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 March 31,September 30, 2020

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)

 

delawareDelaware

 

20-5901152

(State of Incorporation)

 

(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.    YESYes      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).    YESYes      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 April 30,October 31, 2020, 55,191,70555,194,538 shares of the issuer’s common stock were outstanding.

 

 

 


DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31,September 30, 2020

INDEX

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE (LOSS) INCOME (LOSS)

3

 

 

 

 

CONSOLIDATED BALANCE SHEETS

4

 

 

 

 

CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY

5

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

67

 

 

 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

78

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

89

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

3746

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

4860

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

4860

 

 

 

PART II

OTHER INFORMATION

4861

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

4861

 

 

 

ITEM 1A.

RISK FACTORS

4961

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

5062

 

 

 

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

5062

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

5062

 

 

 

ITEM 5.

OTHER INFORMATION

5062

 

 

 

ITEM 6.

EXHIBITS

5163

 

 

 

 

 


PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE (LOSS) INCOME (LOSS)

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

For the three months ended

 

 

March 31,

 

 

March 31,

 

 

2020

 

 

2019

 

 

(Unaudited)

 

 

$

 

 

$

 

Sales

 

1,278

 

 

 

1,376

 

Operating expenses

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

1,083

 

 

 

1,052

 

Depreciation and amortization

 

72

 

 

 

73

 

Selling, general and administrative

 

102

 

 

 

123

 

Impairment of long-lived assets (NOTE 11)

 

 

 

 

10

 

Closure and restructuring costs (NOTE 11)

 

 

 

 

4

 

Other operating loss (income), net (NOTE 6)

 

2

 

 

 

(1

)

 

 

1,259

 

 

 

1,261

 

Operating income

 

19

 

 

 

115

 

Interest expense, net

 

14

 

 

 

13

 

Non-service components of net periodic benefit cost (NOTE 5)

 

(4

)

 

 

(3

)

Earnings before income taxes and equity loss

 

9

 

 

 

105

 

Income tax expense (NOTE 7)

 

3

 

 

 

24

 

Equity loss, net of taxes

 

1

 

 

 

1

 

Net earnings

 

5

 

 

 

80

 

Per common share (in dollars) (NOTE 4)

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

Basic

 

0.09

 

 

 

1.27

 

Diluted

 

0.09

 

 

 

1.27

 

Weighted average number of common shares

   outstanding (millions)

 

 

 

 

 

 

 

Basic

 

56.1

 

 

 

63.0

 

Diluted

 

56.2

 

 

 

63.2

 

Cash dividends per common share

 

0.46

 

 

 

0.44

 

 

 

 

 

 

 

 

 

Net earnings

 

5

 

 

 

80

 

Other comprehensive (loss) income (NOTE 12):

 

 

 

 

 

 

 

Net derivative (losses) gains on cash flow hedges:

 

 

 

 

 

 

 

Net (losses) gains arising during the period, net of tax of

   $16 (2019 – $(4))

 

(49

)

 

 

11

 

Less: Reclassification adjustment for losses

   included in net earnings, net of tax of $(2) (2019 – nil)

 

7

 

 

 

1

 

Foreign currency translation adjustments

 

(74

)

 

 

2

 

Change in unrecognized gains and prior service cost related to

   pension and post-retirement benefit plans, net of tax of

   $(1) (2019 – $(1))

 

1

 

 

 

3

 

Other comprehensive (loss) income

 

(115

)

 

 

17

 

Comprehensive (loss) income

 

(110

)

 

 

97

 

 

For the three months ended

 

 

For the nine months ended

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(Unaudited)

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

1,124

 

 

 

1,283

 

 

 

3,414

 

 

 

3,976

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

911

 

 

 

1,041

 

 

 

2,831

 

 

 

3,172

 

Depreciation and amortization

 

71

 

 

 

72

 

 

 

214

 

 

 

219

 

Selling, general and administrative

 

99

 

 

 

94

 

 

 

294

 

 

 

322

 

Impairment of long-lived assets (NOTE 12)

 

111

 

 

 

33

 

 

 

111

 

 

 

58

 

Closure and restructuring costs (NOTE 12)

 

68

 

 

 

11

 

 

 

69

 

 

 

23

 

Other operating loss (income), net (NOTE 7)

 

 

 

 

3

 

 

 

(2

)

 

 

4

 

 

 

1,260

 

 

 

1,254

 

 

 

3,517

 

 

 

3,798

 

Operating (loss) income

 

(136

)

 

 

29

 

 

 

(103

)

 

 

178

 

Interest expense, net

 

14

 

 

 

12

 

 

 

43

 

 

 

38

 

Non-service components of net periodic benefit cost (NOTE 6)

 

(4

)

 

 

(2

)

 

 

(13

)

 

 

(7

)

(Loss) earnings before income taxes and equity loss

 

(146

)

 

 

19

 

 

 

(133

)

 

 

147

 

Income tax (benefit) expense (NOTE 8)

 

(55

)

 

 

(1

)

 

 

(67

)

 

 

28

 

Equity loss, net of taxes

 

1

 

 

 

 

 

 

2

 

 

 

1

 

Net (loss) earnings

 

(92

)

 

 

20

 

 

 

(68

)

 

 

118

 

Per common share (in dollars) (NOTE 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

(1.67

)

 

 

0.33

 

 

 

(1.23

)

 

 

1.89

 

Diluted

 

(1.67

)

 

 

0.32

 

 

 

(1.23

)

 

 

1.88

 

Weighted average number of common shares

   outstanding (millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

55.2

 

 

 

61.5

 

 

 

55.5

 

 

 

62.5

 

Diluted

 

55.2

 

 

 

61.7

 

 

 

55.5

 

 

 

62.7

 

Cash dividends per common share

 

 

 

 

0.46

 

 

 

0.91

 

 

 

1.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

(92

)

 

 

20

 

 

 

(68

)

 

 

118

 

Other comprehensive income (loss) (NOTE 14):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) arising during the period, net of tax of

   $(7) and nil, respectively (2019 – $4 and $(1),

   respectively)

 

20

 

 

 

(9

)

 

 

 

 

 

5

 

Less: Reclassification adjustment for losses

   included in net earnings (loss), net of tax of $(1) and $(5),

   respectively (2019 – $(1) and $(2), respectively)

 

1

 

 

 

3

 

 

 

14

 

 

 

5

 

Foreign currency translation adjustments

 

40

 

 

 

(34

)

 

 

5

 

 

 

(12

)

Change in unrecognized (losses) gains and prior service cost

   (losses) related to pension and post-retirement benefit plans,

   net of tax of $12 and $11, respectively (2019 – $(1) and $(3),

   respectively)

 

(38

)

 

 

2

 

 

 

(35

)

 

 

7

 

Other comprehensive income (loss)

 

23

 

 

 

(38

)

 

 

(16

)

 

 

5

 

Comprehensive (loss) income

 

(69

)

 

 

(18

)

 

 

(84

)

 

 

123

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

3



DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

At

 

 

At

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(Unaudited)

 

 

(Unaudited)

 

 

$

 

 

$

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

152

 

 

 

61

 

 

 

218

 

 

 

61

 

Receivables, less allowances of $10 and $6

 

 

600

 

 

 

577

 

Inventories (NOTE 8)

 

 

740

 

 

 

786

 

Receivables, less allowances of $11 and $6

 

 

543

 

 

 

577

 

Inventories (NOTE 9)

 

 

764

 

 

 

786

 

Prepaid expenses

 

 

32

 

 

 

33

 

 

 

36

 

 

 

33

 

Income and other taxes receivable

 

 

27

 

 

 

61

 

 

 

44

 

 

 

61

 

Total current assets

 

 

1,551

 

 

 

1,518

 

 

 

1,605

 

 

 

1,518

 

Property, plant and equipment, net

 

 

2,493

 

 

 

2,567

 

 

 

2,378

 

 

 

2,567

 

Operating lease right-of-use assets (NOTE 9)

 

 

77

 

 

 

81

 

Intangible assets, net (NOTE 10)

 

 

561

 

 

 

573

 

Operating lease right-of-use assets (NOTE 10)

 

 

72

 

 

 

81

 

Intangible assets, net (NOTE 11)

 

 

573

 

 

 

573

 

Other assets

 

 

151

 

 

 

164

 

 

 

163

 

 

 

164

 

Total assets

 

 

4,833

 

 

 

4,903

 

 

 

4,791

 

 

 

4,903

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Trade and other payables

 

 

700

 

 

 

705

 

 

 

626

 

 

 

705

 

Income and other taxes payable

 

 

26

 

 

 

23

 

 

 

37

 

 

 

23

 

Operating lease liabilities due within one year (NOTE 9)

 

 

27

 

 

 

28

 

Operating lease liabilities due within one year (NOTE 10)

 

 

27

 

 

 

28

 

Long-term debt due within one year

 

 

1

 

 

 

1

 

 

 

13

 

 

 

1

 

Total current liabilities

 

 

754

 

 

 

766

 

 

 

703

 

 

 

766

 

Long-term debt

 

 

1,102

 

 

 

938

 

 

 

1,086

 

 

 

938

 

Operating lease liabilities (NOTE 9)

 

 

65

 

 

 

69

 

Operating lease liabilities (NOTE 10)

 

 

58

 

 

 

69

 

Deferred income taxes and other

 

 

457

 

 

 

479

 

 

 

413

 

 

 

479

 

Other liabilities and deferred credits

 

 

274

 

 

 

275

 

 

 

320

 

 

 

275

 

Commitments and contingencies (NOTE 14)

 

 

 

 

 

 

 

 

Shareholders' equity (NOTE 13)

 

 

 

 

 

 

 

 

Commitments and contingencies (NOTE 16)

 

 

 

 

 

 

 

 

Shareholders' equity (NOTE 15)

 

 

 

 

 

 

 

 

Common stock $0.01 par value; authorized 2,000,000,000 shares;

issued 65,001,104 and 65,001,104 shares

 

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

Treasury stock $0.01 par value; 9,810,777 and 8,120,194 shares

 

 

 

 

 

 

Treasury stock $0.01 par value; 9,808,481 and 8,120,194 shares

 

 

 

 

 

 

Additional paid-in capital

 

 

1,710

 

 

 

1,770

 

 

 

1,714

 

 

 

1,770

 

Retained earnings

 

 

978

 

 

 

998

 

 

 

905

 

 

 

998

 

Accumulated other comprehensive loss

 

 

(508

)

 

 

(393

)

 

 

(409

)

 

 

(393

)

Total shareholders' equity

 

 

2,181

 

 

 

2,376

 

 

 

2,211

 

 

 

2,376

 

Total liabilities and shareholders' equity

 

 

4,833

 

 

 

4,903

 

 

 

4,791

 

 

 

4,903

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

4



DOMTAR CORPORATION

CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

For the three months ended

 

 

 

March 31, 2020

 

 

 

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, 2019

 

 

56.9

 

 

 

1

 

 

 

1,770

 

 

 

998

 

 

 

(393

)

 

 

2,376

 

Stock-based compensation, net of tax

 

 

0.1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Net earnings

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Net derivative losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses arising during the period,

   net of tax of $16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(49

)

 

 

(49

)

Less: Reclassification adjustment for losses

   included in net earnings, net of tax of $(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

7

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Change in unrecognized gains and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Stock repurchase

 

 

(1.8

)

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

 

(59

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Balance at March 31, 2020

 

 

55.2

 

 

 

1

 

 

 

1,710

 

 

 

978

 

 

 

(508

)

 

 

2,181

 

 

 

For the three months ended

 

 

 

September 30, 2020

 

 

 

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, 2020

 

 

55.2

 

 

 

1

 

 

 

1,711

 

 

 

997

 

 

 

(432

)

 

 

2,277

 

Stock-based compensation, net of tax

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(92

)

 

 

 

 

 

(92

)

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

20

 

Less: Reclassification adjustment for losses

   included in net loss, net of tax of $(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

 

 

40

 

Change in unrecognized losses and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

(38

)

Balance at September 30, 2020

 

 

55.2

 

 

 

1

 

 

 

1,714

 

 

 

905

 

 

 

(409

)

 

 

2,211

 

 

 

For the nine months ended

 

 

 

September 30, 2020

 

 

 

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, 2019

 

 

56.9

 

 

 

1

 

 

 

1,770

 

 

 

998

 

 

 

(393

)

 

 

2,376

 

Stock-based compensation, net of tax

 

 

0.1

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(68

)

 

 

 

 

 

(68

)

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses arising during the period,

   net of tax of nil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Reclassification adjustment for losses

   included in net loss, net of tax of $(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

14

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Change in unrecognized losses and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

 

(35

)

Stock repurchase

 

 

(1.8

)

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

 

(59

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Balance at September 30, 2020

 

 

55.2

 

 

 

1

 

 

 

1,714

 

 

 

905

 

 

 

(409

)

 

 

2,211

 

The accompanying notes are an integral part of the consolidated financial statements.


DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

For the three 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 June 30, 2019

 

 

62.9

 

 

 

1

 

 

 

1,977

 

 

 

1,065

 

 

 

(424

)

 

 

2,619

 

Stock-based compensation, net of tax

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

20

 

Net derivative losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(34

)

 

 

(34

)

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

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

 

 

 

(27

)

Balance at September 30, 2019

 

 

59.0

 

 

 

1

 

 

 

1,842

 

 

 

1,058

 

 

 

(462

)

 

 

2,439

 

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

March 31, 2019

 

 

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

 

 

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)

 

 

(Unaudited)

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at December 31, 2018

 

 

62.9

 

 

 

1

 

 

 

1,981

 

 

 

1,023

 

 

 

(467

)

 

 

2,538

 

 

 

62.9

 

 

 

1

 

 

 

1,981

 

 

 

1,023

 

 

 

(467

)

 

 

2,538

 

Stock-based compensation, net of tax

 

 

0.2

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

0.2

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

118

 

 

 

 

 

 

118

 

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

net of tax of $(4)(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Less: Reclassification adjustment for losses

included in net earnings, net of tax of nil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Less: Reclassification adjustment for losses

included in net earnings, net of tax of $(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

(12

)

Change in unrecognized gains and prior service cost

related to pension and post-retirement benefit

plans, net of tax of $(1)(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

7

 

Stock repurchase

 

 

(4.1

)

 

 

 

 

 

(145

)

 

 

 

 

 

 

 

 

(145

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(28

)

 

 

 

 

 

(28

)

 

 

 

 

 

 

 

 

 

 

 

(83

)

 

 

 

 

 

(83

)

Balance at March 31, 2019

 

 

63.1

 

 

 

1

 

 

 

1,982

 

 

 

1,075

 

 

 

(450

)

 

 

2,608

 

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 CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

For the three months ended

 

 

For the nine months ended

 

March 31, 2020

 

 

March 31, 2019

 

 

September 30, 2020

 

 

September 30, 2019

 

(Unaudited)

 

 

(Unaudited)

 

$

 

 

$

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

5

 

 

 

80

 

Adjustments to reconcile net earnings to cash flows

from operating activities

 

 

 

 

 

 

 

Net (loss) earnings

 

 

(68

)

 

 

118

 

Adjustments to reconcile net (loss) earnings to cash flows

from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

72

 

 

 

73

 

 

 

214

 

 

 

219

 

Deferred income taxes and tax uncertainties

 

1

 

 

 

(3

)

 

 

(60

)

 

 

1

 

Impairment of long-lived assets

 

 

 

 

10

 

 

 

111

 

 

 

58

 

Stock-based compensation expense

 

1

 

 

 

2

 

 

 

5

 

 

 

7

 

Equity loss, net

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Changes in assets and liabilities, excluding the effect of acquisition of business

 

 

 

 

 

 

 

 

Receivables

 

(28

)

 

 

(30

)

 

 

38

 

 

 

50

 

Inventories

 

28

 

 

 

(49

)

 

 

30

 

 

 

(34

)

Prepaid expenses

 

(5

)

 

 

 

 

 

9

 

 

 

(4

)

Trade and other payables

 

(16

)

 

 

(69

)

 

 

(21

)

 

 

(111

)

Income and other taxes

 

39

 

 

 

26

 

 

 

34

 

 

 

(27

)

Difference between employer pension and

other post-retirement contributions and

pension and other post-retirement expense

 

(1

)

 

 

1

 

 

 

(6

)

 

 

(3

)

Other assets and other liabilities

 

(9

)

 

 

13

 

 

 

(12

)

 

 

7

 

Cash flows from operating activities

 

88

 

 

 

55

 

 

 

276

 

 

 

282

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

(62

)

 

 

(46

)

 

 

(130

)

 

 

(157

)

Proceeds from disposals of property, plant and equipment

 

 

 

 

 

1

 

Acquisition of business, net of cash acquired

 

 

(30

)

 

 

 

Cash flows used for investing activities

 

(62

)

 

 

(46

)

 

 

(160

)

 

 

(156

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend payments

 

(26

)

 

 

(27

)

 

 

(51

)

 

 

(83

)

Stock repurchase

 

(59

)

 

 

 

 

 

(59

)

 

 

(139

)

Net change in bank indebtedness

 

(10

)

 

 

3

 

 

 

(10

)

 

 

2

 

Change in revolving credit facility

 

140

 

 

 

 

 

 

(80

)

 

 

45

 

Proceeds from receivables securitization facility

 

25

 

 

 

20

 

 

 

25

 

 

 

150

 

Repayments of receivables securitization facility

 

 

 

 

(20

)

 

 

(80

)

 

 

(110

)

Issuance of long-term debt

 

 

300

 

 

 

 

Repayments of long-term debt

 

 

(3

)

 

 

(1

)

Other

 

(3

)

 

 

(1

)

 

 

(3

)

 

 

(1

)

Cash flows provided from (used for) financing activities

 

67

 

 

 

(25

)

 

 

39

 

 

 

(137

)

Net increase (decrease) in cash and cash equivalents

 

93

 

 

 

(16

)

 

 

155

 

 

 

(11

)

Impact of foreign exchange on cash

 

(2

)

 

 

(1

)

 

 

2

 

 

 

(2

)

Cash and cash equivalents at beginning of period

 

61

 

 

 

111

 

 

 

61

 

 

 

111

 

Cash and cash equivalents at end of period

 

152

 

 

 

94

 

 

 

218

 

 

 

98

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash payments (refund) for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

17

 

 

 

16

 

 

 

44

 

 

 

39

 

Income taxes

 

(25

)

 

 

6

 

 

 

(25

)

 

 

55

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6



INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1

BASIS OF PRESENTATION

89

 

 

 

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

910

 

 

 

NOTE 3

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTACQUISITION OF BUSINESS

1012

 

 

 

NOTE 4

EARNINGS PER COMMON SHAREDERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

1413

 

 

 

NOTE 5

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

15

NOTE 6

OTHER OPERATING LOSS (INCOME), NET

16

NOTE 7

INCOME TAXES

17

NOTE 8

INVENTORIESEARNINGS (LOSS) PER COMMON SHARE

18

 

 

 

NOTE 96

LEASESPENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

19

 

 

 

NOTE 107

INTANGIBLE ASSETSOTHER OPERATING LOSS (INCOME), NET

21

 

 

 

NOTE 118

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETSINCOME TAXES

22

 

 

 

NOTE 129

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENTINVENTORIES

23

 

 

 

NOTE 1310

SHAREHOLDERS’ EQUITYLEASES

2524

 

 

 

NOTE 1411

COMMITMENTS AND CONTINGENCIESINTANGIBLE ASSETS

2627

 

 

 

NOTE 1512

SEGMENT DISCLOSURESCLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

28

 

 

 

NOTE 1613

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATIONLONG-TERM DEBT

29

NOTE 14

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

30

 

 

 

NOTE 1715

SUBSEQUENT EVENTSSHAREHOLDERS’ EQUITY

3633

NOTE 16

COMMITMENTS AND CONTINGENCIES

34

NOTE 17

SEGMENT DISCLOSURES

37

NOTE 18

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

39

 

 

 

 

 

 

78

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 1.

_________________

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 threenine months of the year may not necessarily be indicative of full yearfull-year results. It is suggested that these consolidated financial statements 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, 2019, as filed with the Securities and Exchange Commission. The December 31, 2019 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.

 

 

89

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS

In August 2018, the FASB issued Accounting Standards Update (“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 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 guidance on presentation and disclosure.

The Company adopted the new guidance on January 1, 2020 with no significant impact on the consolidated financial statements.

RECEIVABLES

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses”. This ASU added a new impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss.

The Company adopted the new guidance on January 1, 2020 with no significant impact on the consolidated financial statements.

INCOME TAXES

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The ASU simplifies the accounting for income taxes by eliminating certain exceptions in ASC 740 related to the methodology for calculating income taxes in an interim period. It also clarifies and simplifies other aspects of the accounting for income taxes, improving the consistent application and simplification of U.S. GAAP. For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this standard for its interim period ending September 30, 2020, using the methods directed by the standard. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods, which allowed the Company to recognize a higher tax benefit this quarter than previously allowable. The adoption of this ASU will not change the total income tax benefit the Company is expected to recognize for the full year ending December 31, 2020.


10


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

 

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

On March 12, 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The amendments in the ASU are elective and apply to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022.

The Company has begun its impact assessment and while its evaluation of this guidance is in the early stages, the Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

 

 

9

11

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3.

_________________

ACQUISITION OF BUSINESS

Purchase of Appvion Point of Sale business

On April 27, 2020, Domtar Corporation completed the acquisition of the Point of Sale paper business from Appvion Operation Inc. The business includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property and assumed liabilities related to post-retirement benefits. The results of this business have been included in the consolidated financial statements as of April 27, 2020 and are presented in the Pulp and Paper reportable segment. The purchase price was $20 million in cash plus the book value of raw materials and finished goods inventory, subject to post-closing adjustments. The acquisition was accounted for as a business combination under the acquisition method of accounting. The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which are based on information currently available.

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition

 

 

 

 

 

 

Inventories

 

 

 

$

11

 

Property, plant and equipment

 

 

 

 

23

 

Operating lease right-of-use assets

 

 

 

 

2

 

Total assets

 

 

 

 

36

 

 

 

 

 

 

 

 

Less: Assumed Liabilities

 

 

 

 

6

 

 

 

 

 

 

 

 

Fair value of net assets acquired at the date of acquisition

 

 

 

 

30

 

12


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

________________

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, interest rates and prices of the Company’s common stock with regard to the Company’s stock-based compensation program. 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 Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on 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 March 31,September 30, 2020, 1Pulp2Pulp and Paper segment customercustomers located in the U.S. represented 13%11% or $81$62 million, and 10% or $55  million, respectively, of the Company’s receivables (December 31, 2019 – 2 Pulp and Paper segment customers located in the U.S. represented 11% or $66 million, and 11% or $65 million, respectively).

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.

EQUITY RISK

The Company is exposed to changes in share prices with regard to its stock-based compensation program. The Company manages its exposure through the use of derivative instruments such as equity swap contracts. In March 2020, the Company entered into a total return swap agreement covering 500,000 common shares maturing on March 4, 2022.

13


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

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 4539 months.

10


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 March 31,September 30, 2020 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020 (1)

 

 

6,265,000

 

 

 

$

19

 

 

 

34%

 

 

 

2,384,843

 

 

 

$

7

 

 

 

35%

 

2021

 

 

9,270,000

 

 

 

$

27

 

 

 

36%

 

 

 

9,270,000

 

 

 

$

27

 

 

 

39%

 

2022

 

 

9,270,000

 

 

 

$

25

 

 

 

36%

 

 

 

9,270,000

 

 

 

$

25

 

 

 

37%

 

2023

 

 

4,210,000

 

 

 

$

12

 

 

 

16%

 

 

 

4,210,000

 

 

 

$

12

 

 

 

16%

 

 

(1)

Represents the remaining ninethree months of 2020

(2)

MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of March 31,September 30, 2020.

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, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. 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. 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 March 31,September 30, 2020 to hedge forecasted purchases and sales:

 

Currency exposure hedged

 

Business Segment

 

Year of

maturity

 

Notional

contractual value

 

Percentage of

forecasted net

exposures under

contracts

 

 

Average

Protection rate

 

Average

Obligation rate

 

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

 

2020 (1)

 

659 CAD

 

95%

 

 

1 USD = 1.3211

 

1 USD = 1.3379

 

Pulp and Paper

 

2020 (1)

 

226 CAD

 

95%

 

 

1 USD = 1.3259

 

1 USD = 1.3426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2021

 

565 CAD

 

60%

 

 

1 USD = 1.3417

 

1 USD = 1.3479

 

Pulp and Paper

 

2021

 

721 CAD

 

76%

 

 

1 USD = 1.3412

 

1 USD = 1.3558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2022

 

112 CAD

 

12%

 

 

1 USD = 1.3591

 

1 USD = 1.3591

 

Pulp and Paper

 

2022

 

304 CAD

 

32%

 

 

1 USD = 1.3606

 

1 USD = 1.3606

 

(1)Represents the remaining three months of 2020 

Represents the remaining nine months of 2020

 

The foreign exchange derivative contracts were effective as of March 31,September 30, 2020.

11


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(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 establishesestablish 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, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. 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 March 31,September 30, 2020 and December 31, 2019, 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:

 

March 31, 2020

 

 

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, 2020

 

 

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

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Prepaid expenses

 

 

10

 

 

 

 

 

 

10

 

 

 

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other assets

 

 

6

 

 

 

 

 

 

6

 

 

 

 

(a)

Other assets

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

2

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

37

 

 

 

 

 

 

37

 

 

 

 

(a)

Trade and other payables

 

 

5

 

 

 

 

 

 

5

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

7

 

 

 

 

 

 

7

 

 

 

 

(a)

Trade and other payables

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Trade and other payables

Currency derivatives

 

 

17

 

 

 

 

 

 

17

 

 

 

 

(a)

Other liabilities and deferred credits

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other liabilities and deferred credits

Natural gas swap contracts

 

 

7

 

 

 

 

 

 

7

 

 

 

 

(a)

Other liabilities and deferred credits

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

68

 

 

 

 

 

 

68

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

liability awards

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

Trade and other payables

 

 

5

 

 

 

5

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

liability awards

 

 

9

 

 

 

9

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

 

 

13

 

 

 

13

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Equity swap contracts

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Long-term debt

 

 

1,082

 

 

 

 

 

 

1,082

 

 

 

 

(b)

Long-term debt

 

 

1,192

 

 

 

 

 

 

1,192

 

 

 

 

(b)

Long-term debt

 

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $14$2 million at March 31,September 30, 2020, of which a loss of $7$1 million willis expected to 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 March 31,September 30, 2020.


12


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The net cumulative lossgain recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $52$10 million at March 31,September 30, 2020, of which a lossgain of $36$5 million willis expected to 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 March 31,September 30, 2020.

16


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

Fair Value of financial instruments at:

 

December 31, 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

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Other assets

Total Assets

 

 

8

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

9

 

 

 

 

 

 

9

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

8

 

 

 

 

 

 

8

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

19

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

   liability awards

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

   liability awards

 

 

18

 

 

 

18

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Long-term debt

 

 

1,030

 

 

 

 

 

 

1,030

 

 

 

 

(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 measuredForeign currency forward and option contracts are valued using techniques derived from the Black-Scholes pricing model.standard valuation models. 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 March 31,September 30, 2020 and December 31, 2019. The carrying value of the Company’s long-term debt is $1,103$1,099 million and $939 million at March 31,September 30, 2020 and December 31, 2019, respectively.

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.

 

 

 

1317

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

_________________

EARNINGS PER COMMON SHARE

The following table provides the reconciliation between basic and diluted earnings per common share:

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net earnings

 

$

5

 

 

$

80

 

Weighted average number of common shares

   outstanding (millions)

 

 

56.1

 

 

 

63.0

 

Effect of dilutive securities (millions)

 

 

0.1

 

 

 

0.2

 

Weighted average number of diluted common shares

   outstanding (millions)

 

 

56.2

 

 

 

63.2

 

 

 

 

 

 

 

 

 

 

Basic net earnings per common share (in dollars)

 

$

0.09

 

 

$

1.27

 

Diluted net earnings per common share (in dollars)

 

$

0.09

 

 

$

1.27

 

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

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Options to purchase common shares

 

 

410,547

 

 

 

198,219

 


14


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 5.

_________________

EARNINGS (LOSS) PER COMMON SHARE

The following table provides the reconciliation between basic and diluted (loss) earnings per common share:

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net (loss) earnings

 

$

(92

)

 

$

20

 

 

$

(68

)

 

$

118

 

Weighted average number of common shares

   outstanding (millions)

 

 

55.2

 

 

 

61.5

 

 

 

55.5

 

 

 

62.5

 

Effect of dilutive securities (millions)

 

 

 

 

 

0.2

 

 

 

 

 

 

0.2

 

Weighted average number of diluted common shares

   outstanding (millions)

 

 

55.2

 

 

 

61.7

 

 

 

55.5

 

 

 

62.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) earnings per common share (in dollars)

 

$

(1.67

)

 

$

0.33

 

 

$

(1.23

)

 

$

1.89

 

Diluted net (loss) earnings per common share (in dollars)

 

$

(1.67

)

 

$

0.32

 

 

$

(1.23

)

 

$

1.88

 

The following table provides the securities that could potentially dilute basic (loss) earnings per common share in the future, but were not included in the computation of diluted (loss) 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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Options to purchase common shares

 

 

407,662

 

 

 

398,869

 

 

 

407,662

 

 

 

325,757

 

18


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6.

_________________

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANSINCOME TAXES

DEFINED CONTRIBUTION PLANSIn December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The ASU simplifies the accounting for income taxes by eliminating certain exceptions in ASC 740 related to the methodology for calculating income taxes in an interim period. It also clarifies and simplifies other aspects of the accounting for income taxes, improving the consistent application and simplification of U.S. GAAP. For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this standard for its interim period ending September 30, 2020, using the methods directed by the standard. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods, which allowed the Company to recognize a higher tax benefit this quarter than previously allowable. The adoption of this ASU will not change the total income tax benefit the Company is expected to recognize for the full year ending December 31, 2020.


10


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

On March 12, 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The amendments in the ASU are elective and apply to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022.

The Company has several defined contribution plansbegun its impact assessment and multiemployer plans.while its evaluation of this guidance is in the early stages, the Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

11


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

_________________

ACQUISITION OF BUSINESS

Purchase of Appvion Point of Sale business

On April 27, 2020, Domtar Corporation completed the acquisition of the Point of Sale paper business from Appvion Operation Inc. The pension expensebusiness includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property and assumed liabilities related to post-retirement benefits. The results of this business have been included in the consolidated financial statements as of April 27, 2020 and are presented in the Pulp and Paper reportable segment. The purchase price was $20 million in cash plus the book value of raw materials and finished goods inventory, subject to post-closing adjustments. The acquisition was accounted for as a business combination under these plansthe acquisition method of accounting. The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which are based on information currently available.

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition

 

 

 

 

 

 

Inventories

 

 

 

$

11

 

Property, plant and equipment

 

 

 

 

23

 

Operating lease right-of-use assets

 

 

 

 

2

 

Total assets

 

 

 

 

36

 

 

 

 

 

 

 

 

Less: Assumed Liabilities

 

 

 

 

6

 

 

 

 

 

 

 

 

Fair value of net assets acquired at the date of acquisition

 

 

 

 

30

 

12


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

The Company is equalexposed to market risk, such as changes in currency exchange rates, commodity prices, interest rates and prices of the Company’s common stock with regard to the Company’s contribution. Forstock-based compensation program. To the three months ended March 31, 2020,extent the pension expense was $12 million (2019 – $14 million).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.

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANSUpon 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 Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joiningis exposed to credit risk on accounts receivable from its customers. In order to reduce this risk, the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employeesreviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of September 30, 2020, 2Pulp and Paper segment customers located in the U.S. joiningrepresented 11% or $62 million, and 10% or $55  million, respectively, of the Company after January 1, 2008 participate in a defined contribution pension plan. UnionizedCompany’s receivables (December 31, 2019 – 2 Pulp and non-union hourly employeesPaper segment customers located in the U.S. represented 11% or $66 million, and 11% or $65 million, respectively).

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 grandfatheredobtained. 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.

EQUITY RISK

The Company is exposed to changes in share prices with regard to its stock-based compensation program. The Company manages its exposure through the use of derivative instruments such as equity swap contracts. In March 2020, the Company entered into a total return swap agreement covering 500,000 common shares maturing on March 4, 2022.

13


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

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 39 months.

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 2020 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

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020 (1)

 

 

2,384,843

 

 

 

$

7

 

 

 

35%

 

2021

 

 

9,270,000

 

 

 

$

27

 

 

 

39%

 

2022

 

 

9,270,000

 

 

 

$

25

 

 

 

37%

 

2023

 

 

4,210,000

 

 

 

$

12

 

 

 

16%

 

(1)

Represents the remaining three months of 2020

(2)

MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of September 30, 2020.

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the existing defined benefit pension plans, participateUnited 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 defined contribution pension plancurrency 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 future service.periods up to three years. The Company also sponsorsmay 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, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. 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. 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, 2020 to hedge forecasted purchases and sales:

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

 

2020 (1)

 

226 CAD

 

95%

 

 

1 USD = 1.3259

 

1 USD = 1.3426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2021

 

721 CAD

 

76%

 

 

1 USD = 1.3412

 

1 USD = 1.3558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2022

 

304 CAD

 

32%

 

 

1 USD = 1.3606

 

1 USD = 1.3606

(1)Represents the remaining three months of 2020 

The foreign exchange derivative contracts were effective as of September 30, 2020.

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements and disclosures establish a numberfair 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 other post-retirement benefit plans for eligible U.S.input that is available and non-U.S. employees;significant to 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:fair value measurement.

 

Level 1

For the three months ended

March 31, 2020

Pension plans

Other post-retirement benefit plans

$

$

Service cost

7

Interest expense

11

Expected return on planQuoted prices in active markets for identical assets

(17

)

Amortization of net actuarial loss

2

Net periodic benefit cost

3

or liabilities.

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:

 

Level 2

ForObservable 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 three months ended

full term of the assets or liabilities.

 

Level 3

March 31, 2019

Pension plans

Other post-retirement benefit plans

$

$

Service cost

8

Interest expense

13

Expected return on plan assets

(20

)

AmortizationInputs that are generally unobservable and typically reflect management’s estimates of net actuarial loss

3

Amortization of prior year service costs

1

Net periodic benefit cost

5

assumptions that market participants would use in pricing the asset or liability.

The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than the service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statements of Earnings and Comprehensive (Loss) Income.

For the three months ended March 31, 2020, the Company contributed $2 million (2019 – $3 million) to the pension plans and $1 million (2019 – $1 million) to the other post-retirement benefit plans.

15

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCHSEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. 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, 2020 and December 31, 2019, 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, 2020

 

 

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

 

 

10

 

 

 

 

 

 

10

 

 

 

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

6

 

 

 

 

 

 

6

 

 

 

 

(a)

Other assets

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

18

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

5

 

 

 

 

 

 

5

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Trade and other payables

Currency derivatives

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other liabilities and deferred credits

Natural gas swap contracts

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

10

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

   liability awards

 

 

5

 

 

 

5

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

   liability awards

 

 

13

 

 

 

13

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Equity swap contracts

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Long-term debt

 

 

1,192

 

 

 

 

 

 

1,192

 

 

 

 

(b)

Long-term debt

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $2 million at September 30, 2020, of which a loss of $1 million is expected to 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, 2020.

The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $10 million at September 30, 2020, of which a gain of $5 million is expected to 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, 2020.

16


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value of financial instruments at:

 

December 31, 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

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Other assets

Total Assets

 

 

8

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

9

 

 

 

 

 

 

9

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

8

 

 

 

 

 

 

8

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

19

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

   liability awards

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

   liability awards

 

 

18

 

 

 

18

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Long-term debt

 

 

1,030

 

 

 

 

 

 

1,030

 

 

 

 

(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: Foreign currency forward and option contracts are valued using standard valuation models. 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, 2020 and December 31, 2019. The carrying value of the Company’s long-term debt is $1,099 million and $939 million at September 30, 2020 and December 31, 2019, respectively.

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.

17


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

_________________

EARNINGS (LOSS) PER COMMON SHARE

The following table provides the reconciliation between basic and diluted (loss) earnings per common share:

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net (loss) earnings

 

$

(92

)

 

$

20

 

 

$

(68

)

 

$

118

 

Weighted average number of common shares

   outstanding (millions)

 

 

55.2

 

 

 

61.5

 

 

 

55.5

 

 

 

62.5

 

Effect of dilutive securities (millions)

 

 

 

 

 

0.2

 

 

 

 

 

 

0.2

 

Weighted average number of diluted common shares

   outstanding (millions)

 

 

55.2

 

 

 

61.7

 

 

 

55.5

 

 

 

62.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) earnings per common share (in dollars)

 

$

(1.67

)

 

$

0.33

 

 

$

(1.23

)

 

$

1.89

 

Diluted net (loss) earnings per common share (in dollars)

 

$

(1.67

)

 

$

0.32

 

 

$

(1.23

)

 

$

1.88

 

The following table provides the securities that could potentially dilute basic (loss) earnings per common share in the future, but were not included in the computation of diluted (loss) 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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Options to purchase common shares

 

 

407,662

 

 

 

398,869

 

 

 

407,662

 

 

 

325,757

 

18


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 6.

_________________

OTHER OPERATING LOSS (INCOME), NET

Other operating loss (income), net is an aggregate of both recurring and occasional 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

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

$

 

 

$

 

Bad debt expense

 

 

4

 

 

 

 

Environmental provision

 

 

1

 

 

 

1

 

Foreign exchange (gain) loss

 

 

(2

)

 

 

1

 

Other

 

 

(1

)

 

 

(3

)

Other operating loss (income), net

 

 

2

 

 

 

(1

)


16


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

INCOME TAXES

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. The ASU simplifies the accounting for income taxes by eliminating certain exceptions in ASC 740 related to the methodology for calculating income taxes in an interim period. It also clarifies and simplifies other aspects of the accounting for income taxes, improving the consistent application and simplification of U.S. GAAP. For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this standard for its interim period ending September 30, 2020, using the methods directed by the standard. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods, which allowed the Company to recognize a higher tax benefit this quarter than previously allowable. The adoption of this ASU will not change the total income tax benefit the Company is expected to recognize for the full year ending December 31, 2020.


10


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

On March 12, 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The amendments in the ASU are elective and apply to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022.

The Company has begun its impact assessment and while its evaluation of this guidance is in the early stages, the Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

11


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

_________________

ACQUISITION OF BUSINESS

Purchase of Appvion Point of Sale business

On April 27, 2020, Domtar Corporation completed the acquisition of the Point of Sale paper business from Appvion Operation Inc. The business includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property and assumed liabilities related to post-retirement benefits. The results of this business have been included in the consolidated financial statements as of April 27, 2020 and are presented in the Pulp and Paper reportable segment. The purchase price was $20 million in cash plus the book value of raw materials and finished goods inventory, subject to post-closing adjustments. The acquisition was accounted for as a business combination under the acquisition method of accounting. The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which are based on information currently available.

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition

 

 

 

 

 

 

Inventories

 

 

 

$

11

 

Property, plant and equipment

 

 

 

 

23

 

Operating lease right-of-use assets

 

 

 

 

2

 

Total assets

 

 

 

 

36

 

 

 

 

 

 

 

 

Less: Assumed Liabilities

 

 

 

 

6

 

 

 

 

 

 

 

 

Fair value of net assets acquired at the date of acquisition

 

 

 

 

30

 

12


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

________________

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, interest rates and prices of the Company’s common stock with regard to the Company’s stock-based compensation program. 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 Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on 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, 2020, 2Pulp and Paper segment customers located in the U.S. represented 11% or $62 million, and 10% or $55  million, respectively, of the Company’s receivables (December 31, 2019 – 2 Pulp and Paper segment customers located in the U.S. represented 11% or $66 million, and 11% or $65 million, respectively).

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.

EQUITY RISK

The Company is exposed to changes in share prices with regard to its stock-based compensation program. The Company manages its exposure through the use of derivative instruments such as equity swap contracts. In March 2020, the Company entered into a total return swap agreement covering 500,000 common shares maturing on March 4, 2022.

13


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

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 39 months.

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 2020 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

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020 (1)

 

 

2,384,843

 

 

 

$

7

 

 

 

35%

 

2021

 

 

9,270,000

 

 

 

$

27

 

 

 

39%

 

2022

 

 

9,270,000

 

 

 

$

25

 

 

 

37%

 

2023

 

 

4,210,000

 

 

 

$

12

 

 

 

16%

 

(1)

Represents the remaining three months of 2020

(2)

MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of September 30, 2020.

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, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. 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. 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, 2020 to hedge forecasted purchases and sales:

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

 

2020 (1)

 

226 CAD

 

95%

 

 

1 USD = 1.3259

 

1 USD = 1.3426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2021

 

721 CAD

 

76%

 

 

1 USD = 1.3412

 

1 USD = 1.3558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2022

 

304 CAD

 

32%

 

 

1 USD = 1.3606

 

1 USD = 1.3606

(1)Represents the remaining three months of 2020 

The foreign exchange derivative contracts were effective as of September 30, 2020.

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements and disclosures establish 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, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. 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, 2020 and December 31, 2019, 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, 2020

 

 

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

 

 

10

 

 

 

 

 

 

10

 

 

 

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

6

 

 

 

 

 

 

6

 

 

 

 

(a)

Other assets

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

18

 

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

5

 

 

 

 

 

 

5

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Trade and other payables

Currency derivatives

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other liabilities and deferred credits

Natural gas swap contracts

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

10

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

   liability awards

 

 

5

 

 

 

5

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

   liability awards

 

 

13

 

 

 

13

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Equity swap contracts

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Long-term debt

 

 

1,192

 

 

 

 

 

 

1,192

 

 

 

 

(b)

Long-term debt

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $2 million at September 30, 2020, of which a loss of $1 million is expected to 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, 2020.

The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $10 million at September 30, 2020, of which a gain of $5 million is expected to 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, 2020.

16


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value of financial instruments at:

 

December 31, 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

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Other assets

Total Assets

 

 

8

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

9

 

 

 

 

 

 

9

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

8

 

 

 

 

 

 

8

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

19

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

   liability awards

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

   liability awards

 

 

18

 

 

 

18

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Long-term debt

 

 

1,030

 

 

 

 

 

 

1,030

 

 

 

 

(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: Foreign currency forward and option contracts are valued using standard valuation models. 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, 2020 and December 31, 2019. The carrying value of the Company’s long-term debt is $1,099 million and $939 million at September 30, 2020 and December 31, 2019, respectively.

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.

17


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

_________________

EARNINGS (LOSS) PER COMMON SHARE

The following table provides the reconciliation between basic and diluted (loss) earnings per common share:

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net (loss) earnings

 

$

(92

)

 

$

20

 

 

$

(68

)

 

$

118

 

Weighted average number of common shares

   outstanding (millions)

 

 

55.2

 

 

 

61.5

 

 

 

55.5

 

 

 

62.5

 

Effect of dilutive securities (millions)

 

 

 

 

 

0.2

 

 

 

 

 

 

0.2

 

Weighted average number of diluted common shares

   outstanding (millions)

 

 

55.2

 

 

 

61.7

 

 

 

55.5

 

 

 

62.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) earnings per common share (in dollars)

 

$

(1.67

)

 

$

0.33

 

 

$

(1.23

)

 

$

1.89

 

Diluted net (loss) earnings per common share (in dollars)

 

$

(1.67

)

 

$

0.32

 

 

$

(1.23

)

 

$

1.88

 

The following table provides the securities that could potentially dilute basic (loss) earnings per common share in the future, but were not included in the computation of diluted (loss) 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,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Options to purchase common shares

 

 

407,662

 

 

 

398,869

 

 

 

407,662

 

 

 

325,757

 

18


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6.

_________________

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans, including multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and nine months ended September 30, 2020, the pension expense was $11 million and $32 million, respectively (2019 – $10 million and $33 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory 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

 

 

 

September 30, 2020

 

 

September 30, 2020

 

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Service cost

 

 

7

 

 

 

 

 

 

21

 

 

 

1

 

Interest expense

 

 

10

 

 

 

 

 

 

30

 

 

 

1

 

Expected return on plan assets

 

 

(17

)

 

 

 

 

 

(51

)

 

 

 

Amortization of net actuarial loss (gain)

 

 

3

 

 

 

 

 

 

7

 

 

 

(1

)

Curtailment loss (1)

 

 

2

 

 

 

 

 

 

2

 

 

 

 

Amortization of prior year service costs

 

 

 

 

 

 

 

 

1

 

 

 

 

Net periodic benefit cost

 

 

5

 

 

 

 

 

 

10

 

 

 

1

 

(1)

During the third quarter of 2020, the Company recorded $2 million of pension curtailment under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) related to a cost savings program (see Note 12 "Closure and Restructuring Costs and Impairment of Long-Lived Assets" for more details).

19


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

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

 

 

 

September 30, 2019

 

 

September 30, 2019

 

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Service cost

 

 

6

 

 

 

 

 

 

21

 

 

 

1

 

Interest expense

 

 

14

 

 

 

 

 

 

41

 

 

 

1

 

Expected return on plan assets

 

 

(19

)

 

 

 

 

 

(59

)

 

 

 

Amortization of net actuarial loss (gain)

 

 

2

 

 

 

 

 

 

7

 

 

 

(1

)

Amortization of prior year service costs

 

 

1

 

 

 

 

 

 

4

 

 

 

 

Net periodic benefit cost

 

 

4

 

 

 

 

 

 

14

 

 

 

1

 

The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than service cost and curtailment loss, are presented in Non-service components of net periodic benefit cost on the Consolidated Statement of Earnings (loss) and Comprehensive Income (Loss).

For the three and nine months ended September 30, 2020, the Company contributed $8 million and $12 million, respectively (2019 – $7 million and $14 million, respectively) to the pension plans and $1 million and $3 million, respectively (2019 – $1 million and $3 million, respectively) to the other post-retirement benefit plans.

20


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

OTHER OPERATING LOSS (INCOME), NET

Other operating loss (income), net is an aggregate of both recurring and non-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

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Bad debt expense

 

 

 

 

 

1

 

 

 

5

 

 

 

2

 

Environmental provision

 

 

 

 

 

1

 

 

 

1

 

 

 

2

 

Non-production agreement terminated

 

 

 

 

 

 

 

 

(7

)

 

 

 

Foreign exchange loss

 

 

1

 

 

 

1

 

 

 

1

 

 

 

3

 

Other

 

 

(1

)

 

 

 

 

 

(2

)

 

 

(3

)

Other operating loss (income), net

 

 

 

 

 

3

 

 

 

(2

)

 

 

4

 

21


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

_________________

INCOME TAXES

 

For the firstthird quarter of 2020, the Company’s income tax expensebenefit was $3$55 million, consisting of $2 million ofa current income tax expensebenefit of $7 million and a deferred income tax benefit of $48 million. This compares to an income tax benefit of $1 million in the third quarter of 2019, consisting of a current income tax benefit of $3 million and a deferred income tax expense of $2 million. The Company received income tax refunds, net of payments of $1 million during the third quarter of 2020. The effective tax rate was 38% compared with an effective tax rate of -5% in the third quarter of 2019. 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 2020 was significantly impacted by such an adjustment, mainly due to a change in the mix of earnings or loss between tax jurisdictions. The effective tax rate for the third quarter of 2020 was also favorably impacted by the CARES Act, which granted companies the ability to carry back tax losses generated in the U.S. in 2020 to a tax year with earnings that were taxed at a higher statutory tax rate. The effective tax rate for the third quarter of 2019 was favorably impacted by additional R&D tax credits in the U.S. and Spain and by the finalization of certain estimates in connection with the filing of the Company’s 2018 income tax returns.

For the first nine months of 2020, the Company’s income tax benefit was $67 million, consisting of a current income tax benefit of $7 million and a deferred income tax benefit of $60 million. This compares to an income tax expense of $24$28 million in the first quarternine months of 2019, consisting of $27 million ofa current income tax expense of $27 million and a deferred income tax benefitexpense of $3$1 million. The Company received refunds, net of income tax payments, of $25 million during the first quarternine months of 2020. The effective tax rate was 33%50% compared withto an effective tax rate of 23%19% in the first quarternine months of 2019. The effective tax rate for the first nine months of 2020 was significantly impacted by the mix of earnings or loss in the Company’s major jurisdictions, by the recognition of additional tax credits in various jurisdictions, and by the ability to carry back U.S. tax losses generated in 2020 to a tax year with earnings that were taxed at a higher statutory tax rate. These favorable impacts were partially offset by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits. The effective tax rate for the first quarternine months of 2019 was impacted by the inclusion of additional forecasted tax expense for 2019 related to Global Intangible Low-Taxed Income and for forecasted withholding tax on unremitted foreign earnings. The effective tax rate for the first quarter of 2019 was also 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 $1 million researchvaluation allowance against certain state tax credit carryforwards and development creditby the finalization of certain estimates in a U.S. state.connection with the filing of the Company’s 2018 income tax returns.

 

 


17

22

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 8.9.

_________________

INVENTORIES

The following table presents the components of inventories:

 

 

March 31,

 

 

December 31,

 

September 30,

 

 

December 31,

 

2020

 

 

2019

 

2020

 

 

2019

 

$

 

 

$

 

$

 

 

$

Work in process and finished goods

 

 

372

 

 

401

 

 

405

 

 

401

Raw materials

 

 

142

 

 

153

 

 

147

 

 

153

Operating and maintenance supplies

 

 

226

 

 

232

 

 

212

 

 

232

 

 

740

 

 

786

 

 

764

 

 

786

 


18

23

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 9.10.

_________________

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 1312 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.

 

The components of lease expense were as follows:

 

 

 

 

 

 

 

For the three months ended

 

 

 

 

 

 

 

For the three months ended

 

 

For the nine months ended

 

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

$

 

 

$

 

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Operating lease expense

Operating lease expense

 

8

 

 

 

7

 

 

Operating lease expense

 

8

 

 

 

8

 

 

 

24

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance lease expense:

Finance lease expense:

 

 

 

 

 

 

 

 

Finance lease expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

Amortization of right-of-use assets

 

 

 

 

 

 

Amortization of right-of-use assets

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

 

Interest on lease liabilities

Interest on lease liabilities

 

 

 

 

 

 

Interest on lease liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Total finance lease expense

Total finance lease expense

 

 

 

 

 

 

Total finance lease expense

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

 

 

 

 

For the three months ended

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended

 

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Cash paid for amounts included in the measurement of lease liabilities:

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

8

 

 

 

7

 

 

Operating cash flows from operating leases

 

 

 

 

 

25

 

 

 

23

 

 

Operating cash flows from finance leases

 

 

 

 

 

 

Operating cash flows from finance leases

 

 

 

 

 

1

 

 

 

1

 

 

Financing cash flows from finance leases

 

 

 

 

 

 

Financing cash flows from finance leases

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease liabilities:

Right-of-use assets obtained in exchange for lease liabilities:

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

3

 

 

 

8

 

 

Operating leases

 

 

 

 

 

7

 

 

 

24

 

 

Finance leases

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

 

 

 

 

 

19

24

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 9.10. LEASES (CONTINUED)

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Operating leases

 

 

 

 

 

 

 

 

 

Operating leases right-of-use assets

 

77

 

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease liabilities due within one year

 

27

 

 

 

28

 

 

 

Operating lease liabilities

 

65

 

 

 

69

 

 

 

 

 

92

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

13

 

 

 

15

 

 

 

Accumulated depreciation

 

(6

)

 

 

(7

)

 

 

 

 

7

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due within one year

 

1

 

 

 

1

 

 

 

Long-term debt

 

8

 

 

 

9

 

 

 

 

 

9

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term

 

 

 

 

 

 

 

 

 

 

Operating leases

4.8 years

 

 

4.9 years

 

 

 

 

Finance leases

9.8 years

 

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

Operating leases

 

4.5

%

 

 

4.6

%

 

 

 

Finance leases

 

6.7

%

 

 

6.7

%

 

Maturities of lease liabilities at March 31, 2020 were as follows:

 

 

 

 

 

Operating leases

 

 

Finance leases

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

2020

 

 

2020

 

 

 

 

 

 

 

$

 

 

$

 

 

2020 (1)

 

 

 

 

 

21

 

 

 

1

 

 

2021

 

 

 

 

 

25

 

 

 

2

 

 

2022

 

 

 

 

 

20

 

 

 

1

 

 

2023

 

 

 

 

 

14

 

 

 

1

 

 

2024

 

 

 

 

 

9

 

 

 

1

 

 

Thereafter

 

 

 

 

 

14

 

 

 

6

 

 

Total lease payments

 

 

 

 

 

103

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Imputed interest

 

 

 

 

 

11

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease liabilities

 

 

 

 

 

92

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the remaining nine months of 2020.

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Operating leases

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases right-of-use assets

 

 

 

 

 

72

 

 

 

81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease liabilities due within one year

 

 

 

 

 

27

 

 

 

28

 

 

 

Operating lease liabilities

 

 

 

 

 

58

 

 

 

69

 

 

 

 

 

 

 

 

 

85

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 

 

 

14

 

 

 

15

 

 

 

Accumulated depreciation

 

 

 

 

 

(7

)

 

 

(7

)

 

 

 

 

 

 

 

 

7

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due within one year

 

 

 

 

 

1

 

 

 

1

 

 

 

Long-term debt

 

 

 

 

 

8

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

4.5 years

 

 

4.9 years

 

 

 

 

Finance leases

 

 

 

 

9.3 years

 

 

10 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

 

4.5

%

 

 

4.6

%

 

 

 

Finance leases

 

 

 

 

 

6.3

%

 

 

6.7

%

 

 

 

20

25

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 10. LEASES (CONTINUED)

Maturities of lease liabilities September 30, 2020 were as follows:

 

 

 

 

 

 

 

 

Operating leases

 

 

Finance leases

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

 

 

 

 

 

 

 

 

2020

 

 

2020

 

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

2020 (1)

 

 

 

 

 

 

 

 

7

 

 

 

 

 

2021

 

 

 

 

 

 

 

 

26

 

 

 

2

 

 

2022

 

 

 

 

 

 

 

 

21

 

 

 

2

 

 

2023

 

 

 

 

 

 

 

 

16

 

 

 

1

 

 

2024

 

 

 

 

 

 

 

 

9

 

 

 

1

 

 

Thereafter

 

 

 

 

 

 

 

 

15

 

 

 

6

 

 

Total lease payments

 

 

 

 

 

 

 

 

94

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Imputed interest

 

 

 

 

 

 

 

 

9

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease liabilities

 

 

 

 

 

 

 

 

85

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the remaining three months of 2020.

26


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11.

_________________

INTANGIBLE ASSETS

The following table presents the components of intangible assets:

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

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

 

 

376

 

 

 

(111

)

 

 

265

 

 

 

380

 

 

 

(108

)

 

 

272

 

 

10 – 40

 

 

388

 

 

 

(123

)

 

 

265

 

 

 

380

 

 

 

(108

)

 

 

272

 

Technology

 

7 – 20

 

 

8

 

 

 

(5

)

 

 

3

 

 

 

8

 

 

 

(5

)

 

 

3

 

 

7 – 20

 

 

8

 

 

 

(5

)

 

 

3

 

 

 

8

 

 

 

(5

)

 

 

3

 

Non-Compete

 

9

 

 

1

 

 

 

(1

)

 

 

 

 

 

1

 

 

 

(1

)

 

 

 

 

9

 

 

1

 

 

 

(1

)

 

 

 

 

 

1

 

 

 

(1

)

 

 

 

License rights

 

12

 

 

28

 

 

 

(16

)

 

 

12

 

 

 

29

 

 

 

(16

)

 

 

13

 

 

12

 

 

28

 

 

 

(17

)

 

 

11

 

 

 

29

 

 

 

(16

)

 

 

13

 

 

 

 

 

416

 

 

 

(134

)

 

 

282

 

 

 

421

 

 

 

(131

)

 

 

290

 

 

 

 

 

428

 

 

 

(147

)

 

 

281

 

 

 

421

 

 

 

(131

)

 

 

290

 

Indefinite-lived intangible

assets not subject

to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water rights

 

 

 

 

4

 

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

4

 

 

 

 

 

4

 

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

4

 

Trade names

 

 

 

 

231

 

 

 

 

 

 

231

 

 

 

235

 

 

 

 

 

 

235

 

 

 

 

 

242

 

 

 

 

 

 

242

 

 

 

235

 

 

 

 

 

 

235

 

License rights

 

 

 

 

6

 

 

 

 

 

 

6

 

 

 

6

 

 

 

 

 

 

6

 

 

 

 

 

6

 

 

 

 

 

 

6

 

 

 

6

 

 

 

 

 

 

6

 

Catalog rights

 

 

 

 

38

 

 

 

 

 

 

38

 

 

 

38

 

 

 

 

 

 

38

 

 

 

 

 

40

 

 

 

 

 

 

40

 

 

 

38

 

 

 

 

 

 

38

 

Total

 

 

 

 

695

 

 

 

(134

)

 

 

561

 

 

 

704

 

 

 

(131

)

 

 

573

 

 

 

 

 

720

 

 

 

(147

)

 

 

573

 

 

 

704

 

 

 

(131

)

 

 

573

 

 

Amortization expense related to intangible assets for the three and nine months ended March 31,September 30, 2020 was $5 million and $14 million, respectively (2019 – $5 million)million and $14 million, respectively).

Amortization expense for the next five years related to intangible assets is expected to be as follows:

 

 

 

2020

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

 

$

 

$

 

 

$

 

 

$

 

 

$

 

Amortization expense related to intangible assets

 

21 (1)

 

 

21

 

 

 

20

 

 

 

20

 

 

 

20

 

 

 

2020

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

 

$

 

$

 

 

$

 

 

$

 

 

$

 

Amortization expense related to intangible assets

 

21 (1)

 

 

21

 

 

 

21

 

 

 

20

 

 

 

20

 

 

 

(1)

Represents twelve months of amortization

 


21

27

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 11.12.

_________________

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

Cost reduction program

The Company is implementing a cost savings program. As part of this program, on August 7, 2020, the Company announced the permanent closure of the uncoated freesheet manufacturing at the Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at the Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. These actions will reduce the Company’s annual uncoated freesheet paper capacity by approximately 721,000 short tons, and will result in a workforce reduction of approximately 750 employees. The Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations. The Ridgefields converting center ceased operations at the end of the third quarter of 2020, while the Port Huron mill is expected to shut down by the end of the first quarter of 2021.

The Company plans to enter the linerboard market with the conversion of the Kingsport paper machine. Domtar estimates the conversion cost to be between $300 and $350 million. As a result of the decision to change the nature and use of the Kingsport, Tennessee mill, the carrying amount of the remaining assets of the Kingsport mill has been tested for impairment and resulted in no additional impairment charge in the quarter. The carrying amount of these assets was approximately $80 million at September 30, 2020. The Company is also completing the conversion of the Ashdown mill to 100% softwood and fluff pulp, which is requiring $15 to $20 million of capital investments and is expected to be completed within nine to twelve months. During the third quarter of 2020, the Company recorded $111 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, the Company recorded $29 million of severance and termination costs, $31 million of inventory obsolescence, $2 million of pension curtailment loss and $6 million of other costs, under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

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 took place at the Ashdown, Arkansas pulp and paper mill and the Port Huron, Michigan paper mill. As a result, the Company recorded, in the third quarter of 2019, $32 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) 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 March 31,September 30, 2019, the Company recorded $10$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 (Loss) and Comprehensive Income (Loss) Income. The. For the three and nine months ended September 30, 2019, the Company also recorded $3$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.

Other costs

For the three and nine months ended September 30, 2020, other costs related to previous and ongoing closures and restructuring included nil and $1 million, respectively, of severance and termination costs and a $1 million write-down of inventory under Closure and restructuring costs.(2019 – nil).

 


2228

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12.13.

_________________

LONG-TERM DEBT

TERM LOAN

On May 5, 2020, the Company entered into a $300 million Term Loan Agreement (the “Term Loan Agreement”) that matures on May 5, 2025. The Company used borrowings under the Term Loan Agreement to repay other debt and to pay related fees and expenses. Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 2.5% and require principal repayments of $3 million each quarter. 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. All borrowings under the Term Loan are unsecured. Certain domestic subsidiaries of the Company guarantee the obligations arising under the Term Loan Agreement.

29


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14.

_________________

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component(1) for the threenine months ended March 31,September 30, 2020 and the year ended December 31, 2019:

 

 

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, 2018

 

 

(24

)

 

 

(231

)

 

 

11

 

 

 

(223

)

 

 

(467

)

 

 

(24

)

 

 

(231

)

 

 

11

 

 

 

(223

)

 

 

(467

)

Natural gas swap contracts

 

 

(10

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(10

)

 

 

(10

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(10

)

Currency options

 

 

5

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

5

 

 

 

5

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

5

 

Foreign exchange forward contracts

 

 

16

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

16

 

 

 

16

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

16

 

Net gain

 

N/A

 

 

1

 

 

1

 

 

N/A

 

 

 

2

 

 

N/A

 

 

1

 

 

1

 

 

N/A

 

 

 

2

 

Foreign currency items

 

N/A

 

 

N/A

 

 

N/A

 

 

 

21

 

 

 

21

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

21

 

 

 

21

 

Other comprehensive income

before reclassifications

 

 

11

 

 

 

1

 

 

 

1

 

 

 

21

 

 

 

34

 

 

 

11

 

 

 

1

 

 

 

1

 

 

 

21

 

 

 

34

 

Amounts reclassified from Accumulated

other comprehensive loss

 

 

8

 

 

 

33

 

 

 

(1

)

 

 

 

 

 

40

 

 

 

8

 

 

 

33

 

 

 

(1

)

 

 

 

 

 

40

 

Net current period other comprehensive

income

 

 

19

 

 

 

34

 

 

 

 

 

 

21

 

 

 

74

 

 

 

19

 

 

 

34

 

 

 

 

 

 

21

 

 

 

74

 

Balance at December 31, 2019

 

 

(5

)

 

 

(197

)

 

 

11

 

 

 

(202

)

 

 

(393

)

 

 

(5

)

 

 

(197

)

 

 

11

 

 

 

(202

)

 

 

(393

)

Natural gas swap contracts

 

 

(2

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(2

)

 

 

3

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

3

 

Currency options

 

 

(8

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(8

)

 

 

(1

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(1

)

Foreign exchange forward contracts

 

 

(39

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(39

)

 

 

(2

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(2

)

Net loss

 

N/A

 

 

 

(41

)

 

 

 

 

N/A

 

 

 

(41

)

Foreign currency items

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(74

)

 

 

(74

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

5

 

 

 

5

 

Other comprehensive loss

before reclassifications

 

 

(49

)

 

 

 

 

 

 

 

 

(74

)

 

 

(123

)

Other comprehensive (loss) income

before reclassifications

 

 

 

 

 

(41

)

 

 

 

 

 

5

 

 

 

(36

)

Amounts reclassified from Accumulated

other comprehensive loss

 

 

7

 

 

 

1

 

 

 

 

 

 

 

 

 

8

 

 

 

14

 

 

 

7

 

 

 

(1

)

 

 

 

 

 

20

 

Net current period other comprehensive

(loss) income

 

 

(42

)

 

 

1

 

 

 

 

 

 

(74

)

 

 

(115

)

Balance at March 31, 2020

 

 

(47

)

 

 

(196

)

 

 

11

 

 

 

(276

)

 

 

(508

)

Net current period other comprehensive

income (loss)

 

 

14

 

 

 

(34

)

 

 

(1

)

 

 

5

 

 

 

(16

)

Balance at September 30, 2020

 

 

9

 

 

 

(231

)

 

 

10

 

 

 

(197

)

 

 

(409

)

 

(1)

All amounts are after tax. Amounts in parentheses indicate losses.

(2)

The projected benefit obligation is actuarially determined on an annual basis as of December 31.

 

 

2330

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12.14. 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, 2020 and 2019:

 

Details about Accumulated other comprehensive loss components

 

Amounts reclassified from

Accumulated other

comprehensive loss

 

 

Amounts reclassified from

Accumulated other

comprehensive loss

 

 

For the three months ended

 

 

For the three months ended

 

 

March 31, 2020

 

 

March 31, 2019

 

 

September 30, 2020

 

 

September 30, 2019

 

 

$

 

 

$

 

 

$

 

 

$

 

Net derivative losses on cash flow hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas swap contracts (1)

 

 

(5

)

 

 

 

 

 

(2

)

 

 

(2

)

Currency options and forwards (1)

 

 

(4

)

 

 

(1

)

 

 

 

 

 

(2

)

Total before tax

 

 

(9

)

 

 

(1

)

 

 

(2

)

 

 

(4

)

Tax benefit

 

 

2

 

 

 

 

 

 

1

 

 

 

1

 

Net of tax

 

 

(7

)

 

 

(1

)

 

 

(1

)

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss (2)

 

 

(2

)

 

 

(3

)

 

 

(3

)

 

 

(2

)

Amortization of prior year service cost (2)

 

 

 

 

 

(1

)

Curtailment loss (2)

 

 

(2

)

 

 

 

Amortization of prior year service costs (2)

 

 

 

 

 

(1

)

Total before tax

 

 

(2

)

 

 

(4

)

 

 

(5

)

 

 

(3

)

Tax benefit

 

 

1

 

 

 

1

 

 

 

2

 

 

 

1

 

Net of tax

 

 

(1

)

 

 

(3

)

 

 

(3

)

 

 

(2

)

 

 

 

 

 

 

 

 

Amortization of other post-retirement benefit items

 

 

 

 

 

 

 

 

Amortization of net actuarial gain (2)

 

 

 

 

 

 

Amortization of prior year service costs (2)

 

 

 

 

 

 

Total before tax

 

 

 

 

 

 

Tax expense

 

 

 

 

 

 

Net of tax

 

 

 

 

 

 


31


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

 

 

Amounts reclassified from

Accumulated other

comprehensive loss

 

 

 

For the nine months ended

 

 

 

September 30, 2020

 

 

September 30, 2019

 

 

 

$

 

 

$

 

Net derivatives losses on cash flow hedge

 

 

 

 

 

 

 

 

Natural gas swap contracts (1)

 

 

(10

)

 

 

(2

)

Currency options and forwards (1)

 

 

(9

)

 

 

(5

)

Total before tax

 

 

(19

)

 

 

(7

)

Tax benefit

 

 

5

 

 

 

2

 

Net of tax

 

 

(14

)

 

 

(5

)

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension items

 

 

 

 

 

 

 

 

Amortization of net actuarial loss (2)

 

 

(7

)

 

 

(7

)

Curtailment loss (2)

 

 

(2

)

 

 

 

Amortization of prior year service costs (2)

 

 

(1

)

 

 

(4

)

Total before tax

 

 

(10

)

 

 

(11

)

Tax benefit

 

 

3

 

 

 

3

 

Net of tax

 

 

(7

)

 

 

(8

)

 

 

 

 

 

 

 

 

 

Amortization of other post-retirement benefit items

 

 

 

 

 

 

 

 

Amortization of net actuarial gain (2)

 

 

1

 

 

 

1

 

Amortization of prior year service costs (2)

 

 

 

 

 

 

Total before tax

 

 

1

 

 

 

1

 

Tax expense

 

 

 

 

 

 

Net of tax

 

 

1

 

 

 

1

 

 

(1)(1)

These amounts are included in Cost of salesSales in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) Income..

(2)(2)

These amounts are included in the computation of net periodic benefit cost (see Note 56 “Pension Plans and Other Post-Retirement Benefit Plans” for more details).

 

 

 

24

32

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13.15.

_________________

SHAREHOLDERS’ EQUITY

DIVIDENDS

On February 18, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.455 per share, to be paid to holders of the Company’s common stock. Total dividends of approximately $25 million were paid on April 15, 2020 to shareholders of record on April 2, 2020.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (“the Program”(the “Program”) of up to $1.3 billion. 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 quarternine months of 2020, the Company repurchased 1,798,306 shares at an average price of $33.05 for a total cost of $59 million.

During the first quarternine months of 2019, there were 0the Company repurchased 4,076,723 shares repurchased under the Program.   at an average price of $35.47 for a total cost of $145 million.

SUSPENSION OF CAPITAL RETURN PROGRAM

DueOn May 5, 2020, due to the unprecedented market conditions and uncertainty caused by COVID-19, the Company has suspended the payment of its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment. The Board of Directors will continue to evaluate the Company’s capital return program based upon customary considerations, including market conditions.

 


25

33

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14.16.

_________________

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 was completed in the first quarter of 2019. The Company previously recorded an environmental reserve to address its estimated exposure.

A former owner of the Company’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 or generated 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 pollutants,pollutant, including mercury, by the historical operators of the Dryden Property. This Indemnity subsequently was assigned to Domtarthe Company in connection with its 2007 purchase of the Dryden Property.

As the current owner of the Dryden Property, Domtarthe Company is actively engaged with the Province with respect to the management of the historical contamination.

The Province issued a Director's order under environmental laws to certain prior owners of the Dryden Property in connection with a nearby waste disposal site that has never has been owned by Domtar.the Company. The Director's order required certain work to be conducted by those prior owners. The prior owners asserted that the Indemnity covered the work required by the Director’s order. Following extensive litigation, the Supreme Court of Canada found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such as the Director's order.

In the future, the Province may challenge whether Domtarthe Company has the benefit of the Indemnity. In addition to the Indemnity, Domtarthe Company has other recourses relating to the historical contamination.

The situation involving the historical contamination is continuing to develop, and Domtarthe Company cannot predict its outcome. While Domtarthe Company currently does not believe that it will be required to incur costs that would have a material impact on its results of operations or financial condition, there is no certainty that this is in fact the case.

The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:

 

 

 

March 31,September 30, 2020

 

 

 

$

 

Balance at beginning of year

 

 

35

 

Additions and other changes

 

 

14

 

Environmental spending

 

 

(12

)

Effect of foreign currency exchange rate change

 

 

(21

)

Balance at end of period

 

 

3336

 

 

26


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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,”“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 former operating sites, due to possible soil, sediment or groundwater contamination.

34


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.SEPTEMBER 30, 2020

The EPA has repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) rule. Unlike the Clean Power Plan, which would have required significant changes across the entire power sector, ACE only requires states to develop plans for efficiency improvements at coal-fired electric utility generating units. The rule has been challenged in the U.S. Court of Appeals for the D.C. Circuit. Regardless of the outcome for the ACE rule, 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 province of Quebec has a greenhouse gases (“GHG”) cap-and-trade system with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company does not expect its facilities to be disproportionately affected by these measures compared to the other pulp and paper producers located in these provinces.(UNAUDITED)

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 has imposed its carbon pricing program for regulating GHG emissions in Ontario which took effect on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario 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.

NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 March 31,September 30, 2020, 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 March 31,September 30, 2020, 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, 0 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 March 31,As of September 30, 2020, the Company has 0t recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

GENERAL RISK FACTORS

Climate change and air quality regulation

27Various 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 EPA repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”) rule. Unlike the Clean Power Plan, which would have required significant changes across the entire power sector, ACE only requires states to develop plans for efficiency improvements at coal-fired electric utility generating units. The rule has been challenged in the U.S. Court of Appeals for the D.C. Circuit. Regardless of the outcome for the ACE rule, 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 province of Quebec has a greenhouse gases (“GHG”) cap-and-trade system with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company does not expect its facilities to be disproportionately affected by these measures 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 has imposed its carbon pricing program for regulating GHG emissions in Ontario, which took effect on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario finalized its own GHG Emission Performance Standards regulation. The Ontario Government has been in discussions with the Canadian Government to replace the federal program in Ontario with its provincial program. The Ontario Government has announced the federal government will accept its program as an alternative to the federal program. Timing for this transition and any additional environmental costs that may result from this effort cannot be reasonably estimated at this time.


35

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15.16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The EPA proposed to revise its Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”), or Boiler MACT, in a notice published on August 24, 2020. The proposed rule is a response to two court decisions that remanded certain issues for further review by the EPA, and it includes revisions to 34 different emission limitations that could apply to some of the Company’s facilities. Although the EPA has indicated that a small number of facilities may need to reduce emissions further compared to the current limits, the Company does not expect its facilities to be disproportionately affected compared to other U.S. pulp and paper producers.

36


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17.

_________________

SEGMENT DISCLOSURES

The Company’s 2 reportable segments described below also represent its 2 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.

Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.

As a result of changes in Domtar’s organization structure, the Company has changed its segment reporting. Starting January 1, 2020, Domtar’s materials business, EAM Corporation, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under its Personal Care segment is now presented under its Pulp and Paper segment. Prior period segment results have been restated to the new segment presentation with no significant impact on segment results. There were no changes to the Company’s consolidated sales or operating income.

 

28

37

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15.17. SEGMENT DISCLOSURES (CONTINUED)

 

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 three months ended

 

 

For the nine months ended

 

SEGMENT DATA

 

March 31, 2020

 

 

March 31, 2019

 

 

September 30, 2020

 

 

September 30, 2019

 

 

September 30, 2020

 

 

September 30, 2019

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales by segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

1,031

 

 

 

1,157

 

 

 

899

 

 

 

1,079

 

 

 

2,732

 

 

 

3,342

 

Personal Care

 

 

266

 

 

 

239

 

 

 

243

 

 

 

219

 

 

 

738

 

 

 

686

 

Total for reportable segments

 

 

1,297

 

 

 

1,396

 

 

 

1,142

 

 

 

1,298

 

 

 

3,470

 

 

 

4,028

 

Intersegment sales

 

 

(19

)

 

 

(20

)

 

 

(18

)

 

 

(15

)

 

 

(56

)

 

 

(52

)

Consolidated sales

 

 

1,278

 

 

 

1,376

 

 

 

1,124

 

 

 

1,283

 

 

 

3,414

 

 

 

3,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales by product group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Communication papers

 

 

623

 

 

 

685

 

 

 

483

 

 

 

635

 

 

 

1,491

 

 

 

1,963

 

Specialty and packaging papers

 

 

150

 

 

 

169

 

 

 

148

 

 

 

159

 

 

 

425

 

 

 

490

 

Market pulp

 

 

231

 

 

 

275

 

 

 

242

 

 

 

262

 

 

 

734

 

 

 

812

 

Absorbent hygiene products

 

 

274

 

 

 

247

 

 

 

251

 

 

 

227

 

 

 

764

 

 

 

711

 

Consolidated sales

 

 

1,278

 

 

 

1,376

 

 

 

1,124

 

��

 

1,283

 

 

 

3,414

 

 

 

3,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

58

 

 

 

58

 

 

 

56

 

 

 

57

 

 

 

170

 

 

 

174

 

Personal Care

 

 

14

 

 

 

15

 

 

 

15

 

 

 

15

 

 

 

44

 

 

 

45

 

Total for reportable segments

 

 

72

 

 

 

73

 

 

 

71

 

 

 

72

 

 

 

214

 

 

 

219

 

Impairment of long-lived assets - Pulp and Paper

 

 

111

 

 

 

32

 

 

 

111

 

 

 

32

 

Impairment of long-lived assets - Personal Care

 

 

 

 

 

10

 

 

 

 

 

 

1

 

 

 

 

 

 

26

 

Consolidated depreciation and amortization and

impairment of long-lived assets

 

 

72

 

 

 

83

 

 

 

182

 

 

 

105

 

 

 

325

 

 

 

277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

 

Operating (loss) income (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

4

 

 

 

144

 

 

 

(140

)

 

 

31

 

 

 

(133

)

 

 

237

 

Personal Care

 

 

20

 

 

 

(8

)

 

 

16

 

 

 

2

 

 

 

54

 

 

 

(24

)

Corporate

 

 

(5

)

 

 

(21

)

 

 

(12

)

 

 

(4

)

 

 

(24

)

 

 

(35

)

Consolidated operating income

 

 

19

 

 

 

115

 

Consolidated operating (loss) income

 

 

(136

)

 

 

29

 

 

 

(103

)

 

 

178

 

Interest expense, net

 

 

14

 

 

 

13

 

 

 

14

 

 

 

12

 

 

 

43

 

 

 

38

 

Non-service components of net periodic benefit cost

 

 

(4

)

 

 

(3

)

 

 

(4

)

 

 

(2

)

 

 

(13

)

 

 

(7

)

Earnings before income taxes and equity loss

 

 

9

 

 

 

105

 

Income tax expense

 

 

3

 

 

 

24

 

(Loss) earnings before income taxes and equity loss

 

 

(146

)

 

 

19

 

 

 

(133

)

 

 

147

 

Income tax (benefit) expense

 

 

(55

)

 

 

(1

)

 

 

(67

)

 

 

28

 

Equity loss, net of taxes

 

 

1

 

 

 

1

 

 

 

1

 

 

 

 

 

 

2

 

 

 

1

 

Net earnings

 

 

5

 

 

 

80

 

Net (loss) earnings

 

 

(92

)

 

 

20

 

 

 

(68

)

 

 

118

 

(1)

The Government of Canada created the Canada Emergency Wage Subsidy (“CEWS”) to provide financial support for businesses during the COVID-19 pandemic and prevent large layoffs. CEWS allows eligible entities to receive a subsidy retroactive to March 15, 2020. The Company qualified and applied for the first seven periods identified under CEWS, from March 15 through September 26, 2020. For the three months ended September 30, 2020, the Company recognized $9 million of income (CDN $12 million) ($8 million in Cost of sales (CDN $10 million) and $1 million in Selling, general and administrative (CDN $2 million)) related to this program. For the nine months ended September 30, 2020, the Company recognized $34 million of income (CDN $46 million) ($29 million in Cost of sales (CDN $38 million) and $5 million in Selling, general and administrative (CDN $8 million)) related to this program.

 

2938

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16.18.

_________________

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 March 31,September 30, 2020 and December 31, 2019, the Statements of Earnings (Loss) and Comprehensive Income (Loss) Incomefor the three and nine months ended September 30, 2020 and 2019 and the Statements of Cash Flows for the threenine months ended March 31,September 30, 2020 and 2019 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

 

 

March 31, 2020

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

AND COMPREHENSIVE LOSS

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

(LOSS) AND COMPREHENSIVE INCOME (LOSS)

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

 

 

 

 

1,045

 

 

 

465

 

 

 

(232

)

 

 

1,278

 

 

 

 

 

 

918

 

 

 

458

 

 

 

(252

)

 

 

1,124

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

 

 

 

947

 

 

 

368

 

 

 

(232

)

 

 

1,083

 

 

 

 

 

 

814

 

 

 

349

 

 

 

(252

)

 

 

911

 

Depreciation and amortization

 

 

 

 

 

51

 

 

 

21

 

 

 

 

 

 

72

 

 

 

 

 

 

49

 

 

 

22

 

 

 

 

 

 

71

 

Selling, general and administrative

 

 

2

 

 

 

26

 

 

 

74

 

 

 

 

 

 

102

 

 

 

2

 

 

 

8

 

 

 

89

 

 

 

 

 

 

99

 

Other operating loss (income), net

 

 

 

 

 

4

 

 

 

(2

)

 

 

 

 

 

2

 

Impairment of long-lived assets

 

 

 

 

 

111

 

 

 

 

 

 

 

 

 

111

 

Closure and restructuring costs

 

 

 

 

 

64

 

 

 

4

 

 

 

 

 

 

68

 

 

 

2

 

 

 

1,028

 

 

 

461

 

 

 

(232

)

 

 

1,259

 

 

 

2

 

 

 

1,046

 

 

 

464

 

 

 

(252

)

 

 

1,260

 

Operating (loss) income

 

 

(2

)

 

 

17

 

 

 

4

 

 

 

 

 

 

19

 

Operating loss

 

 

(2

)

 

 

(128

)

 

 

(6

)

 

 

 

 

 

(136

)

Interest expense (income), net

 

 

16

 

 

 

19

 

 

 

(21

)

 

 

 

 

 

14

 

 

 

17

 

 

 

18

 

 

 

(21

)

 

 

 

 

 

14

 

Non-service components of net periodic benefit cost

 

 

 

 

 

(1

)

 

 

(3

)

 

 

 

 

 

(4

)

 

 

 

 

 

(1

)

 

 

(3

)

 

 

 

 

 

(4

)

(Loss) earnings before income taxes

 

 

(18

)

 

 

(1

)

 

 

28

 

 

 

 

 

 

9

 

Income tax (benefit) expense

 

 

(2

)

 

 

3

 

 

 

2

 

 

 

 

 

 

3

 

(Loss) earnings before income taxes and equity loss

 

 

(19

)

 

 

(145

)

 

 

18

 

 

 

 

 

 

(146

)

Income tax expense (benefit)

 

 

59

 

 

 

11

 

 

 

(125

)

 

 

 

 

 

(55

)

Equity loss, net of taxes

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Share in earnings of equity accounted investees

 

 

21

 

 

 

26

 

 

 

 

 

 

(47

)

 

 

 

Net earnings

 

 

5

 

 

 

21

 

 

 

26

 

 

 

(47

)

 

 

5

 

Other comprehensive loss

 

 

(115

)

 

 

(117

)

 

 

(73

)

 

 

190

 

 

 

(115

)

Comprehensive loss

 

 

(110

)

 

 

(96

)

 

 

(47

)

 

 

143

 

 

 

(110

)

Share in (loss) earnings of equity accounted investees

 

 

(14

)

 

 

142

 

 

 

 

 

 

(128

)

 

 

 

Net (loss) earnings

 

 

(92

)

 

 

(14

)

 

 

142

 

 

 

(128

)

 

 

(92

)

Other comprehensive income

 

 

23

 

 

 

16

 

 

 

41

 

 

 

(57

)

 

 

23

 

Comprehensive (loss) income

 

 

(69

)

 

 

2

 

 

 

183

 

 

 

(185

)

 

 

(69

)

 

30

39

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16.18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

 

For the nine months ended

 

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (LOSS)

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

AND COMPREHENSIVE INCOME (LOSS)

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

 

 

 

 

2,775

 

 

 

1,342

 

 

 

(703

)

 

 

3,414

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

 

 

 

2,504

 

 

 

1,030

 

 

 

(703

)

 

 

2,831

 

Depreciation and amortization

 

 

 

 

 

150

 

 

 

64

 

 

 

 

 

 

214

 

Selling, general and administrative

 

 

7

 

 

 

80

 

 

 

207

 

 

 

 

 

 

294

 

Impairment of long-lived assets

 

 

 

 

 

111

 

 

 

 

 

 

 

 

 

111

 

Closure and restructuring costs

 

 

 

 

 

65

 

 

 

4

 

 

 

 

 

 

69

 

Other operating loss (income), net

 

 

1

 

 

 

4

 

 

 

(7

)

 

 

 

 

 

(2

)

 

 

 

8

 

 

 

2,914

 

 

 

1,298

 

 

 

(703

)

 

 

3,517

 

Operating (loss) income

 

 

(8

)

 

 

(139

)

 

 

44

 

 

 

 

 

 

(103

)

Interest expense (income), net

 

 

49

 

 

 

56

 

 

 

(62

)

 

 

 

 

 

43

 

Non-service components of net periodic benefit cost

 

 

 

 

 

(5

)

 

 

(8

)

 

 

 

 

 

(13

)

(Loss) earnings before income taxes and equity loss

 

 

(57

)

 

 

(190

)

 

 

114

 

 

 

 

 

 

(133

)

Income tax (benefit) expense

 

 

(35

)

 

 

(89

)

 

 

57

 

 

 

 

 

 

(67

)

Equity loss, net of taxes

 

 

 

 

 

1

 

 

 

1

 

 

 

 

 

 

2

 

Share in (loss) earnings of equity accounted investees

 

 

(46

)

 

 

56

 

 

 

 

 

 

(10

)

 

 

 

Net (loss) earnings

 

 

(68

)

 

 

(46

)

 

 

56

 

 

 

(10

)

 

 

(68

)

Other comprehensive (loss) income

 

 

(16

)

 

 

(27

)

 

 

8

 

 

 

19

 

 

 

(16

)

Comprehensive (loss) income

 

 

(84

)

 

 

(73

)

 

 

64

 

 

 

9

 

 

 

(84

)

 

 

For the three months ended

 

 

For the three months ended

 

 

March 31, 2019

 

 

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

 

 

 

 

 

1,126

 

 

 

531

 

 

 

(281

)

 

 

1,376

 

 

 

 

 

 

1,060

 

 

 

459

 

 

 

(236

)

 

 

1,283

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

 

 

 

930

 

 

 

403

 

 

 

(281

)

 

 

1,052

 

 

 

 

 

 

891

 

 

 

386

 

 

 

(236

)

 

 

1,041

 

Depreciation and amortization

 

 

 

 

 

51

 

 

 

22

 

 

 

 

 

 

73

 

 

 

 

 

 

51

 

 

 

21

 

 

 

 

 

 

72

 

Selling, general and administrative

 

 

6

 

 

 

56

 

 

 

61

 

 

 

 

 

 

123

 

 

 

 

 

 

59

 

 

 

35

 

 

 

 

 

 

94

 

Impairment of long-lived assets

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

33

 

Closure and restructuring costs

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

4

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Other operating (income) loss, net

 

 

 

 

 

(4

)

 

 

3

 

 

 

 

 

 

(1

)

Other operating loss, net

 

 

 

 

 

1

 

 

 

2

 

 

 

 

 

 

3

 

 

 

6

 

 

 

1,045

 

 

 

491

 

 

 

(281

)

 

 

1,261

 

 

 

 

 

 

1,046

 

 

 

444

 

 

 

(236

)

 

 

1,254

 

Operating (loss) income

 

 

(6

)

 

 

81

 

 

 

40

 

 

 

 

 

 

115

 

Operating income

 

 

 

 

 

14

 

 

 

15

 

 

 

 

 

 

29

 

Interest expense (income), net

 

 

17

 

 

 

20

 

 

 

(24

)

 

 

 

 

 

13

 

 

 

18

 

 

 

18

 

 

 

(24

)

 

 

 

 

 

12

 

Non-service components of net periodic benefit cost

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

 

 

 

 

 

1

 

 

 

(3

)

 

 

 

 

 

(2

)

(Loss) earnings before income taxes

 

 

(23

)

 

 

61

 

 

 

67

 

 

 

 

 

 

105

 

 

 

(18

)

 

 

(5

)

 

 

42

 

 

 

 

 

 

19

 

Income tax (benefit) expense

 

 

(6

)

 

 

14

 

 

 

16

 

 

 

 

 

 

24

 

 

 

(4

)

 

 

(2

)

 

 

5

 

 

 

 

 

 

(1

)

Equity loss, net of taxes

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Share in earnings of equity accounted investees

 

 

97

 

 

 

50

 

 

 

 

 

 

(147

)

 

 

 

 

 

34

 

 

 

37

 

 

 

 

 

 

(71

)

 

 

 

Net earnings

 

 

80

 

 

 

97

 

 

 

50

 

 

 

(147

)

 

 

80

 

 

 

20

 

 

 

34

 

 

 

37

 

 

 

(71

)

 

 

20

 

Other comprehensive income

 

 

17

 

 

 

17

 

 

 

4

 

 

 

(21

)

 

 

17

 

Comprehensive income

 

 

97

 

 

 

114

 

 

 

54

 

 

 

(168

)

 

 

97

 

Other comprehensive loss

 

 

(38

)

 

 

(37

)

 

 

(33

)

 

 

70

 

 

 

(38

)

Comprehensive (loss) income

 

 

(18

)

 

 

(3

)

 

 

4

 

 

 

(1

)

 

 

(18

)

 

3140

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16.18. 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

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Assets

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

87

 

 

 

2

 

 

 

63

 

 

 

 

 

 

152

 

Receivables

 

 

 

 

 

157

 

 

 

443

 

 

 

 

 

 

600

 

Inventories

 

 

 

 

 

503

 

 

 

237

 

 

 

 

 

 

740

 

Prepaid expenses

 

 

3

 

 

 

18

 

 

 

11

 

 

 

 

 

 

32

 

Income and other taxes receivable

 

 

36

 

 

 

2

 

 

 

18

 

 

 

(29

)

 

 

27

 

Intercompany accounts

 

 

652

 

 

 

671

 

 

 

300

 

 

 

(1,623

)

 

 

 

Total current assets

 

 

778

 

 

 

1,353

 

 

 

1,072

 

 

 

(1,652

)

 

 

1,551

 

Property, plant and equipment, net

 

 

 

 

 

1,684

 

 

 

809

 

 

 

 

 

 

2,493

 

Operating lease right-of-use assets

 

 

 

 

 

62

 

 

 

15

 

 

 

 

 

 

77

 

Intangible assets, net

 

 

 

 

 

242

 

 

 

319

 

 

 

 

 

 

561

 

Investments in affiliates

 

 

3,532

 

 

 

2,441

 

 

 

 

 

 

(5,973

)

 

 

 

Intercompany long-term advances

 

 

5

 

 

 

1

 

 

 

1,517

 

 

 

(1,523

)

 

 

 

Other assets

 

 

14

 

 

 

24

 

 

 

126

 

 

 

(13

)

 

 

151

 

Total assets

 

 

4,329

 

 

 

5,807

 

 

 

3,858

 

 

 

(9,161

)

 

 

4,833

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

 

46

 

 

 

437

 

 

 

217

 

 

 

 

 

 

700

 

Intercompany accounts

 

 

473

 

 

 

361

 

 

 

789

 

 

 

(1,623

)

 

 

 

Income and other taxes payable

 

 

27

 

 

 

14

 

 

 

14

 

 

 

(29

)

 

 

26

 

Operating lease liabilities due within one year

 

 

 

 

 

21

 

 

 

6

 

 

 

 

 

 

27

 

Long-term debt due within one year

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Total current liabilities

 

 

546

 

 

 

833

 

 

 

1,027

 

 

 

(1,652

)

 

 

754

 

Long-term debt

 

 

1,013

 

 

 

 

 

 

89

 

 

 

 

 

 

1,102

 

Operating lease liabilities

 

 

 

 

 

56

 

 

 

9

 

 

 

 

 

 

65

 

Intercompany long-term loans

 

 

561

 

 

 

961

 

 

 

1

 

 

 

(1,523

)

 

 

 

Deferred income taxes and other

 

 

1

 

 

 

311

 

 

 

158

 

 

 

(13

)

 

 

457

 

Other liabilities and deferred credits

 

 

27

 

 

 

114

 

 

 

133

 

 

 

 

 

 

274

 

Shareholders' equity

 

 

2,181

 

 

 

3,532

 

 

 

2,441

 

 

 

(5,973

)

 

 

2,181

 

Total liabilities and shareholders' equity

 

 

4,329

 

 

 

5,807

 

 

 

3,858

 

 

 

(9,161

)

 

 

4,833

 

32

41

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16.18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

December 31, 2019

 

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

1

 

 

 

11

 

 

 

49

 

 

 

 

 

 

61

 

 

 

129

 

 

 

9

 

 

 

80

 

 

 

 

 

 

218

 

Receivables

 

 

 

 

 

146

 

 

 

431

 

 

 

 

 

 

577

 

 

 

 

 

 

146

 

 

 

397

 

 

 

 

 

 

543

 

Inventories

 

 

 

 

 

543

 

 

 

243

 

 

 

 

 

 

786

 

 

 

 

 

 

517

 

 

 

247

 

 

 

 

 

 

764

 

Prepaid expenses

 

 

5

 

 

 

17

 

 

 

11

 

 

 

 

 

 

33

 

 

 

5

 

 

 

20

 

 

 

11

 

 

 

 

 

 

36

 

Income and other taxes receivable

 

 

34

 

 

 

 

 

 

27

 

 

 

 

 

 

61

 

 

 

69

 

 

 

30

 

 

 

22

 

 

 

(77

)

 

 

44

 

Intercompany accounts

 

 

538

 

 

 

547

 

 

 

237

 

 

 

(1,322

)

 

 

 

 

 

594

 

 

 

661

 

 

 

311

 

 

 

(1,566

)

 

 

 

Total current assets

 

 

578

 

 

 

1,264

 

 

 

998

 

 

 

(1,322

)

 

 

1,518

 

 

 

797

 

 

 

1,383

 

 

 

1,068

 

 

 

(1,643

)

 

 

1,605

 

Property, plant and equipment, net

 

 

 

 

 

1,689

 

 

 

878

 

 

 

 

 

 

2,567

 

 

 

 

 

 

1,528

 

 

 

850

 

 

 

 

 

 

2,378

 

Operating lease right-of-use assets

 

 

 

 

 

63

 

 

 

18

 

 

 

 

 

 

81

 

 

 

 

 

 

57

 

 

 

15

 

 

 

 

 

 

72

 

Intangible assets, net

 

 

 

 

 

245

 

 

 

328

 

 

 

 

 

 

573

 

 

 

 

 

 

237

 

 

 

336

 

 

 

 

 

 

573

 

Investments in affiliates

 

 

3,627

 

 

 

2,493

 

 

 

 

 

 

(6,120

)

 

 

 

 

 

3,555

 

 

 

2,505

 

 

 

 

 

 

(6,060

)

 

 

 

Intercompany long-term advances

 

 

5

 

 

 

1

 

 

 

1,482

 

 

 

(1,488

)

 

 

 

 

 

5

 

 

 

1

 

 

 

1,503

 

 

 

(1,509

)

 

 

 

Other assets

 

 

14

 

 

 

30

 

 

 

131

 

 

 

(11

)

 

 

164

 

 

 

14

 

 

 

23

 

 

 

139

 

 

 

(13

)

 

 

163

 

Total assets

 

 

4,224

 

 

 

5,785

 

 

 

3,835

 

 

 

(8,941

)

 

 

4,903

 

 

 

4,371

 

 

 

5,734

 

 

 

3,911

 

 

 

(9,225

)

 

 

4,791

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

Trade and other payables

 

 

57

 

 

 

390

 

 

 

258

 

 

 

 

 

 

705

 

 

 

19

 

 

 

379

 

 

 

228

 

 

 

 

 

 

626

 

Intercompany accounts

 

 

344

 

 

 

299

 

 

 

679

 

 

 

(1,322

)

 

 

 

 

 

437

 

 

 

359

 

 

 

770

 

 

 

(1,566

)

 

 

 

Income and other taxes payable

 

 

1

 

 

 

12

 

 

 

10

 

 

 

 

 

 

23

 

 

 

26

 

 

 

17

 

 

 

71

 

 

 

(77

)

 

 

37

 

Operating lease liabilities due within one year

 

 

 

 

 

21

 

 

 

7

 

 

 

 

 

 

28

 

 

 

 

 

 

21

 

 

 

6

 

 

 

 

 

 

27

 

Long-term debt due within one year

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

12

 

 

 

 

 

 

1

 

 

 

 

 

 

13

 

Total current liabilities

 

 

402

 

 

 

731

 

 

 

955

 

 

 

(1,322

)

 

 

766

 

 

 

494

 

 

 

776

 

 

 

1,076

 

 

 

(1,643

)

 

 

703

 

Long-term debt

 

 

873

 

 

 

 

 

 

65

 

 

 

 

 

 

938

 

 

 

1,077

 

 

 

 

 

 

9

 

 

 

 

 

 

1,086

 

Operating lease liabilities

 

 

 

 

 

58

 

 

 

11

 

 

 

 

 

 

69

 

 

 

 

 

 

49

 

 

 

9

 

 

 

 

 

 

58

 

Intercompany long-term loans

 

 

541

 

 

 

946

 

 

 

1

 

 

 

(1,488

)

 

 

 

 

 

563

 

 

 

945

 

 

 

1

 

 

 

(1,509

)

 

 

 

Deferred income taxes and other

 

 

 

 

 

324

 

 

 

166

 

 

 

(11

)

 

 

479

 

 

 

4

 

 

 

252

 

 

 

170

 

 

 

(13

)

 

 

413

 

Other liabilities and deferred credits

 

 

32

 

 

 

99

 

 

 

144

 

 

 

 

 

 

275

 

 

 

22

 

 

 

157

 

 

 

141

 

 

 

 

 

 

320

 

Shareholders' equity

 

 

2,376

 

 

 

3,627

 

 

 

2,493

 

 

 

(6,120

)

 

 

2,376

 

 

 

2,211

 

 

 

3,555

 

 

 

2,505

 

 

 

(6,060

)

 

 

2,211

 

Total liabilities and shareholders' equity

 

 

4,224

 

 

 

5,785

 

 

 

3,835

 

 

 

(8,941

)

 

 

4,903

 

 

 

4,371

 

 

 

5,734

 

 

 

3,911

 

 

 

(9,225

)

 

 

4,791

 

 

3342

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16.18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

1

 

 

 

11

 

 

 

49

 

 

 

 

 

 

61

 

Receivables

 

 

 

 

 

146

 

 

 

431

 

 

 

 

 

 

577

 

Inventories

 

 

 

 

 

543

 

 

 

243

 

 

 

 

 

 

786

 

Prepaid expenses

 

 

5

 

 

 

17

 

 

 

11

 

 

 

 

 

 

33

 

Income and other taxes receivable

 

 

34

 

 

 

 

 

 

27

 

 

 

 

 

 

61

 

Intercompany accounts

 

 

538

 

 

 

547

 

 

 

237

 

 

 

(1,322

)

 

 

 

Total current assets

 

 

578

 

 

 

1,264

 

 

 

998

 

 

 

(1,322

)

 

 

1,518

 

Property, plant and equipment, net

 

 

 

 

 

1,689

 

 

 

878

 

 

 

 

 

 

2,567

 

Operating lease right-of-use assets

 

 

 

 

 

63

 

 

 

18

 

 

 

 

 

 

81

 

Intangible assets, net

 

 

 

 

 

245

 

 

 

328

 

 

 

 

 

 

573

 

Investments in affiliates

 

 

3,627

 

 

 

2,493

 

 

 

 

 

 

(6,120

)

 

 

 

Intercompany long-term advances

 

 

5

 

 

 

1

 

 

 

1,482

 

 

 

(1,488

)

 

 

 

Other assets

 

 

14

 

 

 

30

 

 

 

131

 

 

 

(11

)

 

 

164

 

Total assets

 

 

4,224

 

 

 

5,785

 

 

 

3,835

 

 

 

(8,941

)

 

 

4,903

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

Trade and other payables

 

 

57

 

 

 

390

 

 

 

258

 

 

 

 

 

 

705

 

Intercompany accounts

 

 

344

 

 

 

299

 

 

 

679

 

 

 

(1,322

)

 

 

 

Income and other taxes payable

 

 

1

 

 

 

12

 

 

 

10

 

 

 

 

 

 

23

 

Operating lease liabilities due within one year

 

 

 

 

 

21

 

 

 

7

 

 

 

 

 

 

28

 

Long-term debt due within one year

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Total current liabilities

 

 

402

 

 

 

731

 

 

 

955

 

 

 

(1,322

)

 

 

766

 

Long-term debt

 

 

873

 

 

 

 

 

 

65

 

 

 

 

 

 

938

 

Operating lease liabilities

 

 

 

 

 

58

 

 

 

11

 

 

 

 

 

 

69

 

Intercompany long-term loans

 

 

541

 

 

 

946

 

 

 

1

 

 

 

(1,488

)

 

 

 

Deferred income taxes and other

 

 

 

 

 

324

 

 

 

166

 

 

 

(11

)

 

 

479

 

Other liabilities and deferred credits

 

 

32

 

 

 

99

 

 

 

144

 

 

 

 

 

 

275

 

Shareholders' equity

 

 

2,376

 

 

 

3,627

 

 

 

2,493

 

 

 

(6,120

)

 

 

2,376

 

Total liabilities and shareholders' equity

 

 

4,224

 

 

 

5,785

 

 

 

3,835

 

 

 

(8,941

)

 

 

4,903

 

 

 

 

For the three months ended

 

 

 

March 31, 2020

 

CONDENSED CONSOLIDATING STATEMENT OF

   CASH FLOWS

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

5

 

 

 

21

 

 

 

26

 

 

 

(47

)

 

 

5

 

Changes in operating and intercompany assets and

   liabilities and non-cash items, included in net earnings

 

7

 

 

 

40

 

 

 

(11

)

 

 

47

 

 

 

83

 

Cash flows from operating activities

 

 

12

 

 

 

61

 

 

 

15

 

 

 

 

 

 

88

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

 

 

 

(38

)

 

 

(24

)

 

 

 

 

 

(62

)

Cash flows used for investing activities

 

 

 

 

 

(38

)

 

 

(24

)

 

 

 

 

 

(62

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend payments

 

 

(26

)

 

 

 

 

 

 

 

 

 

 

 

(26

)

Stock repurchase

 

 

(59

)

 

 

 

 

 

 

 

 

 

 

 

(59

)

Net change in bank indebtedness

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

(10

)

Change in revolving credit facility

 

 

140

 

 

 

 

 

 

 

 

 

 

 

 

140

 

Proceeds from receivables securitization facility

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

Increase in long-term advances to related parties

 

 

 

 

 

(22

)

 

 

 

 

 

22

 

 

 

 

Decrease in long-term advances to related parties

 

 

22

 

 

 

 

 

 

 

 

 

(22

)

 

 

 

Other

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

Cash flows provided from (used for) financing activities

 

 

74

 

 

 

(32

)

 

 

25

 

 

 

 

 

 

67

 

Net increase (decrease) in cash and cash equivalents

 

 

86

 

 

 

(9

)

 

 

16

 

 

 

 

 

 

93

 

Impact of foreign exchange on cash

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Cash and cash equivalents at beginning of period

 

 

1

 

 

 

11

 

 

 

49

 

 

 

 

 

 

61

 

Cash and cash equivalents at end of period

 

 

87

 

 

 

2

 

 

 

63

 

 

 

 

 

 

152

 

34

43

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16.18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

For the three months ended

 

 

For the nine months ended

 

 

March 31, 2019

 

 

September 30, 2020

 

CONDENSED CONSOLIDATING STATEMENT OF

CASH FLOWS

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Adjustments

 

 

Consolidated

 

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Adjustments

 

 

Consolidated

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

80

 

 

 

97

 

 

 

50

 

 

 

(147

)

 

 

80

 

Changes in operating and intercompany assets and

liabilities and non-cash items, included in net earnings

 

(86

)

 

 

(86

)

 

 

 

 

 

147

 

 

 

(25

)

Net (loss) earnings

 

 

(68

)

 

 

(46

)

 

 

56

 

 

 

(10

)

 

 

(68

)

Changes in operating and intercompany assets and

liabilities and non-cash items, included in net (loss)

earnings

Changes in operating and intercompany assets and

liabilities and non-cash items, included in net (loss)

earnings

 

41

 

 

 

81

 

 

 

212

 

 

 

10

 

 

 

344

 

Cash flows (used for) provided from operating activities

 

 

(6

)

 

 

11

 

 

 

50

 

 

 

 

 

 

55

 

 

 

(27

)

 

 

35

 

 

 

268

 

 

 

 

 

 

276

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

 

 

 

(25

)

 

 

(21

)

 

 

 

 

 

(46

)

 

 

 

 

 

(75

)

 

 

(55

)

 

 

 

 

 

(130

)

Acquisition of business, net of cash acquired

 

 

 

 

 

 

 

 

(30

)

 

 

 

 

 

(30

)

Cash flows used for investing activities

 

 

 

 

 

(25

)

 

 

(21

)

 

 

 

 

 

(46

)

 

 

 

 

 

(75

)

 

 

(85

)

 

 

 

 

 

(160

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend payments

 

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

(27

)

 

 

(51

)

 

 

 

 

 

 

 

 

 

 

 

(51

)

Stock repurchase

 

 

(59

)

 

 

 

 

 

 

 

 

 

 

 

(59

)

Net change in bank indebtedness

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

(10

)

Change in revolving credit facility

 

 

(80

)

 

 

 

 

 

 

 

 

 

 

 

(80

)

Proceeds from receivables securitization facility

 

 

 

 

 

 

 

 

20

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

Repayments of receivables securitization facility

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

Issuance of long-term debt

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

300

 

Repayments of long-term debt

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

Increase in long-term advances to related parties

 

 

 

 

 

 

 

 

(53

)

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

(100

)

 

 

100

 

 

 

 

Decrease in long-term advances to related parties

 

 

36

 

 

 

17

 

 

 

 

 

 

(53

)

 

 

 

 

 

52

 

 

 

48

 

 

 

 

 

 

(100

)

 

 

 

Other

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

(4

)

 

 

 

 

 

1

 

 

 

 

 

 

(3

)

Cash flows provided from (used for) financing activities

 

 

8

 

 

 

20

 

 

 

(53

)

 

 

 

 

 

(25

)

 

 

155

 

 

 

38

 

 

 

(154

)

 

 

 

 

 

39

 

Net increase (decrease) in cash and cash equivalents

 

 

2

 

 

 

6

 

 

 

(24

)

 

 

 

 

 

(16

)

 

 

128

 

 

 

(2

)

 

 

29

 

 

 

 

 

 

155

 

Impact of foreign exchange on cash

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Cash and cash equivalents at beginning of period

 

 

 

 

 

 

 

 

111

 

 

 

 

 

 

111

 

 

 

1

 

 

 

11

 

 

 

49

 

 

 

 

 

 

61

 

Cash and cash equivalents at end of period

 

 

2

 

 

 

6

 

 

 

86

 

 

 

 

 

 

94

 

 

 

129

 

 

 

9

 

 

 

80

 

 

 

 

 

 

218

 

3544

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31,SEPTEMBER 30, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17.

_________________

SUBSEQUENT EVENTS

TEMPORARY IDLING OF PAPER CAPACITY TO ADDRESS COVID-19 RELATED BUSINESS IMPACT

On April 6, 2020, Domtar announced the temporary idling of the operations of its Kingsport, Tennessee mill and the A62 paper machine at its Ashdown, Arkansas mill for three months in response to the unforeseeable business conditions created by the COVID-19 pandemic.

On April 27, 2020, Domtar further announced the temporary idling of the operations of its Hawesville, Kentucky mill beginning May 5th, 2020. The Company expects to restart the H1 paper machine in June 2020, while the H2 paper machine will remain idle until July 2020.

The temporary shutdowns will reduce Domtar’s uncoated freesheet paper production capacity by approximately 227,000 short tons. As a result, the Company laid off approximately 304 employees at its Kingsport mill, 142 employees at its Ashdown mill and 400 employees at its Hawesville mill.

PURCHASE OF APPVION POINT OF SALE BUSINESS

On February 14, 2020, Domtar entered into a purchase agreement with Appvion Operations, Inc. to acquire Appvion’s Point of Sale paper business. The transaction was completed on April 27, 2020. The asset purchase agreement includes the coater and related equipment located only at the West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property.

TERM LOAN

On May 5, 2020, the Company entered into a $300 million Term Loan Agreement (the “Term Loan Agreement”) that matures on May 5, 2025. The Term Loan Agreement was fully drawn down at closing. The Company is using borrowings under the Term Loan Agreement to repay other debt, to pay related fees and expenses and to add to cash reserves. Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 2.5% and require principal repayments of $3 million each quarter. 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. All borrowings under the Term Loan are unsecured. Certain domestic subsidiaries of the Company unconditionally guarantee any obligations from time to time arising under the Term Loan Agreement.18. 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

 

 


36



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, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2020. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed below under “Forward-looking statements”, as well as in itemPart II, Item 1A, risk factors,Risk Factors, in this report.Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refersrefer 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 month periodsand nine months ended March 31,September 30, 2020 and September 30, 2019. The three month and nine month periods are also referred to as the third quarter and first quarternine months of 2020 and 2019. Reference to notes refers to footnotes to the consolidated financial statements and notes thereto included in Part I, Item 1 ofin this Form 10-Q.report.

This MD&A is intended to provide investors with an understanding of our recent performance, financial condition and outlook. Topics discussed and analyzed include:

 

Overview

 

Highlights for the three month periodand nine month periods ended March 31,September 30, 2020

 

Impact of the COVID-19 pandemicPandemic and Outlook

Cost Reduction Program

 

Consolidated Results of Operations and Segment Review

 

Liquidity and Capital Resources

Purchase of Appvion Point of Sale Business

On April 27, 2020, we completed the acquisition of the Point of Sale paper business from Appvion Operation Inc. The business includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property and assumed liabilities related to post-retirement benefits. The results of this business have been included in the consolidated financial statements as of April 27, 2020 and are presented in the Pulp and Paper reportable segment. For more information, refer to Note 3 “Acquisition of Business” of the financial statements in this Quarterly Report on Form 10-Q.

Change in Segment Reporting for EAM Corporation

As a result of changes in our organizational structure, we have changed our segment reporting. Starting January 1, 2020, our materials business, EAM Corporation, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under our Personal Care segment is now presented under our Pulp and Paper segment. There were no changes to our consolidated sales or operating income. Prior period segment results have been restated to the new segment presentation with no significant impact on segment results.

For more information, refer to Note 17 “Segment Disclosures” of the financial statement in this Quarterly Report on Form 10-Q.


37



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 thanApproximately 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 MARCH 31,SEPTEMBER 30, 2020

 

Operating income and net earnings decreased by 83%569% and 94%560%, respectively, from the firstthird quarter of 2019

 

Sales decreased by 7%12% from the firstthird quarter of 2019. Net average selling prices for pulp and paper were down from the firstthird quarter of 2019. Our manufactured paper volumesvolume and pulp volume were down while our pulp volumes were up and ourwhen compared to the third quarter of 2019. Our Personal Care business had higher volume when compared to the third quarter of 2019

Recognition of closure and favorable mixrestructuring charges and accelerated depreciation under Impairment of long-lived assets, of $68 million and $111 million, respectively, mostly related to our announced cost reduction program within our Pulp and Paper segment

Recognition of $9 million (CDN $12 million) from the Canada Emergency Wage Subsidy (“CEWS”) in the third quarter of 2020. This program was created by the Government of Canada to provide financial support for businesses during the COVID-19 pandemic to prevent large layoffs

HIGHLIGHTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2020  

Operating income and net earnings decreased by 158% and 158%, respectively, from the first nine months of 2019

Sales decreased by 14% from the first nine months of 2019. Net average selling prices for pulp and paper were down from the first nine months of 2019. Our manufactured paper volume was down while our pulp volume as well as our Personal Care business was up when compared to the first quarternine months of 2019

Recognition of closure and restructuring charges and accelerated depreciation under Impairment of long-lived assets, of $69 million and $111 million, respectively, mostly related to our announced cost reduction program within our Pulp and Paper segment

Recognition of $34 million (CDN $46 million) from the CEWS and received a $7 million payment from lifting the non-production clause related to the sale agreement of our Lebel-sur-Quévillon kraft pulp mill in 2012

 

We repurchased $59 million of our common stock and paid $26$51 million in dividendsdividends. Our capital return program, which includes our regular quarterly dividend and stock repurchase program, was suspended in the second quarter of 2020

 

 

Three months ended

 

 

Three months ended

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

 

 

 

 

 

 

 

Variance

 

FINANCIAL HIGHLIGHTS

 

March 31, 2020

 

 

March 31, 2019

 

 

$

 

 

%

 

 

September 30, 2020

 

 

September 30, 2019

 

 

$

 

 

%

 

 

September 30, 2020

 

 

September 30, 2019

 

 

$

 

 

%

 

(In millions of dollars, unless otherwise noted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

1,278

 

 

$

1,376

 

 

 

(98

)

 

 

-7

%

 

$

1,124

 

 

$

1,283

 

 

 

(159

)

 

 

-12

%

 

$

3,414

 

 

$

3,976

 

 

 

(562

)

 

 

-14

%

Operating income

 

19

 

 

 

115

 

 

 

(96

)

 

 

-83

%

Net earnings

 

 

5

 

 

 

80

 

 

 

(75

)

 

 

-94

%

Net earnings per common share

(in dollars)1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

Operating (loss) income

 

(136

)

 

 

29

 

 

 

(165

)

 

 

-569

%

 

 

(103

)

 

 

178

 

 

 

(281

)

 

 

-158

%

Net (loss) earnings

 

 

(92

)

 

 

20

 

 

 

(112

)

 

 

-560

%

 

 

(68

)

 

 

118

 

 

 

(186

)

 

 

-158

%

Net (loss) earnings per common share

(in dollars)1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

 

$

1.27

 

 

 

(1.18

)

 

 

-93

%

 

$

(1.67

)

 

$

0.33

 

 

 

(2.00

)

 

 

-606

%

 

$

(1.23

)

 

$

1.89

 

 

 

(3.12

)

 

 

-165

%

Diluted

 

$

0.09

 

 

$

1.27

 

 

 

(1.18

)

 

 

-93

%

 

$

(1.67

)

 

$

0.32

 

 

 

(1.99

)

 

 

-622

%

 

$

(1.23

)

 

$

1.88

 

 

 

(3.11

)

 

 

-165

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2020

 

 

At December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2020

 

 

At December 31, 2019

 

Total assets

 

 

 

 

 

 

 

 

 

$

4,833

 

 

$

4,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,791

 

 

$

4,903

 

Total long-term debt, including current portion

 

 

 

 

 

 

 

 

 

$

1,103

 

 

$

939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,099

 

 

$

939

 

 

1

See Note 45 “Earnings (Loss) 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.


38



Impact of the COVID-19 pandemic

With the unprecedented and rapid spread of COVID-19 and social distancing measures implemented throughout the world due to the pandemic, we have seen thethis virus has had a profound impact this virus is having on human health, the global economy and society in general. We are actively monitoring the impact of COVID-19 on all aspects of our business, including how it will impactis impacting our employees, operations, customers, suppliers, liquidity and capital resources.

Our operations are considered to be essential services in the jurisdictions where we operate. Certain of our paper products are used in the testing for COVID-19 as well as for personal protection medical gowns, and our personal care products are essential to the daily lives of consumers. All of our operating sites were in operation throughout the three months ended March 31, 2020. However, demand for our paper has declined significantly since the beginning of April, largely due to work-from-home rules and the overall economic slowdown. The length and severity of the reduction in paper demand is uncertain; at the current time, we expect the adverse impact to continue through to the secondfourth quarter of 2020. Beyond the secondfourth quarter of 2020, paper demand will depend largely on when, and the extent to which, work-from-home reducessubsides and on the timing of the return to normal global economic activities.

 

Effects from COVID-19 began for us at the end of the first quarter of 2020 but were not material to the three-month’s results ended March 31, 2020. April shipmentsShipments of paper were lower by approximately 35%19% in the third quarter of 2020 when compared to the third quarter of 2019 and lower by approximately 19% in the first nine months of 2020 when compared to the first quarter monthly average. Our April average selling price for paper decreased when compared to the average selling price for the first quarternine months of 2020.2019. As a result of the decrease in demand, on April 6,August 7, 2020, we announced the temporary idling of 144,000 tons of capacity, and on April 27, 2020 we announced the temporary idling of a further 83,000 tons of capacity. These measures removed approximately 227,000 tons of our 2020 production capacity. At this point, these measures are expected to maintain inventory at appropriate levels. For more information on these announced temporary idlings, refer to Note 17 “Subsequent Events”permanent closure of the financial statementsuncoated freesheet manufacturing at our Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at our Ashdown, Arkansas mill and the converting center in this Quarterly Report on Form 10-Q. We continue to monitor market demandRidgefields, Tennessee. These actions will reduce our annual uncoated freesheet paper capacity by approximately 721,000 short tons, and are prepared to further reduce capacity if necessary.will result in a workforce reduction of approximately 750 employees. The Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations.

Our pulp shipments were steadylower by approximately 5% in the three months ended March 31,third quarter of 2020 despite some logistical challenges and a major shutdown of operations in China due to COVID-19. We experienced good demand from our North American consumer tissue customers, and we expect overall demand in the second quarter to remain strong, particularly in China as the Chinese government continues to reopen the economy. Although we are experiencing higher than normal demand, mostly due to tissue and towel sales, we do expect containment measures across Europe and North America to adversely impact certain end-use markets. April shipments of pulp were up when compared to the firstthird quarter monthly average. Our average selling price was slightly upof 2019 and were higher by approximately 7% in the nine months ended September 30, 2020 when compared to the average selling price for our first quarter of 2020.nine months ended September 30, 2019. We expect near-term pulp markets to continue to gradually improve driven by better demand, maintenance outages and restocking in China.

Our Personal care business experienced minimal impacts due to COVID-19 during the three months and nine months ended March 31,September 30, 2020. At the end of our first quarter and in April, we experienced increased demand across substantially all our products, due to both new customer wins and consumer increases of home inventory levels in response to COVID-19. We expect to see continued strong demand for some of our products from higher usage and the impact from new customer wins, which may be followed later in the year by potential demand softness and volatility as consumers use existing home inventories and as demand returns to more normal levels.wins. The ultimate timing and impact of this demand volatility will depend on the duration and scope of COVID-19, global economic conditions and consumer preferences.

Below we further describe specific impacts and the measures we have taken since March 2020.

Health and Safety of our Employees

The safety of our employees continues to be our primary focus. As COVID-19 has evolved, we have taken numerous steps to protect the health and safety of our employees, including: social distancing, providing personnel protection and thermal scanning, health monitoring, contact tracing and enhanced cleaning measures. In addition, we implemented global travel restrictions and work-from-home policies for employees who have the ability to work remotely.

Operations and Supply Chain

We continue to operate in compliance with the orders and restrictions imposed by government authorities in each of our locations, and we are working with our customers to meet their specific shipment needs. We continue to place a priority on business continuity and contingency planning, including potential planning for extended closures of any key facilities, whether because of government action or workforce disruption, or because of disruptions related to our key suppliers that might arise related to COVID-19. At this point, we have experienced only minor disruptions. We are actively monitormonitoring our supply chain, and we may experience disruptions in our supply chain as the pandemic continues. We cannot reasonably estimate the potential impactimpacts or timing of those events, nor can we reasonably estimate our ability to mitigate such impact.impacts.

Cost Reduction Program

On August 7, 2020 we announced the implementation of a cost reduction program targeting $200 million in annual run-rate cost savings to be realized by the end of 2021. The goal of the program is to build a stronger business operation, enhance our cost efficiency, improve operating margins and maximize productivity and cash flow. The cost saving initiatives includes capacity reduction and asset closures (noted above), mill-level cost savings and rightsizing of support functions. See Cost Reduction Program below for more information on this program.


39


Maintenance and Other Cost Reductions

We completed a review of all planned maintenance spending for 2020. We reduced or delayed spending where feasible, without compromising on safety or regulatory compliance. Our current expectation is to spend between $445 million and $455 million in 2020, a reduction of approximately $40 million compared to our original plan. We also have completed a review of other costs including selling, general and administrative costs. We have suspended virtually all travel and cut discretionary spending, instituted a hiring freeze for vacant positions and cut non-essential projects.  


Liquidity and Capital Resources

Subsequent to March 31, 2020, weWe have taken actions and may take other actions, intended to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets. On May 5, 2020, we entered into a five-year $300 million term loan. We have also have suspended our regular quarterly dividend and share buybackstock repurchase program until further notice. In addition, we completed a review of all planned capital expenditures for 2020 and reduced or delayed spending without compromising on safety or regulatory compliance. Our capital expenditures for 2020 are expected to be between $140$160 million and $150$170 million, a decrease of approximately $100$80 million compared to our planned spending.

Government Assistance

The U.S. and Canadian governments have launched several support programs to provide assistance to companies during thisthe COVID-19 pandemic. We are reviewingcontinue to review the details of the various programs to seedetermine whether we might qualify.

The Government of Canada created the CEWS to provide financial support for businesses during the COVID-19 pandemic and to prevent large layoffs. CEWS allows eligible entities to receive a subsidy retroactive to March 15, 2020. We qualified and applied for the first seven periods identified under CEWS, from March 15 through September 26, 2020. We recognized $9 million (CDN $12 million) of income related to this subsidy in the third quarter of 2020 and $34 million (CDN $46 million) for the nine months period ending September 30, 2020.

OUTLOOK

The high degree of uncertainty and volatility day-to-day andIn the longer term potential impacts offourth quarter, paper volume is expected to be flat quarter-over-quarter while mix should be unfavorable due to the economic lockdown remain unclear. In Paper, we expect significantly lower demand in the second quarter.usual seasonality. We expect demand for softwood and fluffnear-term pulp markets to remain strong in the near-termcontinue to gradually improve driven by accelerated growthbetter demand, maintenance outages and restocking in tissue and towel, while containment measures across Europe and North America are expected to weigh on certain end-use markets.China. We expect Personal Care willto continue to benefit from higher usage and the impact from new customer wins, but we expect a portion of the demand increase from consumer stock-up may reverse later in the year. Rawwins. Overall raw material costs are expected to remain stable.stable while planned maintenance costs will be lower.

40COST REDUCTION PROGRAM

On August 7, 2020, we announced the implementation of a cost reduction program, targeting $200 million in annual run-rate cost savings to be realized by the end of 2021. The goal of the program is to build a stronger business operation, enhance our cost efficiency, improve operating margins and maximize productivity and cash flow. The costs saving initiatives include capacity reduction and asset closures, mill-level cost savings and rightsizing support functions. The leaner organizational structure is also expected to improve communication flow and cross-functional collaboration, leveraging more efficient business processes.


As part of this program, we announced the permanent closure of the uncoated freesheet manufacturing at our Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at our Ashdown, Arkansas mill and our converting center in Ridgefields, Tennessee. These actions will reduce our annual uncoated freesheet paper capacity by approximately 721,000 short tons, and will result in a workforce reduction of approximately 750 employees. Our Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations. Our Ridgefields converting center ceased operations at the end of the third quarter of 2020, while our Port Huron mill is expected to shut down by the end of the first quarter of 2021.

During the third quarter of 2020, we recorded $111 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, we recorded $29 million of severance and termination costs, $31 million of inventory obsolescence, $2 million of pension curtailment and $6 million of other costs, under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

The aggregate pre-tax earnings charge in connection with these closures is estimated to be $200 million. Of the estimated total pre-tax charge of approximately $200 million, $179 million has been recognized in the third quarter of 2020 and the remaining $21 million is expected to be incurred by the end of the first quarter of 2021.

Kingsport, Tennessee mill

We plan to enter the linerboard market with the conversion of our Kingsport paper machine. Once in full operation, the mill will produce and market approximately 600,000 tons annually of high-quality recycled linerboard and medium, providing us with a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the end of 2022.

We estimate the conversion cost to be between $300 and $350 million. Once fully operational, the mill is expected to be a low-cost, first quartile recycled linerboard mill in North America. The converted mill is expected to directly employ approximately 160 employees.

Ashdown, Arkansas mill

We will complete the conversion of our Ashdown mill to 100% softwood and fluff pulp, which will require $15 to $20 million of capital investments and is expected to be completed within nine to twelve months. The mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. The conversion of the fiberline to 100% softwood is also necessary for an


eventual expansion into containerboard. Following the fiberline conversion, Ashdown will have annual production capacity of 775,000 tons of fluff and softwood pulp.

See Note 12 “Closure and Restructuring Costs and Impairment of Long-Lived Assets” of the financial statements in this Quarterly Report on Form 10-Q for more information.

CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW

This section presents a discussion and analysis of our third quarter and first quarternine months of 2020 and 2019 sales, operating income (loss) and other information relevant to the understanding of our results of operations.

 

ANALYSIS OF NET SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By Business Segment

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

$

 

 

%

 

Pulp and Paper

 

$

1,031

 

 

$

1,157

 

 

 

(126

)

 

-11%

 

Personal Care

 

 

266

 

 

 

239

 

 

 

27

 

 

11%

 

Total for reportable segments

 

 

1,297

 

 

 

1,396

 

 

 

(99

)

 

-7%

 

Intersegment sales

 

 

(19

)

 

 

(20

)

 

 

1

 

 

 

 

 

Consolidated

 

 

1,278

 

 

 

1,376

 

 

 

(98

)

 

-7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shipments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paper - manufactured (in thousands of ST)

 

 

679

 

 

 

736

 

 

 

(57

)

 

-8%

 

Communication Papers

 

 

569

 

 

 

615

 

 

 

(46

)

 

-7%

 

Specialty and Packaging

 

 

110

 

 

 

121

 

 

 

(11

)

 

-9%

 

Paper - sourced from third parties (in thousands of ST)

 

 

22

 

 

 

23

 

 

 

(1

)

 

-4%

 

Paper - total (in thousands of ST)

 

 

701

 

 

 

759

 

 

 

(58

)

 

-8%

 

Pulp (in thousands of ADMT)

 

 

389

 

 

 

349

 

 

 

40

 

 

11%

 

ANALYSIS OF CHANGES IN SALES

 

 

 

 

 

 

 

 

 

 

First quarter of 2020 versus First quarter of 2019

 

ANALYSIS OF NET SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By Business Segment

 

Three months ended

 

 

Nine months ended

 

 

% Change in Net Sales due to

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

 

 

 

 

 

 

 

Variance

 

 

Net Price

 

 

Volume / Mix

 

 

Currency

 

 

Total

 

 

September 30, 2020

 

 

September 30, 2019

 

 

$

 

 

%

 

 

September 30, 2020

 

 

September 30, 2019

 

 

$

 

 

%

 

Pulp and Paper

 

 

-8

%

 

 

-3

%

 

 

-

%

 

 

-11

%

 

$

899

 

 

$

1,079

 

 

 

(180

)

 

-17%

 

 

$

2,732

 

 

$

3,342

 

 

 

(610

)

 

-18%

 

Personal Care

 

 

-

%

 

 

13

%

 

 

-2

%

 

 

11

%

 

 

243

 

 

 

219

 

 

 

24

 

 

11%

 

 

 

738

 

 

 

686

 

 

 

52

 

 

8%

 

Consolidated sales

 

 

-6

%

 

 

-1

%

 

 

-

%

 

 

-7

%

Total for reportable segments

 

 

1,142

 

 

 

1,298

 

 

 

(156

)

 

-12%

 

 

 

3,470

 

 

 

4,028

 

 

 

(558

)

 

-14%

 

Intersegment sales

 

 

(18

)

 

 

(15

)

 

 

(3

)

 

 

 

 

 

 

(56

)

 

 

(52

)

 

 

(4

)

 

 

 

 

Consolidated

 

 

1,124

 

 

 

1,283

 

 

 

(159

)

 

-12%

 

 

 

3,414

 

 

 

3,976

 

 

 

(562

)

 

-14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shipments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paper - manufactured (in thousands of ST)

 

 

550

 

 

 

672

 

 

 

(122

)

 

-18%

 

 

 

1,688

 

 

 

2,089

 

 

 

(401

)

 

-19%

 

Communication Papers

 

 

449

 

 

 

563

 

 

 

(114

)

 

-20%

 

 

 

1,384

 

 

 

1,745

 

 

 

(361

)

 

-21%

 

Specialty and Packaging

 

 

101

 

 

 

109

 

 

 

(8

)

 

-7%

 

 

 

304

 

 

 

344

 

 

 

(40

)

 

-12%

 

Paper - sourced from third parties (in thousands of ST)

 

 

16

 

 

 

25

 

 

 

(9

)

 

-36%

 

 

 

50

 

 

 

69

 

 

 

(19

)

 

-28%

 

Paper - total (in thousands of ST)

 

 

566

 

 

 

697

 

 

 

(131

)

 

-19%

 

 

 

1,738

 

 

 

2,158

 

 

 

(420

)

 

-19%

 

Pulp (in thousands of ADMT)

 

 

396

 

 

 

416

 

 

 

(20

)

 

-5%

 

 

 

1,212

 

 

 

1,135

 

 

 

77

 

 

7%

 

 

 

ANALYSIS OF OPERATING INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

By Business Segment

 

 

 

 

 

 

 

 

 

Variance

 

 

 

March 31, 2020

 

 

March 31, 2019

 

(a)

$

 

 

%

 

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

$

4

 

 

$

144

 

 

 

(140

)

 

 

-97

%

Personal Care

 

 

20

 

 

 

(8

)

 

 

28

 

 

 

350

%

Corporate

 

 

(5

)

 

 

(21

)

 

 

16

 

 

 

76

%

Consolidated operating income

 

 

19

 

 

 

115

 

 

 

(96

)

 

 

-83

%

ANALYSIS OF CHANGES IN SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third quarter of 2020 versus Third quarter of 2019

 

 

First nine months of 2020 versus First nine months of 2019

 

 

 

% 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

%

 

 

-14

%

 

 

-

%

 

 

-17

%

 

 

-6

%

 

 

-12

%

 

 

-

%

 

 

-18

%

Personal Care

 

 

-

%

 

 

8

%

 

 

3

%

 

 

11

%

 

 

-

%

 

 

8

%

 

 

-

%

 

 

8

%

Consolidated sales

 

 

-2

%

 

 

-10

%

 

 

-

%

 

 

-12

%

 

 

-5

%

 

 

-9

%

 

 

-

%

 

 

-14

%

ANALYSIS OF OPERATING INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Nine months ended

 

By Business Segment

 

 

 

 

 

 

 

 

 

Variance

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

September 30, 2020

 

(a)

September 30, 2019

 

(b)

$

 

 

%

 

 

September 30, 2020

 

(c)

September 30, 2019

 

(d)

$

 

 

%

 

Operating (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

$

(140

)

 

$

31

 

 

 

(171

)

 

 

-552

%

 

$

(133

)

 

$

237

 

 

 

(370

)

 

 

-156

%

Personal Care

 

 

16

 

 

 

2

 

 

 

14

 

 

 

700

%

 

 

54

 

 

 

(24

)

 

 

78

 

 

 

325

%

Corporate

 

 

(12

)

 

 

(4

)

 

 

(8

)

 

 

-200

%

 

 

(24

)

 

 

(35

)

 

 

11

 

 

 

31

%

Consolidated operating (loss) income

 

 

(136

)

 

 

29

 

 

 

(165

)

 

 

-569

%

 

 

(103

)

 

 

178

 

 

 

(281

)

 

 

-158

%


 

(a)

Includes a closure and restructuring chargecharges and accelerated depreciation under Impairment of long-lived assets related to our announced cost reduction program within our Pulp and Paper segment of $67 million and $111 million, respectively and within our Corporate segment of $1 million and nil, respectively.

(b)

Includes closure and restructuring charges and accelerated depreciation under Impairment of long-lived assets, related to our announced margin improvement plan within our Personal Care segment, of $4$6 million and $10$1 million respectively. Includes closure and restructuring charges and accelerated depreciation under Impairment of long-lived assets, related to two paper machine closures within our Pulp and Paper segment, of $5 million and $32 million, respectively.

(c)

Includes closure and restructuring charges and accelerated depreciation under Impairment of long-lived assets related to our announced cost reduction program within our Pulp and Paper segment of $68 million and $111 million, respectively and within our Corporate segment of $1 million and nil, respectively.

(d)

Includes closure and restructuring charges and 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 and accelerated depreciation under Impairment of long-lived assets, related to two paper machine closures within our Pulp and Paper segment, of $5 million and $32 million, respectively.

 

First quarter of 2020 versus First quarter of 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 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

 

Pulp and Paper

 

 

(9

)

 

 

(87

)

 

 

18

 

 

 

(64

)

 

 

2

 

 

 

 

 

 

 

 

 

 

 

(140

)

Personal Care

 

 

6

 

 

 

 

 

 

9

 

 

 

(1

)

 

 

(1

)

 

11

 

 

 

4

 

 

 

 

 

 

28

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

16

 

Consolidated operating income (loss)

 

 

(3

)

 

 

(87

)

 

 

27

 

 

 

(46

)

 

 

1

 

 

11

 

 

 

4

 

 

 

(3

)

 

 

(96

)

41

 


Third quarter of 2020 versus Third quarter of 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By Business Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 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

 

Pulp and Paper

 

 

(34

)

 

 

(29

)

 

 

24

 

 

 

3

 

 

 

3

 

 

(78

)

 

 

(62

)

 

 

2

 

 

 

(171

)

Personal Care

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

1

 

 

1

 

 

 

6

 

 

 

 

 

 

14

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

(1

)

 

 

1

 

 

 

(8

)

Consolidated operating income (loss)

 

 

(31

)

 

 

(29

)

 

 

27

 

 

 

(5

)

 

 

4

 

 

(77

)

 

 

(57

)

 

 

3

 

 

 

(165

)

 

(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 $1 million in the firstthird quarter of 2020, excluding foreign currency impact and there were noimpact. In the third quarter of 2020, we recorded $111 million of accelerated depreciation charges.under Impairment of long-lived assets related to our cost reduction program within our Pulp and Paper segment. In the firstthird quarter of 2019, we recorded $10$32 million of accelerated depreciation under Impairment of long-lived assets related to our decision to permanently close two paper machines in our Pulp and Paper segment and $1 million of accelerated depreciation under Impairment of long-lived assets, related to our margin improvement plan in our Personal Care segment.

(d)(d)Third quarter of 2020 restructuring charges relate to:

There were no restructuring charges in the first quarter of 2020. We recorded $3 million of severance and termination costs and a $1 million write-down of inventory under Closure and restructuring costs in the firstThird quarter of 2019 related to our announced margin improvement plan within the Personal Care segment.

(e) First quarterrestructuring charges relate to: of 2020 operating expenses/income includes:

First quarter of 2019 operating expenses/income includes:

- Environmental provisionInventory write-down ($131 million)

- Bad debt expenseSeverance and termination costs ($29 million)

- Pension curtailment and other costs ($8 million)

- Inventory write-down ($5 million)

- Severance and termination costs ($2 million)

- Asset relocation and other costs ($4 million)

(e)Third quarter of 2020 other operating

income/expense includes:

Third quarter of 2019 other operating

income/expense includes:

- Foreign currency gainloss on working capital items

  ($21 million)

- Other income ($1 million)

 

- Bad debt expense ($1 million)

- Environmental provision ($1 million)

- Foreign currency loss on working capital items

  ($1 million)

Commentary – Third quarter of 2020 compared to Third quarter of 2019

Interest Expense, net

We incurred $14 million of net interest expense in the third quarter of 2020, an increaseof $2 million compared to net interest expense of $12 million in the third quarter of 2019. The net interest expense was impacted by the $300 million Term Loan entered into on May 5, 2020.


Income Taxes

For the third quarter of 2020, our income tax benefit was $55 million, consisting of a current income tax benefit of $7 million and a deferred income tax benefit of $48 million. This compares to an income tax benefit of $1 million in the third quarter of 2019, consisting of a current income tax benefit of $3 million and a deferred income tax expense of $2 million. We received income tax refunds, net of payments, of $1 million during the third quarter of 2020. The effective tax rate for the third quarter of 2020 was 38% compared with an effective tax rate of -5% in the third quarter of 2019. Our 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 that quarter. In each interim quarter we update our estimate of our annual effective tax rate and, if the estimated annual tax rate changes, make a cumulative adjustment in that quarter. Our effective tax rate for the third quarter of 2020 was significantly impacted by such an adjustment, mainly due to a change in the mix of earnings or loss between tax jurisdictions. Our effective tax rate for the third quarter of 2020 was also favorably impacted by the CARES Act, which granted companies the ability to carry back tax losses generated in the U.S. in 2020 to a tax year with earnings that were taxed at a higher statutory tax rate. Our effective tax rate for the third quarter of 2019 was favorably impacted by additional R&D tax credits in the U.S. and Spain and by the finalization of certain estimates in connection with filing our 2018 income tax returns.

First nine months of 2020 versus First nine months of 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By Business Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ 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

 

Pulp and Paper

 

 

(93

)

 

 

(195

)

 

 

60

 

 

 

(15

)

 

 

5

 

 

 

(76

)

 

 

(63

)

 

 

7

 

 

 

(370

)

Personal Care

 

 

11

 

 

 

1

 

 

 

16

 

 

 

6

 

 

 

(1

)

 

 

27

 

 

 

18

 

 

 

 

 

 

78

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

 

 

11

 

Consolidated operating income (loss)

 

 

(82

)

 

 

(194

)

 

 

76

 

 

 

4

 

 

 

4

 

 

 

(49

)

 

 

(46

)

 

 

6

 

 

 

(281

)

(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 $4 million in the first nine months of 2020, excluding foreign currency impact. In the first nine months of 2020, we recorded $111 million of accelerated depreciation under Impairment of long-lived assets related to our cost reduction program within our Pulp and Paper segment. In the first nine months of 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets related to our decision to permanently close two paper machines in our Pulp and Paper segment and $26 million of accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-lived assets, related to our margin improvement plan in our Personal Care segment.

(d)First nine months of 2020 restructuring charges relate to:

First nine months of 2019 restructuring charges relate to:

- Inventory write-down ($31 million)

- Severance and termination costs ($30 million)

- Pension curtailment and other costs ($8 million)

- Inventory write-down ($6 million)

- Severance and termination costs ($6 million)

- Asset relocation and other costs ($11 million)

(e)     First nine months of 2020 other operating income/

expense includes:

First nine months of 2019 other operating income/

expense includes:

- Income from termination of non-production agreement     ($7 million)

- Bad debt expense ($5 million)

- Foreign currency loss on working capital items ($1 million)

- Environmental provision ($1 million)

- Other income ($2 million)

- Foreign currency loss on working capital items ($3 million)

- Environmental provision ($2 million)

- Bad debt expense ($2 million)

- Other income ($3 million)

Commentary – First quarternine months of 2020 compared to First quarterfirst nine months of 2019

Interest Expense, net

We incurred $14$43 million of net interest expense in the first quarternine months of 2020, an increase of $5 million compared to net interest expense of $13$38 million in the first quarternine months of 2019. The net interest expense was impacted by the $300 million Term Loan entered into on May 5, 2020 as well as an increase in borrowingsborrowing under the revolving credit facility.

Income Taxes

InFor the first quarternine months of 2020, our income tax expense benefit was $3$67 million,, consisting of $2 million ofa current income tax benefit of $7 million and a deferred income tax benefit of $60 million. This compares to an income tax expense of $28 million in the first nine months of 2019,


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 $24 million in the first quarter of 2019, consisting of $27 million of current income tax expense and a deferred income tax benefit of $3 million. We received income tax refunds, net of income tax payments, of $25 million during the first quarternine months of 2020. TheOur effective tax rate was 33%50% compared withto an effective tax rate of 23%19% in the first quarternine months of 2019. The effective tax rate for the first nine months of 2020 was significantly impacted by our mix of earnings or loss in our major jurisdictions, by our recognition of additional tax credits in various jurisdictions, and by our ability to carry back U.S. tax losses generated in 2020 to a tax year with earnings that were taxed at a higher statutory tax rate. These favorable impacts were partially offset by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits. TheOur effective tax rate for the first quarternine months of 2019 was impacted by the inclusion of additional forecasted tax expense for 2019 for Global Intangible Low-taxed Income and for forecasted withholding tax on unremitted foreign earnings. The effective tax rate for the first quarter of 2019 was also 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 $1 million researchvaluation allowance against certain state tax credit carryforwards and development creditby the finalization of certain estimates in a U.S. state.connection with filing our 2018 income tax returns.

Commentary – Segment Review

Pulp and Paper Segment

EAM’s results of operations, previously reported under our Personal Care segment, are now presented under our Pulp and Paper segment with no significant impact on our segmentssegment results. Prior period segment results have been restated to the new segment presentation.

Sales in our Pulp and Paper segment decreased by $126$180 million, or 11%17%, when compared to sales in the firstthird quarter of 2019. This decrease in sales is mostly due to a decrease in our pulp and paper sales volumes and a decrease in our net average selling prices for pulp and paper.

Operating loss in our Pulp and Paper segment amounted to $140 million in the third quarter of 2020, a decrease of $171 million, when compared to operating income of $31 million in the third quarter of 2019. Our results were negatively impacted by:

Higher depreciation/impairment charges ($78 million). We recorded $111 million of accelerated depreciation under Impairment of long-lived assets, related to our cost reduction program in the third quarter of 2020 compared to $32 million of accelerated depreciation under Impairment of long-lived assets, related to our decision to permanently close two paper machines in the third quarter of 2019. Depreciation charges were lower by $1 million when compared to the third quarter of 2019

Higher restructuring charges ($62 million) in the third quarter of 2020 as a result of the cost reduction program ($67 million) compared to the decision to permanently close two paper machines in the third quarter of 2019 ($5 million)

Lower volume/mix ($34 million)

Lower net average selling prices for pulp and paper ($29 million)

These decreases were partially offset by:

Lower input costs ($24 million) mostly related to lower cost of fiber due, in part, to better weather as well as favorable market conditions compared to the third quarter of 2019

Lower operating expenses ($3 million) mostly due to lower maintenance and other costs due to our cash conservation initiatives (including our cost reduction program) in light of the COVID-19 pandemic and amounts recognized from the CEWS when compared to the third quarter of 2019, partially offset by lower production

Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($3 million)

Higher other income ($2 million)

Sales in our Pulp and Paper segment decreased by $610 million, or 18%, when compared to sales in the first nine months of 2019. This decreasein sales is mostly due to a decrease in our paper sales volumes as well as a decrease in our paper sales volumes. This decrease wasnet average selling prices for pulp and paper. These decreases were partially offset by an increase in our pulp sales volumes.

Operating incomeloss in our Pulp and Paper segment amounted to $4$133 million in the first quarternine months of 2020, a decrease of $140$370 million, when compared to operating income of $144$237 million in the first quarternine months of 2019. Our results were negatively impacted by:

 

Lower net average selling prices for pulp and paper ($87195 million)

Lower volume/mix ($93 million)


Higher depreciation/impairment charges ($76 million). We recorded $111 million of accelerated depreciation under Impairment of long-lived assets, related to our cost reduction program in the first nine months of 2020 compared to $32 million of accelerated depreciation under Impairment of long-lived assets, related to our decision to permanently close two paper machines in the first nine months of 2019. Depreciation charges were lower by $3 million when compared to the first nine months of 2019

Higher restructuring charges ($63 million) in the first nine months of 2020 as a result of the cost reduction program ($68 million) compared to the decision to permanently close two paper machines in the first nine months of 2019 ($5 million)

 

Higher operating expenses ($6415 million) mostly related to higher maintenance costs due to the timing of major maintenance as well as lower production, partially offset by lower freightmaintenance and other costs due to our cash conservation initiatives (including our cost reduction program) in light of the COVID-19 pandemic and amounts recognized from the CEWS when compared to the first quarternine months of 2019

Lower volume and mix ($9 million)

These decreases were partially offset by:

 

Lower input costs ($1860 million) mostly related to lower costscost of fiber due, in part, to weather-related wood supply shortage inbetter weather and favorable market conditions compared to the first quarternine months of 2019

 

Higher other income ($7 million)

��

Positive impact of a weaker Canadian dollar on our Canadian dollar denominated expenses, net of our hedging program ($25 million)

42


Purchase of Appvion Point of Sale Business

On February 14, 2020, we entered into an asset purchase agreement with Appvion Operations, Inc. to acquire their Point of Sale paper business. The transaction was completed on April 27, 2020. The asset purchase agreement includes the coater and related equipment located only at the West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property.

Paper Machine Idling

On April 6, 2020, we announced the temporary idling of the operations of our Kingsport, Tennessee mill and the A62 paper machine at our Ashdown, Arkansas mill for three months in response to the unforeseeable business conditions created by the COVID-19 pandemic.

On April 27, 2020, we further announced the temporary idling of the operations of our Hawesville, Kentucky mill beginning May 5th, 2020. We expect to restart the H1 paper machine in June 2020, while the H2 paper machine will remain idle until July 2020.

The temporary shutdowns will reduce our uncoated freesheet paper production capacity by approximately 227,000 short tons. As a result, we laid off approximately 304 employees at our Kingsport mill, 142 employees at our Ashdown mill and 400 employees at our Hawesville mill.

Economic conditions and uncertainties

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. In addition, current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions in certain countries due to economic slowdowns and government restrictions on movement.

 

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.

The high degree of uncertainty and volatility day-to-day and the longer term potential impacts of the economic lockdownslowdown remain unclear. In Paper, we expect significantly lower demand in the second quarter.fourth quarter, paper volume is expected to be flat quarter-over-quarter while mix should be unfavorable due to the usual seasonality. We expect demand for softwood and fluffnear-term pulp markets to remain strong in the near-termcontinue to gradually improve driven by accelerated growthbetter demand, maintenance outages and restocking in tissue and towel, while certain containment measures across Europe and North America are expected to weigh on certain end-use markets. RawChina. Overall raw material costs are expected to remain stable.stable while planned maintenance costs will be lower.

Personal Care Segment

Sales in our Personal Care segment increased by $27$24 million, or 11%, when compared to sales in the firstthird quarter of 2019. This increase was mainly driven by higher volume as well as by favorable foreign exchange when compared to the third quarter of 2019.

Operating income increased by $14 million, in the third quarter of 2020 compared to the third quarter of 2019. Our results were positively impacted by:

Lower closure and restructuring charges ($6 million) due to charges related to our margin improvement plan recorded in the third quarter of 2019

Higher sales volume partially offset by unfavorable mix ($3 million)

Favorable input costs ($3 million) mostly due to lower raw material pricing

Lower depreciation/impairment charges ($1 million) due to charges related to our margin improvement plan in the third quarter of 2019

Favorable foreign exchange ($1 million) mostly between the Euro and the U.S. dollar, net of our hedging program

Sales in our Personal Care segment increased by $52 million, or 8%, when compared to sales in the first nine months of 2019. This increase in sales was driven by higher volume and favorable mix and partially offset by unfavorable foreign currency exchange, mostly duewhen compared to the fluctuation between the U.S dollar and the Euro.first nine months of 2019.


Operating income increased by $28$78 million, or 350%, in the first quarternine months of 2020 when compared to the first quarternine months of 2019. Our results were positively impacted by:

 

Lower depreciation/impairment charges ($1127 million) mostly due to the non-cash impairment of long-lived assets charge of $10$26 million recorded in the first quarternine months of 2019, related to our margin improvement plan

 

Lower closure and restructuring charges ($18 million) due to charges related to our margin improvement plan recorded in the first nine months of 2019

Favorable input costs ($16 million) mostly due to lower raw materialsmaterial pricing  ($9 million)

 

Higher sales volume and favorablepartially offset by unfavorable mix ($611 million)

 

Lower closure and restructuring chargesoperating expenses ($46 million) mostly due to our 2019 margin improvement planhigher production and lower SG&A

Higher net average selling prices ($1 million)

These increases were partially offset by:

 

Unfavorable foreign exchange, impact, net of our hedging program ($1 million)

Higher operating expenses ($1 million)

 


43


Economic conditions and uncertainties

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 have grown significantly in recent years.

While we are expected to benefit from the overall increase in healthcare spending due to an aging population, the pressures to limit spending on healthcare may 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 inincluding the infant and adult private label retail space as competitors that were historically almost absent in our markets have increased their presence in such markets.retail.

The principal levers of competition remain brand loyalty, product innovation, quality, price and marketing and distribution capabilities.

In the fourth quarter, we expect Personal Care willto continue to benefit from higher usage and the impact from new customer wins, but we expect a portion of the demand increase from consumer stock-up may reverse later in the year.wins. Overall raw material costs are expected to remain stable.

 

Margin Improvement Plan

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 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 March 31,September 30, 2019, we recorded $10$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). WeFor the three and nine months ended September 30, 2019, we also recorded $3$1 million and $5 million, respectively, of severance and termination costs, and $1 million of write-downand $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 quarternine months of 2020, stock-based compensation incomeexpense recognized in our results of operations was $3$4 million for all outstanding awards which includes the mark-to-market recovery related to liability awards of $7 million.$9 million. This compares to a stock-based compensation expense of $16$17 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $12$4 million in the first quarternine months of 2019. 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 $480$649 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $11$139 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. The U.S. Tax Reform includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries for which we recorded a provisional repatriation tax amount of $46 million in 2017 and adjusted by $7 million in 2018. After completing our evaluation of the U.S. Tax Reform’s impact on the business operations, we have determined that we are no longer indefinitely reinvested in these undistributed foreign earnings as well as foreign earnings after December 31, 2017. We remain indefinitely reinvested in the outside basis differences of our foreign subsidiaries.  


44


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 $88$276 million in the first quarternine months of 2020, a $33$6 million increasedecrease compared to cash flows from operating activities of $55$282 million in the first quarternine months of 2019. This increasedecrease in cash flows from operating activities is primarily due to a decrease in profitability. This decrease was partially offset by an improvement in cash flow from working capital requirements partially offset by a decrease in profitability in the first quarter of 2020 when compared to the first quarter of 2019.. We received income tax refunds, net of payments, of $25 million during the first quarternine months of 2020 compared to income tax payments, net of refunds, of $6$55 million in the first quarternine months of 2019.

Investing Activities

Cash flows used for investing activities in the first quarternine months of 2020 amounted to $62$160 million, a $16$4 million increase compared to cash flows used for investing activities of $46$156 million in the first quarternine months of 2019.

The use of cash in the first quarternine months of 2020 was attributable to additions to property, plant and equipment of $62 million.$130 million and the acquisition of the Appvion Point of Sale Business in the second quarter of 2020 ($30 million).

The use of cash in the first quarternine months of 2019 was attributable to additions to property, plant and equipment of $46 million.$157 million. This use of cash was partially offset by proceeds of disposals of property, plant and equipment of $1 million.

Our capital expenditures for 2020 are expected to be between $140$160 million and $150$170 million.

Financing Activities

Cash flows provided from financing activities totaled $67$39 million in the first quarternine months of 2020 compared to cash flows used for financing activities of $25$137 million in the first quarternine months of 2019.

InThe primary source of cash flows provided from financing activities was from proceeds of the term loan in the first quarternine months of 2020 we increased our net proceeds from($297 million). This was partially offset by the decrease in borrowings under our credit facilities (revolver and receivables securitization) ($165135 million), the repurchase of our common stock ($59 million), dividend payments ($51 million) and a decrease in bank indebtedness ($10 million).


The use of cash in the first nine months of 2019 was primarily the result of the repurchase of our common stock ($139 million) and dividend payments ($83 million). This was partially offset by the use of cash primarily due to the repurchase ofnet increase in borrowings under our common stockcredit facilities (revolver and receivable securitization) ($5985 million) and dividend payments ($26 million).

The use of cash in the first quarter of 2019 was primarily the result of dividend payments ($27 million).

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $951$881 million as of March 31,September 30, 2020 comparedto $887 million as of December 31, 2019.

Term Loan

On May 5, 2020, we entered into a $300 million Term Loan Agreement that matures on May 5, 2025. We used borrowings under the Term Loan Agreement to repay other debt, to pay related fees and expenses. A mandatory repayment of $3 million was made on September 30, 2020. For more information, refer to Note 13 “Long-Term Debt” of the financial statements in this Quarterly Report on Form 10-Q for more information.

Revolving Credit Facility

In August 2018, we amended and restated ourWe have an unsecured $700 million revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks extending the Credit Agreement’s maturity date from August 18, 2021 tothat matures on August 22, 2023.

Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic subsidiaries. Borrowings by certain foreign subsidiaries under the Credit Agreement are guaranteed by the Company, our significant domestic subsidiaries and certain of our significant foreign subsidiaries.

Borrowings under the Credit Agreement bear interest at the LIBOR, EURIBOR, Canadian bankers'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 Financial Conduct Authority in the United Kingdom plans to phase out LIBOR by the end of 2021. We do not anticipate a significant impact to our financial position from the planned phase out of LIBOR.

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 March 31,September 30, 2020 and March 31,September 30, 2019, we were in compliance with these financial covenants, and had no borrowings under the Credit Agreement amounted to $220 million (March 31,(September 30, 2019 – nil)$45 million). At March 31,September 30, 2020 and March 31,September 30, 2019, our interest coverage ratio was 9.37.4 and 14.8,14.7, respectively, and our leverage ratio was 2.12.4 and 1.1,1.3, respectively. At March 31,September 30, 2020 and March 31,September 30, 2019, we had no$51 million and nil, respectively, of outstanding letters of credit, leaving $480$649 million unused and available under this facility.


45facility (September 30, 2019 – $655 million).

 


Receivables Securitization

We have a $150 million receivables securitization facility that matures in November 2021 .2021. 

At March 31,September 30, 2020, we had no borrowings under the receivables securitization facility, amounted to $80 million, and we had $50 million ofno outstanding letters of credit under the program (March 31,(September 30, 2019 – $50$90 million and $53$50 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 March 31,September 30, 2020, we had $11$139 million unused and available under the receivable securitization facility.

Common Stock

On February 18,May 5, 2020, we suspended the distribution of our Board of Directors approved aregular quarterly dividend of $0.455 per share, to be paid to holders of our common stock. Total dividends of approximately $25 million were paid on April 15, 2020 to shareholders of record on April 2, 2020.

Recent Financing Actions

Subsequent to March 31, 2020, we have taken actions and may continue to take actions intended to increase our cash position and preserve financial flexibilitystock repurchase program in light of current uncertainty in the global markets.

On May 5, 2020, we entered into a $300 million new Term Loan Agreement that matures on May 5, 2025. The Term Loan Agreement was fully drawn down at closing. 2020. We are using borrowings under the Term Loan Agreement to repay other debt, to pay related fees and expenses and to add to cash reserves. For more information, refer to Note 17 “Subsequent Events” of the financial statements in this Quarterly Report on Form 10-Q for more information on the new Term Loan Agreement.

We have suspended our capital return program; including the company’s stock repurchase program and the suspension of our regular quarterly dividend. Our Board of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

GUARANTEES

Indemnifications

In the normal course of business, we offer indemnifications relating to the sale of our 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 March 31,September 30, 2020, 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 March 31,September 30, 2020, 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

46


impairment, pension and other post-retirement benefit plans, income taxes, 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, 2019.

There has not been any material change to our policies since December 31, 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;

 

our ability to implement our business diversification initiatives, including repurposing of assets and strategic acquisitions;acquisitions or divestitures, including facility closures;

failure to achieve our cost containment goals, costs of conversion in excess of our expectations and demand for linerboard;

 

product selling prices;

 

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;

 

performance of our manufacturing operations, including unexpected maintenance requirements;

 

the level of competition from domestic and foreign producers;

 

cyberattackcyberattacks or other security breaches;

 

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;

 

transportation costs;

 

the loss of current customers or the inability to obtain new customers;

 

legal proceedings;

 

changes in asset valuations, including impairment of long-lived assets, 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;

 

a material disruption in our supply chain, manufacturing, or distribution operations or customer demand such as public health crises that impact trade or the general economy, including COVID-19 and other viruses, diseases or illnesses; 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, 2019.

47


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, 2019. Except for the addition of “Equity Risk”, there has not been any material change in our exposure to market risk since December 31, 2019. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 34 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.

EQUITY RISK

We are exposed to changes in share price with regard to our stock-based compensation program. We manage our exposure through the use of derivative instruments such as equity swap contracts. In March 2020, we entered into a total return swap agreement, covering 500,000 common shares maturing on March 4, 2022.2022, covering 500,000 common shares.

 

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 March 31, 2019,September 30, 2020, 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 March 31, 2019,September 30, 2020, 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.

 

PART

PART II OTHER INFORMATION

See Note 1416 “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, 2019.


48


ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2019, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. Except as stated below, there were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

A global pandemic (or any disease outbreak, including epidemics, pandemics, or similar widespread public health concerns such as the recent COVID-19 pandemic) could have a material adverse effect on the Company’s business operations, results of operations, cash flows and financial position

The Company’s business may be negatively impacted by the fear of exposure to or actual effects of a disease outbreak, epidemic, pandemic, or similar widespread public health concern, such as travel restrictions or recommendations or mandates from governmental authorities to avoid large gatherings or to self-quarantine. These impacts include, but are not limited to:

• Significant reductions in demand or significant volatility in demand for one or more of the Company’s products, which may be caused by, among other things: the closing of offices and schools where paper is used extensively, the temporary inability of consumers to purchase the Company’s products due to illness, quarantine or other travel restrictions, financial hardship, shifts in demand away from one or more of our more discretionary or higher priced products to lower priced products or use of alternatives, stockpiling or similar pantry-loading activity; if prolonged, such impacts can further increase the difficulty of planning for operations and may adversely impact the Company’s results;

• Inability to meet the Company’s customers’ needs and achieve cost targets due to disruptions in the Company’s manufacturing and supply arrangements caused by constrained workforce capacity or the loss or disruption of other essential manufacturing and supply elements such as raw materials or other finished product components, transportation, or other manufacturing and distribution capability;

• Failure of third parties on which the Company rely,relies, including the Company’s suppliers, distributors, contractors or commercial banks, to meet their obligations to the Company, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties and may adversely impact the Company’s operations; or

• Significant changes in the political conditions in the markets in which the Company’s manufacture, sellCompany manufactures, sells or distributedistributes its products, including quarantines, import/export restrictions, price controls, or governmental or regulatory actions, closures or other restrictions that limit or close the Company’s operating and manufacturing facilities, restrict the Company’s employees’ ability to travel or perform necessary business functions, or otherwise prevent the Company’s suppliers or customers from sufficiently staffing operations, including operations necessary for the production, distribution and sale of the Company’s products, which could adversely impact the Company’s results.


Despite the Company’s efforts to manage and remedy these impacts to the Company, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of any such outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects.


49


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

On May 5, 2020, due to the unprecedented market conditions and uncertainty caused by the COVID-19 pandemic, we suspended our regular quarterly dividend and stock repurchase program, in order to preserve cash and provide additional flexibility in the current environment. Our Board of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

Share repurchase activity under our share repurchase program was as follows during the three-month period ended March 31,September 30, 2020:

 

Period

 

(a) Total Number of

Shares Purchased

 

 

(b) Average Price Paid

per Share

 

 

(c) Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

 

 

(d) Approximate

Dollar Value of Shares

that May Yet be

Purchased under the

Plans or Programs

(in 000s)

 

January 1 through January 31, 2020

 

 

172,087

 

 

$

35.15

 

 

 

172,087

 

 

$

396,992

 

February 1 through February 29, 2020

 

 

1,490,376

 

 

$

33.14

 

 

 

1,490,376

 

 

$

347,601

 

March 1 through March 31, 2020

 

 

135,843

 

 

$

29.45

 

 

 

135,843

 

 

$

343,601

 

 

 

 

1,798,306

 

 

$

33.05

 

 

 

1,798,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

(a) Total Number of

Shares Purchased

 

 

(b) Average Price Paid

per Share

 

 

(c) Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

 

 

(d) Approximate

Dollar Value of Shares

that May Yet be

Purchased under the

Plans or Programs

(in 000s)

 

July 1  through July 31, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

August 1 through August 31, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

September  1 through September  30, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

During the firstthird quarter of 2020, we repurchased 1,798,306did not repurchase any shares at an average price of $33.05 per share, for a total cost of $59 million under our stockshare repurchase program (the “Program”). As of March 31,September 30, 2020, we havehad $344 million of remaining availability under our Program. 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.stock. 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 the first quarternine months of 2020, we repurchased 1,798,306 shares at an average price of $33.05 for a total cost of $59 million.

During the first nine months of 2019, there were nowe repurchased 4,076,723 shares repurchased under the Program.

Due to the unprecedented market conditions and uncertainty caused by the COVID-19 pandemic, we have suspended our capital return program; including the Company’s stock repurchase program, in order to preserve cash and provide additional flexibility in the current environment. Our Boardat an average price of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

$35.47 for a total cost of $145 million.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

50



ITEM 6. EXHIBITS

 

 

 

 

 

    Incorporated  by reference to:

Exhibit

Number

 

Exhibit Description

 

Form

Exhibit

Filing Date

 

 

 

10.1

 

Term Loan Agreement, dated as of May 5, 2020, among Domtar Corporation, as borrower, the lenders party thereto and Cobank, ACB, a farm credit bank, as agent

 

31.1

 

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase

 

 

 

101.PRE

 

Inline XBRL Extension Presentation Linkbase

 

 

 

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

51

 


 


SIGNATURE

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

 

 

Date: May 8,November 6, 2020

 

 

By:

/s/ Daniel Buron

 

Daniel Buron

 

Senior Vice-President and Chief Financial Officer

 

 

By:

/s/ Razvan L. Theodoru

 

Razvan L. Theodoru

 

Vice-President, Corporate Law and Secretary

 

 

5264