| 757 |
|
|
| 751 |
|
|
| 6 |
|
| 1 |
|
|
| 2,334 |
|
|
| 2,249 |
|
|
| 85 |
|
| 4 |
|
|
| 697 |
|
|
| 757 |
|
|
| (60 | ) |
| -8% |
|
|
| 2,158 |
|
|
| 2,334 |
|
|
| (176 | ) |
| -8% |
| ||||
Pulp (in thousands of ADMT) |
|
| 390 |
|
|
| 424 |
|
|
| (34 | ) |
| -8 |
|
|
| 1,141 |
|
|
| 1,260 |
|
|
| (119 | ) |
| -9 |
|
|
| 416 |
|
|
| 390 |
|
|
| 26 |
|
| 7% |
|
|
| 1,135 |
|
|
| 1,141 |
|
|
| (6 | ) |
| -1% |
|
ANALYSIS OF CHANGES IN SALES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment |
| Third quarter of 2019 versus Third quarter of 2018 |
|
| First nine months of 2019 versus First nine months of 2018 |
| ||||||||||||||||||||||||||
|
| % Change in Net Sales due to |
|
| % Change in Net Sales due to |
| ||||||||||||||||||||||||||
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
| ||||||||
Pulp and Paper |
|
| -3 | % |
|
| -4 | % |
|
| - | % |
|
| -7 | % |
|
| 4 | % |
|
| -6 | % |
|
| - | % |
|
| -2 | % |
Personal Care |
|
| - | % |
|
| -2 | % |
|
| -2 | % |
|
| -4 | % |
|
| - | % |
|
| -2 | % |
|
| -3 | % |
|
| -5 | % |
Consolidated sales |
|
| -2 | % |
|
| -3 | % |
|
| -1 | % |
|
| -6 | % |
|
| 3 | % |
|
| -4 | % |
|
| -1 | % |
|
| -2 | % |
ANALYSIS OF OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||||||||
By Business Segment |
|
|
|
|
|
|
|
|
| Variance |
|
|
|
|
|
|
|
|
|
| Variance |
| ||||||||||
|
| September 30, 2019 (a) |
|
| September 30, 2018 |
|
| $ |
|
| % |
|
| September 30, 2019 (b) |
|
| September 30, 2018 |
|
| $ |
|
| % |
| ||||||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp and Paper |
| $ | 31 |
|
| $ | 135 |
|
|
| (104 | ) |
|
| -77 | % |
| $ | 237 |
|
| $ | 290 |
|
|
| (53 | ) |
|
| -18 | % |
Personal Care |
|
| 2 |
|
|
| (3 | ) |
|
| 5 |
|
|
| 167 | % |
|
| (24 | ) |
|
| 7 |
|
|
| (31 | ) |
|
| -443 | % |
Corporate |
|
| (4 | ) |
|
| (18 | ) |
|
| 14 |
|
|
| 78 | % |
|
| (35 | ) |
|
| (44 | ) |
|
| 9 |
|
|
| 20 | % |
Consolidated operating income |
|
| 29 |
|
|
| 114 |
|
|
| (85 | ) |
|
| -75 | % |
|
| 178 |
|
|
| 253 |
|
|
| (75 | ) |
|
| -30 | % |
ANALYSIS OF CHANGES IN SALES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Third quarter of 2018 versus Third quarter of 2017 |
|
| First nine months of 2018 versus First nine months of 2017 |
| ||||||||||||||||||||||||||
|
| % Change in Net Sales due to |
|
| % Change in Sales due to |
| ||||||||||||||||||||||||||
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
| ||||||||
Pulp and Paper |
|
| 10 | % |
|
| -1 | % |
|
| - | % |
|
| 9 | % |
|
| 8 | % |
|
| - | % |
|
| - | % |
|
| 8 | % |
Personal Care |
|
| -1 | % |
|
| -4 | % |
|
| -1 | % |
|
| -6 | % |
|
| -1 | % |
|
| -1 | % |
|
| 3 | % |
|
| 1 | % |
Consolidated sales |
|
| 8 | % |
|
| -2 | % |
|
| - | % |
|
| 6 | % |
|
| 6 | % |
|
| - | % |
|
| 1 | % |
|
| 7 | % |
(a) | Includes closure and restructuring charges as well as accelerated depreciation under Impairment of long-lived assets, related to our announced margin improvement plan within our Personal Care segment, of $6 million and $1 million, respectively. Includes closure and restructuring charges as well as accelerated depreciation under Impairment of long-lived assets, related to our paper machine closures within our Pulp and Paper segment, of $5 million and $32 million, respectively. |
(b) | Includes closure and restructuring charges as well as accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets, related to our announced margin improvement plan within our Personal Care segment, of $18 million and $26 million, respectively. Includes closure and restructuring charges as well as accelerated depreciation under Impairment of long-lived assets, related to our paper machine closures within our Pulp and Paper segment, of $5 million and $32 million, respectively. |
ANALYSIS OF OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||||||||
By Business Segment |
|
|
|
|
|
|
|
|
| Variance |
|
|
|
|
|
|
|
|
|
| Variance |
| ||||||||||
|
| September 30, 2018 |
|
| September 30, 2017 |
|
| $ |
|
| % |
|
| September 30, 2018 |
|
| September 30, 2017 |
|
| $ |
|
| % |
| ||||||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp and Paper |
| $ | 135 |
|
| $ | 89 |
|
|
| 46 |
|
|
| 52 |
|
| $ | 290 |
|
| $ | 181 |
|
|
| 109 |
|
|
| 60 |
|
Personal Care |
|
| (3 | ) |
|
| 8 |
|
|
| (11 | ) |
|
| -138 |
|
|
| 7 |
|
|
| 37 |
|
|
| (30 | ) |
|
| -81 |
|
Corporate |
|
| (18 | ) |
|
| (12 | ) |
|
| (6 | ) |
|
| -50 |
|
|
| (44 | ) |
|
| (33 | ) |
|
| (11 | ) |
|
| -33 |
|
Consolidated operating income |
|
| 114 |
|
|
| 85 |
|
|
| 29 |
|
|
| 34 |
|
|
| 253 |
|
|
| 185 |
|
|
| 68 |
|
|
| 37 |
|
Third quarter of 2018 versus Third quarter of 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Third quarter of 2019 versus Third quarter of 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
| $ Change in Segmented Operating Income (Loss) due to |
|
| $ Change in Segmented Operating Income (Loss) due to |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (a) |
|
| Operating Expenses (b) |
|
| Currency |
| Depreciation/ Impairment (c) |
|
| Restructuring (d) |
|
| Other Income/ Expense (e) |
|
| Total |
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (a) |
|
| Operating Expenses (b) |
|
| Currency |
| Depreciation/ Impairment (c) |
|
| Restructuring (d) |
|
| Other Income/ Expense (e) |
|
| Total |
| ||||||||||||||||||
Pulp and Paper |
|
| (3 | ) |
|
| 109 |
|
|
| (14 | ) |
|
| (47 | ) |
|
| 3 |
|
| 5 |
|
|
| — |
|
|
| (7 | ) |
|
| 46 |
|
|
| (6 | ) |
|
| (31 | ) |
|
| (18 | ) |
|
| (16 | ) |
|
| 2 |
|
| (30 | ) |
|
| (5 | ) |
|
| — |
|
|
| (104 | ) |
Personal Care |
|
| — |
|
|
| (2 | ) |
|
| (7 | ) |
|
| (2 | ) |
|
| — |
| — |
|
|
| — |
|
|
| — |
|
|
| (11 | ) |
|
| 2 |
|
|
| — |
|
|
| 8 |
|
|
| 1 |
|
|
| — |
|
| — |
|
|
| (6 | ) |
|
| — |
|
|
| 5 |
| |
Corporate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13 |
|
|
| — |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 14 |
|
Consolidated operating income (loss) |
|
| (3 | ) |
|
| 107 |
|
|
| (21 | ) |
|
| (51 | ) |
|
| 3 |
|
| 5 |
|
|
| — |
|
|
| (11 | ) |
|
| 29 |
|
|
| (4 | ) |
|
| (31 | ) |
|
| (10 | ) |
|
| (2 | ) |
|
| 2 |
|
| (30 | ) |
|
| (11 | ) |
|
| 1 |
|
|
| (85 | ) |
(a) | Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy costs. |
(b) | Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs. |
(c) | Depreciation charges were lower by |
(d) | We recorded $5 million of inventory obsolescence, $4 million of asset relocation and other costs and $2 million of severance and termination costs under Closure and restructuring costs in the third quarter of 2019 related to our announced margin improvement plan within the Personal Care segment as well as our decision to permanently close two paper machines in our Pulp and Paper segment. There were no restructuring charges in the third quarter of |
(e)
Third quarter of 2019 other operating income/expense includes: | Third quarter of 2018 other operating income/expense includes: |
|
- Bad debt expense ($1 million) - Environmental provision ($1 million) - Foreign currency loss on working capital items ($1 million) | - Environmental provision ($2 million) - Foreign currency loss on working capital items ($2 million) |
|
Commentary –Third quarter of 20182019 compared to Third quarter of 20172018
Interest Expense, net
We incurred $15$12 million of net interest expense in the third quarter of 2018, 2019, a decreaseof $1$3 million compared to net interest expense of $16$15 million in the third quarter of 2017.2018. The net interest expense was impacted by the repayment of the $300 million Term Loan in the fourth quarter of 2018.
Income Taxes
For the third quarter of 2018,2019, our income tax expensebenefit was $1 million, consisting of a current income tax benefit of $3 million and a deferred income tax expense of $2 million. This compares to an income tax expense of $3 million in the third quarter of 2018, consisting of a current income tax benefit of $5 million and a deferred income tax expense of $8 million. This compares to an income tax expense of $3 million in the third quarter of 2017, consisting of a current income tax expense of $10 million and a deferred income tax benefit of $7 million. We made income tax payments, net of refunds, of $15$5 million during the third quarter of 2019. The effective tax rate was -5% compared with an effective tax rate of 3% in the third quarter of 2018. Our effective tax rate was 3% compared with an effective tax rate of 4% infor the third quarter of 2017.2019 was favorably impacted by additional R&D tax credits in the U.S. and Spain. Our effective tax rate for the third quarter of 2018 was favorably impacted by the income tax effects of the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform”), including the benefit related to an additional pension contribution, andas well as the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. Our effective tax rate for the third quarter of 2017 was favorably impacted by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations. OurThe effective tax rates for both the third quarter of 20182019 and the third quarter of 20172018 were favorably impacted by the finalization of certain estimates in connection with the filing of our 20172018 and 20162017 income tax returns.
returns, respectively.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the applicationOur tax provision for interim periods is determined using an estimate of our annual effective tax rate and then making adjustments for discrete items arising in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effectsthat quarter. In each interim quarter, we update our estimate of the U.S. Tax Reform.annual effective tax rate and, if our estimated annual tax rate changes, we make a cumulative adjustment in that quarter. The U.S. Tax Reform provides for a mandatory one-time deemed repatriation tax on our undistributed foreign earnings and profits. We recorded a provisional repatriation tax amount of $46 million in our consolidated financial statements as of December 31, 2017. As of September 30, 2018, we have finalized our U.S. tax returns for the 2017 tax year which include a repatriation tax amount of $39 million. The difference between the provisional amount and the final amount is included as a benefit to income tax expense in the third quarter of 2018 and favorably impacts our effective tax rate for the quarter.third quarter of 2019 was favorably impacted by such an adjustment.
First nine months of 2018 versus First nine months of 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
First nine months of 2019 versus First nine months of 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
By Business Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
| $ Change in Segmented Operating Income (Loss) due to |
|
| $ Change in Segmented Operating Income (Loss) due to |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (a) |
|
| Operating Expenses (b) |
|
| Currency |
|
| Depreciation/ Impairment (c) |
|
| Restructuring (d) |
|
| Other Income/ Expense (e) |
|
| Total |
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (a) |
|
| Operating Expenses (b) |
|
| Currency |
|
| Depreciation/ Impairment (c) |
|
| Restructuring (d) |
|
| Other Income/ Expense (e) |
|
| Total |
| ||||||||||||||||||
Pulp and Paper |
|
| 8 |
|
|
| 242 |
|
|
| (48 | ) |
|
| (96 | ) |
|
| (10 | ) |
|
| 11 |
|
|
| — |
|
|
| 2 |
|
|
| 109 |
|
|
| (32 | ) |
|
| 123 |
|
|
| (54 | ) |
|
| (61 | ) |
|
| 9 |
|
|
| (24 | ) |
|
| (5 | ) |
|
| (9 | ) |
|
| (53 | ) |
Personal Care |
|
| 5 |
|
|
| (5 | ) |
|
| (22 | ) |
|
| (7 | ) |
|
| 2 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| (30 | ) |
|
| (3 | ) |
|
| 1 |
|
|
| 9 |
|
|
| 7 |
|
|
| (5 | ) |
|
| (21 | ) |
|
| (18 | ) |
|
| (1 | ) |
|
| (31 | ) |
Corporate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| (11 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| 9 |
|
Consolidated operating income (loss) |
|
| 13 |
|
|
| 237 |
|
|
| (70 | ) |
|
| (109 | ) |
|
| (8 | ) |
|
| 8 |
|
|
| — |
|
|
| (3 | ) |
|
| 68 |
|
|
| (35 | ) |
|
| 124 |
|
|
| (45 | ) |
|
| (48 | ) |
|
| 4 |
|
|
| (45 | ) |
|
| (23 | ) |
|
| (7 | ) |
|
| (75 | ) |
(a) | Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy costs. |
(b) | Includes maintenance, freight costs, SG&A expenses and other costs. |
(c) | Depreciation charges were lower by |
(d) | We recorded $11 million of asset relocation and other costs, $6 million of severance and termination costs and $6 million of inventory obsolescence under Closure and restructuring costs in the first nine months of 2019 related to our announced margin improvement plan within the Personal Care segment as well as our decision to permanently close two paper machines in our Pulp and Paper segment. There were no restructuring charges in the first nine months of |
(e)
First nine months of 2019 other operating income/ expense includes: | First nine months of 2018 other operating income/ expense includes: |
|
- Foreign exchange loss on working capital items ($3 million) - Environmental provision ($2 million) - Bad debt expense ($2 million) - Other income ($3 million) | - Gain on sale of property, plant and equipment ($4 million) - Foreign exchange gain on working capital items ($1 million) - Environmental provision ($2 million) - Bad debt expense ($1 million) - Other income ($1 million) |
|
Commentary – First nine months of 20182019 compared to first nine months of 20172018
Interest Expense, net
We incurred $47$38 million of net interest expense in the first nine months of 2018,2019, a decrease of $3$9 million compared to net interest expense of $50$47 million in the first nine months of 2017. This decrease2018. The net interest expense was mostly due toimpacted by the repayment at maturity in June 2017 of the 10.75% Notes and was partially offset by an increase$300 million Term Loan in interest rate on the Term Loan.fourth quarter of 2018.
Income Taxes
For the first nine months of 2018,2019, our income tax expense was $28 million, consisting of a current income tax expense of $27 million and a deferred income tax expense of $1 million. This compares to an income tax expense of $22 million in the first nine months of 2018, consisting of a current income tax expense of $19 million and a deferred income tax expense of $3 million. This compares to an income tax expense of $17 million in the first nine months of 2017, consisting of a current income tax expense of $36 million and a deferred income tax benefit of $19 million. We made income tax payments, net of refunds, of $40$55 million during the first nine months of 2019. The effective tax rate was 19% compared to an effective tax rate of 10% in the first nine months of 2018. Our effective tax rate was 10% compared to an effective tax rate of 12% infor the first nine months of 2017.2019 was favorably impacted by the recognition of additional R&D credits in the U.S. and Spain and by an enacted law change in the state of Arkansas, which were mostly offset by the recording of a valuation allowance against certain state tax credit carryforwards. Our effective tax rate for the first nine months of 2018 was favorably impacted by the income tax effects of the U.S. Tax Reform, including the benefit related to an additional pension contribution, by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations, as well as enacted law changes in Sweden and several U.S. states. Our effective tax rate for the first nine months of 2017 was favorably impacted by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations, as well as by enacted law changes in Sweden and several U.S. states. OurThe effective tax rates for both the first nine months of 20182019 and the first nine months of 20172018 were favorably impacted by the finalization of certain estimates in connection with the filing of our 20172018 and 20162017 income tax returns, respectively.
During the second quarter of 2019, the IRS proposed additional GILTI regulations, which are still pending approval. While we are still evaluating the impact, we do not expect those proposed regulations to have a material impact on our consolidated financial statements.
Commentary – Segment Review
Pulp and Paper Segment
Sales in our Pulp and Paper segment increaseddecreased by $92$75 million, or 9%7%, when compared to sales in the third quarter of 2017.2018. This increasedecrease in sales is mostly due to a decrease in net average selling prices for pulp as well as a decrease in our paper sales volumes. This decrease was partially offset by an increase in net average selling prices for pulppaper and paper as well as an increase in our paperpulp sales volumes. This increase was partially offset by a decrease in our pulp sales volume.
Operating income in our Pulp and Paper segment amounted to $31 million in the third quarter of 2019, a decrease of $104 million, when compared to operating income of $135 million in the third quarter of 2018, an increase of $46 million, when compared to operating income of $89 million in the third quarter of 2017.2018. Our results were positivelynegatively impacted by:
Higher average selling prices for pulp and paper ($109 million)
• | Lower net average selling prices for pulp partially offset by higher net average selling prices for paper ($31 million) |
Lower depreciation charges ($5 million) due to certain assets being fully depreciated
• | Higher depreciation/impairment charges ($30 million) mostly due to our decision to permanently close two paper machines |
• | Higher input costs ($18 million) mostly related to higher costs of fiber due to unfavorable market conditions |
Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($3 million)
• | Higher operating expenses ($16 million) mostly due to higher maintenance and fixed costs due to timing of major maintenance and lower production, partially offset by lower freight costs when compared to the third quarter of 2018 |
• | Lower volume/mix ($6 million) |
• | Higher restructuring charges ($5 million) due to our decision to permanently close two paper machines |
These increasesdecreases were partially offset by:
Higher operating expenses ($47 million) mostly due to higher maintenance due to timing of planned major maintenance and higher freight costs
Higher input costs ($14 million) mostly related to higher costs of fiber and chemicals due to increased market demand as well as higher energy costs in part due to severe weather conditions in the third quarter of 2018
Lower volume/mix ($3 million) mostly related to lower volume of pulp
Lower other income ($7 million)
• | Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($2 million) |
Sales in our Pulp and Paper segment increaseddecreased by $243$55 million, or 8%2%, when compared to sales in the first nine months of 2017.2018. This increase decreasein sales is mostly due to an increasedecrease in our paper sales volumes as well as a decrease in net average selling prices for pulp and paper as well as an increase in our paper sales volume.pulp. This increasedecrease was partially offset by a decrease in our pulp sales volume.an increase in net average selling prices for paper.
Operating income in our Pulp and Paper segment amounted to $237 million in the first nine months of 2019, a decrease of $53 million, when compared to operating income of $290 million in the first nine months of 2018, an increase of $109 million, when compared to operating income of $181 million in the first nine months of 2017.2018. Our results were positivelynegatively impacted by:
Higher average selling prices for pulp and paper ($242 million)
• | Higher operating expenses ($61 million) mostly related to higher maintenance and fixed costs due to timing of major maintenance and lower production when compared to the first nine months of 2018 |
Lower depreciation charges ($11 million) due to certain assets being fully depreciated
• | Higher input costs ($54 million) mostly related to higher costs of fiber due, in part, to wet weather in the first nine months of 2019 as well as unfavorable market conditions, partially offset by lower chemicals and energy costs |
Higher volume/mix ($8 million) mostly related to higher volume of paper, partially offset by lower volume of pulp
• | Lower volume/mix ($32 million) |
• | Higher depreciation/impairment charges ($24 million) due to our decision to permanently close two paper machines, partially offset by certain assets being fully depreciated |
Higher other income ($2 million)
• | Higher other expense ($9 million) |
• | Higher restructuring charges ($5 million) |
These increasesdecreases were partially offset by:
Higher operating expenses ($96 million) mostly due to higher freight costs as a result of a shortage of truck capacity in North America and higher maintenance costs due to timing of planned major maintenance
• | Higher net average selling prices for paper, partially offset by lower net average selling prices for pulp ($123 million) |
Higher input costs ($48 million) mostly related to higher costs of chemical, fiber, and energy in part due to severe weather conditions in the first nine months of 2018 as well as unfavorable market conditions
Negative impact of a stronger Canadian dollar on our Canadian denominated expenses, net of our hedging program ($10 million)
• | Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($9 million) |
The markets in which our pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. Most of our products are commodities that are widely available from other producers as well. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. We also compete on the basis of product quality, breadth of offering and service
solutions. Further, we compete against electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products.
The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and competitively priced pulp products.
For the fourth quarter, we expect lower maintenance costsis expected to be higher while paper is expected to be negatively impacted in Pulppart by a seasonally unfavorable mix. We anticipate some volatility in softwood and Paper. fluff pulp markets.
Paper machine closures
On September 27, 2019, our Board of Directors approved the decision to permanently shut down two paper machines, which was announced on October 3, 2019. The closures will take place at our Ashdown, Arkansas pulp and pulp shouldpaper mill and our Port Huron, Michigan paper mill. These measures will reduce our annual uncoated freesheet paper capacity by approximately 204,000 short tons, and will result in a workforce reduction of approximately 100 employees.
Our Ashdown mill will continue to realize higher prices following recently announced price increases.operate one paper machine with an annual uncoated freesheet paper production capacity of 200,000 short tons. Additionally, the mill operates a fluff pulp machine with the flexibility to produce softwood pulp depending on market conditions. As a result of the closure of the paper machine, the mill will produce an incremental 70,000 ADMT of softwood and fluff pulp, which will ramp up over the next 12 months.
The closure of our Port Huron paper machine will take effect by mid-November. The Port Huron mill will continue to produce a variety of technical and specialty papers for a broad range of customers utilizing three machines with a total annual production capacity of 95,000 short tons.
During the third quarter of 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). Additionally, we recorded $1 million of severance and termination costs and $4 million of inventory obsolescence, under Closure and restructuring costs.
Personal Care Segment
Sales in our Personal Care segment decreased by $14$10 million, or 6%4%, when compared to sales in the third quarter of 2017.2018. This decrease was mainly driven by lower volume and unfavorable foreign currency exchange, and lower selling prices, partially offset by favorable mix when compared to the third quarter of 2017.2018.
Operating income decreasedincreased by $11$5 million, or 138% in the third quarter of 20182019 compared to the third quarter of 2017. 2018. Our results were negativelypositively impacted by:
Unfavorable input costs ($7 million) mostly due to increasing raw materials pricing
• | Favorable input costs ($8 million) mostly due to lower raw material pricing |
• | Favorable mix partially offset by lower sales volume ($2 million) |
• | Lower operating expenses ($1 million) |
Higher operating expenses ($2 million) mostly due to higher manufacturing and freight costsThese increases were partially offset by lower SG&Aby:
Unfavorable average net selling prices ($2 million)
• | Higher closure and restructuring charges ($6 million) related to our margin improvement plan |
Sales in our Personal Care segment increaseddecreased by $10$35 million, or 1%5%, when compared to sales in the first nine months of 2017. 2018. This increasedecrease in sales was driven by favorablelower volume as well as unfavorable foreign currency exchange, mostly due to the fluctuation between the U.S. dollar and the Euro, and favorable mix, partially offset by lower volume and selling prices.favorable mix.
Operating income decreased by $30$31 million, or 81% in the first nine months of 20182019 when compared to the first nine months of 2017.2018. Our results were negatively impacted by:
Higher input costs ($22 million) mostly due to increasing raw materials pricing
• | Higher depreciation/impairment charge ($21 million) mostly due to the non-cash impairment of long-lived assets charge of $26 million recorded in the first nine months of 2019, related to our margin improvement plan |
Unfavorable average net selling prices ($5 million)
• | Higher closure and restructuring charges ($18 million) related to our margin improvement plan |
Higher operating expenses ($7 million) mostly due to higher freight and manufacturing costs
• | Lower sales volume partially offset by favorable mix ($3 million) |
• | Unfavorable foreign exchange ($5 million) mostly between the Euro and the U.S. dollar, net of our hedging program |
Higher depreciation charges ($3 million)
• | Higher other expense ($1 million) |
These decreases were partially offset by:
Favorable mix partially offset by lower sales volume ($5 million)
• | Favorable input costs ($9 million) mostly due to lower raw material pricing as well as insourcing initiatives |
• | Lower operating expenses ($7 million) mostly due to lower SG&A expenses |
Favorable foreign exchange ($2 million) mostly between the Euro and the U.S. dollar, net of our hedging program
• | Higher net average selling prices ($1 million) |
In our absorbent hygiene products business, we compete in an industry with fundamental drivers for long-term growth; however, competitive market pressures in the healthcare and retail markets grewhave grown significantly in the recent years. Although the impact of such pressures presents some uncertainties, we expect them to result in lower than previously anticipated sales and operating margins.
While we expect anto benefit from the overall increase in healthcare spending due to an aging population, it is not clear howthe pressures to limit this spending brought forth through administrative changes by various national governmentson healthcare may impact the source of the funding. Additional changes in the balance of public versus private funding may be forthcoming and these could impact overall consumption or the channels in which consumption occurs. Additionally, excess industry capacity has increased pricing pressure in all markets and instigated a shift in the infant and adult private label retail space as competitors historically almost absent in our markets have increased their presence in such markets.
The principal methods and elements of competition remain brand recognition and loyalty, product innovation, quality and performance, price and marketing and distribution capabilities.
InFor the fourth quarter, Personal Care shouldis expected to benefit from higher volume and our margin improvement efforts while commodity cost inflation is expected to remain at elevated levels. plan and increased sales driven by a stronger order book.
Margin Improvement Plan
On November 1, 2018, we announced a margin improvement plan within our Personal Care segment. As part of this plan, our Board of Directors approved the permanent closure of our Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction across the division. The Waco, Texas facility ceased operations during the second quarter of 2019.
For the three and nine months ended September 30, 2019, we recorded $1 million of accelerated depreciation and $26 million of accelerated depreciation and impairment of operating lease right-of-use, respectively, under Impairment of long-lived assets on the Consolidated Statement of Earnings and Comprehensive Income (Loss). For the three and nine months ended September 30, 2019, we also recorded $1 million and $5 million, respectively, of severance and termination costs; $1 million and $2 million, respectively, of inventory obsolescence; and $4 million and $11 million, respectively, of asset relocation and other costs, under Closure and restructuring costs.
STOCK-BASED COMPENSATION EXPENSE
For the first nine months of 2018,2019, stock-based compensation expense recognized in our results of operations was $17 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $4 million. This compares to a stock-based compensation expense of $19 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $7 million. This compares to a stock-based compensation expense of $15 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $1 million in the first nine months of 2017.2018. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.
LIQUIDITY AND CAPITAL RESOURCES
Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our contractually committed $700 million credit facility, of which $700$655 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $98$2 million is currently undrawn and available. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.
Our ability to make payments on the requirements mentioned above will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our credit and receivable securitization facilities and debt indentures impose various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.
A portion of our cash is held outside the U.S. by foreign subsidiaries. The earnings of the foreign subsidiaries reflect full provision for local income taxes. We continue to assess the impact of the U.S. Tax Reform with respect to our current strategy of reinvesting profits of foreign subsidiaries back into those foreign operations. We have not completed our analysis of the impact of the U.S. Tax Reform and how changes will impact operational decisions around the utilization of cash residing in the foreign subsidiaries and there have been no material changes to our estimated amounts.
Operating Activities
Our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials, including fiber and energy, and other expenses such as income tax and property taxes.
Cash flows from operating activities totaled $282 million in the first nine months of 2019, a $55 million decrease compared to cash flows from operating activities of $337 million in the first nine months of 2018, a $13 million increase compared to cash flows from operating activities of $324 million in the first nine months of 2017.2018. This increasedecrease in cash flows from operating activities is primarily due to a decrease in profitability as well as an increase in profitability, partly offset by a decrease in cash flow from working capital elements in the first nine months of 2018 when compared to the first nine months of 2017.requirements. We made income tax payments, net of refunds, of $40$55 million in the first nine months of 20182019 compared to income tax payments, net of refunds, of $18$40 million during the first nine months of 2017.2018. We paid $46$3 million of employer pension and other post-retirement contribution in excess of pension and other post-retirement expense in the first nine months of 20182019 compared to $33$46 million in the first nine months of 2017.2018.
Investing Activities
Cash flows used for investing activities in the first nine months of 20182019 amounted to $113$156 million, a $10$43 million increase compared to cash flows used for investing activities of $103$113 million in the first nine months of 2017.2018.
The use of cash in the first nine months of 2019 was attributable to additions to property, plant and equipment of $157 million. This use of cash was partially offset by proceeds from disposals of property, plant and equipment of $1 million.
The use of cash in the first nine months of 2018 was attributable to additions to property, plant and equipment of $111 million. Also, in the first nine months of 2018, we made an additional investment of $4 million in our joint venture CelluForce (a company that develops and manufactures nanocrystalline cellulose, a recyclable and renewable nanomaterial) and a $2 million investment in Prisma Renewable Composites, LLC (a company focused on developing advanced materials from lignin and other natural resources). These uses of cash were partially offset by proceeds of disposals of property, plant and equipment of $4 million.
The use of cash in the first nine months of 2017 was attributable to additions to property, plant and equipment of $111 million, partially offset by proceeds of disposals of property, plant and equipment of $8 million.
Our capital expenditures for 20182019 are expected to be approximately between $200$210 million and $220$230 million.
Financing Activities
Cash flows used for financing activities totaled $105$137 million in the first nine months of 20182019 compared to cash flows used for financing activities of $212$105 million in the first nine months of 2017.2018.
The use of cash in the first nine months of 2019 was primarily the result ofthe repurchase of our common stock ($139 million) and dividend payments ($83 million). This was partially offset by the net increase of borrowings under our credit facilities (revolver and receivable securitization) ($85 million).
The use of cash in the first nine months of 2018 was primarily the result of dividend payments ($81 million) and the net repayments of borrowings under our receivable securitization ($25 million).
The use of cash in the first nine months of 2017 was primarily the result of dividend payments ($78 million), the net repayment of borrowings under our credit facilities (revolver and receivable securitization) and long-term debt ($123 million) and a decrease in our bank indebtedness ($12 million).
Capital Resources
Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $848$842 million as of September 30, 20182019 compared to $991$743 million as of December 31, 2017.
Notes Maturity
Our 10.75% Notes, in aggregate principal amount of $63 million, matured on June 1, 2017.
Term Loan
In the third quarter of 2015, a wholly owned subsidiary of Domtar borrowed $300 million under an unsecured 10-year Term Loan Agreement that matures on July 20, 2025, with certain domestic banks. The Company and certain significant domestic subsidiaries of the Company unconditionally guarantee the borrowing under the Term Loan Agreement.
Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 1.875%. The Term Loan Agreement contains customary covenants, including two financial covenants: (i) an interest coverage ratio, as defined in the Term Loan Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Term Loan Agreement that must be maintained at a level of not greater than 3.75 to 1. At September 30, 2018, we were in compliance with these financial covenants.2018.
Revolving Credit Facility
In August 2018, we amended and restated our unsecured revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks, extending the Credit Agreement’s maturity date from August 18, 2021 to August 22, 2023. The amount available under the Credit Agreement remainsremained at $700 million.
Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic subsidiaries. Borrowings by foreign borrowers under the Credit Agreement are guaranteed by the Company, our significant domestic subsidiaries and certain of our foreign significant subsidiaries.
Borrowings under the Credit Agreement bear interest at the LIBOR, EURIBOR, Canadian bankers’ acceptance or prime rate, as applicable, plus a margin linked to our credit rating. In addition, we pay facility fees quarterly at rates dependent on our credit ratings.
The Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying material acquisitions). At September 30, 2018,2019 , we were in compliance with these financial covenants, and had no borrowings under the Credit Agreement amount to $45 million (September 30, 2017–2018 – nil). At September 30, 2018,2019, we had no outstanding letters of credit, (September 30, 2017 – nil), leaving $700$655 million unused and available under this facility. facility (September 30, 2018 – $700 million).
Receivables Securitization
We have a $150 million receivables securitization facility that matures in March 2019.November 2021.
At September 30, 2018, we had no2019, borrowings under the receivables securitization facility amounted to $90 million, and we had $52$50 million of letters of credit under the program (September 30, 20172018 – $60 millionnil and $51$52 million, respectively). The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the Credit Agreement or our failure to repay or satisfy material obligations. At September 30, 2018,2019, we had $98$2 million unused and available under the receivable securitization facility.
Term Loan
In the fourth quarter of 2018, we repaid the $300 million unsecured Term Loan that had been entered into in 2015 by a wholly-owned subsidiary of Domtar with certain domestic banks.
Common Stock
On January 29, 2018,February 19, 2019, May 8, 20182019 and August 7, 2018,6, 2019, our Board of Directors approved a quarterly dividend of $0.435, $0.455 and $0.455 per share, respectively, to be paid to holders of our common stock. Dividends of $27 million,aggregating $28 million were paid on each of April 15, 2019 andJuly 16, 2019, and dividends aggregating $27 million were paid on April 16, 2018, July 16, 2018 and October 15, 2018, respectively,2019, to shareholders of record on April 2, 2018,2019, July 3, 20182, 2019, and October 2, 2018,2019, respectively.
On November 6, 2018,5, 2019, our Board of Directors approved a quarterly dividend of $0.435 $0.455 per share to be paid to holders of our common stock. This dividend is to be paid on January 15, 2019,2020, to shareholders of record on January 2, 2019.2020.
OFF BALANCE SHEET ARRANGEMENTSGUARANTEES
Indemnifications
In the normal course of business, we finance certainoffer indemnifications relating to the sale of our activities off balance sheet through operating leases.businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At September 30, 2019, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.
Pension Plans
We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At September 30, 2019, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 “Recent Accounting Pronouncements,” of the financial statements in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes, business combinations and contingencies related to legal claims. These critical accounting estimates and policies have been reviewed with the Audit Committee of our Board of Directors. We believe these accounting policies, and others, should be reviewed as they are essential to understanding our results of operations, cash flows and financial condition. Actual results could differ from those estimates.
For more details on critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
There has not been any material change to our policies since December 31, 20172018 except for the adoption of ASU 2014-09,2016-02, “Revenue from Contracts with CustomersLeases” on January 1, 2018.2019. For more details, refer to Note 2 “Recent Accounting Pronouncements” of the financial statements in this Quarterly Report on Form 10-Q.
FORWARD-LOOKING STATEMENTS
The information included in this Quarterly Report on Form 10-Q, contains forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance, liquidity and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate”, “believe”, “expect”, “intend”, “aim”, “target”, “plan”, “continue”, “estimate”, “project”, “may”, “will”, “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occurs, what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors include, but are not limited to:
continued decline in usage of fine paper products in our core North American market;
• | continued decline in usage of fine paper products in our core North American market; |
our ability to implement our business diversification initiatives, including strategic acquisitions;
• | our ability to implement our business diversification initiatives, including repurposing of assets and strategic acquisitions; |
product selling prices;
• | product selling prices; |
raw material prices, including fiber, chemical and energy;
• | raw material prices, including wood fiber, chemical and energy; |
conditions in the global capital and credit markets, and the economy generally, particularly in the U.S., Canada and Europe;
• | conditions in the global capital and credit markets, and the economy generally, particularly in the U.S., Canada and Europe; |
performance of Domtar Corporation’s manufacturing operations, including unexpected maintenance requirements;
• | performance of Domtar Corporation’s manufacturing operations, including unexpected maintenance requirements; |
the level of competition from domestic and foreign producers;
• | the level of competition from domestic and foreign producers; |
cyberattack or other security breaches;
• | cyberattack or other security breaches; |
the effect of, or change in, forestry, land use, environmental and other governmental regulations (including tax positions and estimates of the impact of the U.S. Tax Reform on our future results), and accounting regulations;
• | the effect of, or change in, forestry, land use, environmental and other governmental regulations and accounting regulations; |
• | the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters; |
the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters;
• | transportation costs; |
• | the loss of current customers or the inability to obtain new customers; |
• | legal proceedings; |
• | changes in asset valuations, including impairment of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons; |
• | changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar and European currencies; |
| • |
|
the loss of current customers or the inability to obtain new customers;
• | performance of pension fund investments and related derivatives, if any; and |
legal proceedings;
changes in asset valuations, including impairment of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons;
changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar and European currencies;
the effect of timing of retirements and changes in the market price of Domtar Corporation’s common stock on charges for stock-based compensation;
performance of pension fund investments and related derivatives, if any; and
the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2017.
• | the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2018. |
You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. Unless specifically required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking statements to reflect new events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. There havehas not been noany material changeschange in our exposure to market risk since December 31, 2017.2018. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 3 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2018,2019, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018,2019, our disclosure controls and procedures were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.
See Note 1214 “Commitments and Contingencies” of the financial statements in this Quarterly Report on Form 10-Q for the discussion regarding legal proceedings.
For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Our Annual Report on Form 10-K for the year ended December 31, 2017,2018, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. There have beenwere no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share repurchase activity under our share repurchase program was as follows during the three-month period ended September 30, 2019:
Period |
| (a) Total Number of Shares Purchased |
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| (b) Average Price Paid per Share |
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| (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
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| (d) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (in 000s) |
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July 1 through July 31, 2019 |
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| 322,813 |
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| $ | 41.61 |
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| 322,813 |
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| $ | 300,925 |
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August 1 through August 31, 2019 |
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| 1,918,000 |
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| $ | 34.39 |
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| 1,918,000 |
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| $ | 234,971 |
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September 1 through September 30, 2019 |
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| 1,641,503 |
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| $ | 34.73 |
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| 1,641,503 |
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| $ | 177,968 |
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| 3,882,316 |
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| $ | 35.13 |
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| 3,882,316 |
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During the third quarter, and the first nine monthswe repurchased 3,882,316 shares at an average price of 2018, we did not repurchase any shares$35.13 per share, for a total cost of approximately $137 million under our stock repurchase program (the “Program”). We currently have $323As of September 30, 2019, we had approximately $178 million of remaining availability under our Program. On November 5, 2019, our Board of Directors approved an increase to the Program from $1.3 billion to $1.6 billion. The Program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the Program. The Program has no set expiration date. We repurchase our common stock, from time to time, in part to reduce the dilutive effects of our stock options and awards and to improve shareholders’ returns. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions, availability under the program as well as corporate and regulatory considerations. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share. During October 2019, we repurchased 1,751,643 shares at an average price of $34.27 per share, for a total cost of approximately $60 million.
During 2017,2018, there were no shares repurchased under the Program. As of December 31, 2017,2018, the approximate dollar value of shares that may yet be purchased under the Program was $323 million.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
DOMTAR CORPORATION | |
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Date: November | |
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By: | /s/ Daniel Buron |
| Daniel Buron |
| Senior Vice-President and Chief Financial Officer |
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By: | /s/ Razvan L. Theodoru |
| Razvan L. Theodoru |
| Vice-President, Corporate Law and Secretary |
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