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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, 2021

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)

 

delaware

 

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.    YES      NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES      NO  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

At April 30, 2021, 50,245,328 shares of the issuer’s common stock were outstanding.

 

 

 


 

 

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2021

INDEX

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

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

3

 

 

 

 

CONSOLIDATED BALANCE SHEETS

4

 

 

 

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

5

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

6

 

 

 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

 

 

 

ITEM 2.

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

38

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

47

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

47

 

 

 

PART II

OTHER INFORMATION

47

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

47

 

 

 

ITEM 1A.

RISK FACTORS

47

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

48

 

 

 

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

48

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

48

 

 

 

ITEM 5.

OTHER INFORMATION

48

 

 

 

ITEM 6.

EXHIBITS

49

 

 

 

 

 


 

 

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

 

DOMTAR CORPORATION

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

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

For the three months ended

 

 

March 31,

 

 

March 31,

 

 

2021

 

 

2020

 

 

(Unaudited)

 

 

$

 

 

$

 

Sales

 

944

 

 

 

1,031

 

Operating expenses

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

809

 

 

 

906

 

Depreciation and amortization

 

54

 

 

 

58

 

Selling, general and administrative

 

64

 

 

 

66

 

Impairment of long-lived assets (NOTE 11)

 

6

 

 

 

 

Closure and restructuring costs (NOTE 11)

 

3

 

 

 

 

Asset conversion costs (NOTE 11)

 

8

 

 

 

 

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

 

(2

)

 

 

2

 

 

 

942

 

 

 

1,032

 

Operating income (loss)

 

2

 

 

 

(1

)

Interest expense, net

 

15

 

 

 

14

 

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

 

(6

)

 

 

(4

)

Loss before income taxes and equity loss

 

(7

)

 

 

(11

)

Income tax expense (NOTE 8)

 

 

 

 

3

 

Equity method investment loss, net of taxes

 

 

 

 

1

 

Loss from continuing operations

 

(7

)

 

 

(15

)

(Loss) earnings from discontinued operations, net of taxes (NOTE 3)

 

(22

)

 

 

20

 

Net (loss) earnings

 

(29

)

 

 

5

 

Per common share (in dollars) (NOTE 5)

 

 

 

 

 

 

 

Basic net (loss) earnings

 

 

 

 

 

 

 

Loss from continuing operations

 

(0.13

)

 

 

(0.27

)

(Loss) earnings from discontinued operations

 

(0.41

)

 

 

0.36

 

Basic net (loss) earnings

 

(0.54

)

 

 

0.09

 

Diluted net (loss) earnings

 

 

 

 

 

 

 

Loss from continuing operations

 

(0.13

)

 

 

(0.27

)

(Loss) earnings from discontinued operations

 

(0.41

)

 

 

0.36

 

Diluted net (loss) earnings

 

(0.54

)

 

 

0.09

 

Weighted average number of common shares outstanding (millions)

 

 

 

 

 

 

 

Basic

 

53.5

 

 

 

56.1

 

Diluted

 

53.5

 

 

 

56.2

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

 

 

 

0.46

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

(29

)

 

 

5

 

Other comprehensive income (loss) (NOTE 12):

 

 

 

 

 

 

 

Net derivative gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

Net gains (losses) arising during the period, net of tax of $(3) (2020 – $16)

 

9

 

 

 

(49

)

Less: Reclassification adjustment for (gains) losses included in

   net (loss) earnings, net of tax of $(1) (2020 – $(2))

 

(2

)

 

 

7

 

Foreign currency translation adjustments

 

72

 

 

 

(74

)

Change in unrecognized gains and prior service cost related to pension and

   post-retirement benefit plans, net of tax of $(1) (2020 – $(1))

 

5

 

 

 

1

 

Other comprehensive income (loss)

 

84

 

 

 

(115

)

Comprehensive income (loss)

 

55

 

 

 

(110

)

 

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

671

 

 

 

309

 

Receivables, less allowances of $5 and $6

 

 

450

 

 

 

380

 

Inventories (NOTE 9)

 

 

600

 

 

 

630

 

Prepaid expenses

 

 

53

 

 

 

50

 

Income and other taxes receivable

 

 

49

 

 

 

54

 

Current assets held for sale (NOTE 3)

 

 

 

 

 

1,133

 

Total current assets

 

 

1,823

 

 

 

2,556

 

Property, plant and equipment, net

 

 

2,022

 

 

 

2,023

 

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

 

 

55

 

 

 

59

 

Intangible assets, net

 

 

29

 

 

 

29

 

Other assets

 

 

192

 

 

 

189

 

Total assets

 

 

4,121

 

 

 

4,856

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

4

 

 

 

 

Trade and other payables

 

 

504

 

 

 

484

 

Income and other taxes payable

 

 

16

 

 

 

15

 

Operating lease liabilities due within one year (NOTE 10)

 

 

19

 

 

 

20

 

Long-term debt due within one year

 

 

301

 

 

 

13

 

Current liabilities held for sale (NOTE 3)

 

 

 

 

 

295

 

Total current liabilities

 

 

844

 

 

 

827

 

Long-term debt

 

 

503

 

 

 

1,084

 

Operating lease liabilities (NOTE 10)

 

 

47

 

 

 

50

 

Deferred income taxes and other

 

 

324

 

 

 

321

 

Other liabilities and deferred credits

 

 

312

 

 

 

314

 

Commitments and contingencies (NOTE 14)

 

 

 

 

 

 

 

 

Shareholders' equity (NOTE 13)

 

 

 

 

 

 

 

 

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

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

 

 

1

 

 

 

1

 

Treasury stock $0.01 par value; 14,758,312 and 9,806,566 shares

 

 

 

 

 

 

Additional paid-in capital

 

 

1,493

 

 

 

1,717

 

Retained earnings

 

 

817

 

 

 

846

 

Accumulated other comprehensive loss

 

 

(220

)

 

 

(304

)

Total shareholders' equity

 

 

2,091

 

 

 

2,260

 

Total liabilities and shareholders' equity

 

 

4,121

 

 

 

4,856

 

 

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

 

 

 

4

 


 

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

 

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, 2020

 

 

55.2

 

 

 

1

 

 

 

1,717

 

 

 

846

 

 

 

(304

)

 

 

2,260

 

Stock-based compensation, net of tax

 

 

0.1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

 

 

 

(29

)

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

Less: Reclassification adjustment for gains

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72

 

 

 

72

 

Change in unrecognized gains and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Stock repurchase

 

 

(5.1

)

 

 

 

 

 

(223

)

 

 

 

 

 

 

 

 

(223

)

Balance at March 31, 2021

 

 

50.2

 

 

 

1

 

 

 

1,493

 

 

 

817

 

 

 

(220

)

 

 

2,091

 

 

 

 

 

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

 

 

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

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

(29

)

 

 

5

 

Adjustments to reconcile net (loss) earnings to cash flows

   from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

64

 

 

 

72

 

Deferred income taxes and tax uncertainties (NOTE 8)

 

 

(4

)

 

 

1

 

Impairment of long-lived assets (NOTE 11)

 

 

6

 

 

 

 

Net loss on disposition of discontinued operations (NOTE 3)

 

 

32

 

 

 

 

Stock-based compensation expense

 

 

2

 

 

 

1

 

Equity method investment loss, net

 

 

 

 

 

1

 

Other

 

 

2

 

 

 

 

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

 

 

 

 

 

 

 

 

Receivables

 

 

(68

)

 

 

(28

)

Inventories

 

 

32

 

 

 

28

 

Prepaid expenses

 

 

3

 

 

 

(5

)

Trade and other payables

 

 

(6

)

 

 

(16

)

Income and other taxes

 

 

4

 

 

 

39

 

Difference between employer pension and

   other post-retirement contributions and

   pension and other post-retirement expense

 

 

(3

)

 

 

(1

)

Other assets and other liabilities

 

 

(2

)

 

 

(9

)

Cash flows from operating activities

 

 

33

 

 

 

88

 

Investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(51

)

 

 

(62

)

Proceeds from sale of business, net of cash disposed (NOTE 3)

 

 

897

 

 

 

 

Cash flows provided from (used for) investing activities

 

 

846

 

 

 

(62

)

Financing activities

 

 

 

 

 

 

 

 

Dividend payments

 

 

 

 

 

(26

)

Stock repurchase

 

 

(223

)

 

 

(59

)

Net change in bank indebtedness

 

 

4

 

 

 

(10

)

Change in revolving credit facility

 

 

 

 

 

140

 

Proceeds from receivables securitization facility

 

 

 

 

 

25

 

Repayments of long-term debt

 

 

(294

)

 

 

 

Other

 

 

(3

)

 

 

(3

)

Cash flows (used for) provided from financing activities

 

 

(516

)

 

 

67

 

Net increase in cash and cash equivalents

 

 

363

 

 

 

93

 

Impact of foreign exchange on cash

 

 

(1

)

 

 

(2

)

Cash and cash equivalents at beginning of period

 

 

309

 

 

 

61

 

Cash and cash equivalents at end of period

 

 

671

 

 

 

152

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Net cash payments (refund) for:

 

 

 

 

 

 

 

 

Interest

 

 

18

 

 

 

17

 

Income taxes

 

 

(7

)

 

 

(25

)

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

8

 

 

 

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

9

 

 

 

NOTE 3

DISCONTINUED OPERATIONS

10

 

 

 

NOTE 4

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

13

 

 

 

NOTE 5

(LOSS) EARNINGS PER COMMON SHARE

17

 

 

 

NOTE 6

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

18

 

 

 

NOTE 7

OTHER OPERATING (INCOME) LOSS, NET

19

 

 

 

NOTE 8

INCOME TAXES

20

 

 

 

NOTE 9

INVENTORIES

21

 

 

 

NOTE 10

LEASES

22

 

 

 

NOTE 11

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

24

 

 

 

NOTE 12

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

25

 

 

 

NOTE 13

SHAREHOLDERS’ EQUITY

27

 

 

 

NOTE 14

COMMITMENTS AND CONTINGENCIES

28

 

 

 

NOTE 15

SEGMENT DISCLOSURES

31

 

 

 

NOTE 16

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

32

 

 

 

 

 

 

 

 

 

 

 

 

7

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(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 three months of the year may not necessarily be indicative of full 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, 2020, as filed with the Securities and Exchange Commission. The December 31, 2020 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.

 

 

 

8

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

 

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

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 3.

 

DISCONTINUED OPERATIONS

Sale of Personal Care business

On March 1, 2021, Domtar completed the previously announced sale of the Company’s Personal Care business to American Industrial Partners (“AIP”) for a purchase price of $920 million in cash, including elements of working capital estimated at $130 million, subject to customary adjustments. Domtar received a net amount of $897 million, which represents the selling price minus the estimated settlements of the net indebtedness and other elements of working capital adjustments. In connection with the sale, the Company entered into Transition Services Agreements with AIP pursuant to which the Company agreed to provide various back-office and information technology support until the business is fully separated from Domtar.

The results of operations of the Company’s Personal Care business were reclassified to discontinued operations. These results have been summarized in (Loss) earnings from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for each period presented. The Consolidated Statements of Cash Flows were not reclassified to reflect discontinued operations. Personal Care was previously disclosed as a separate reportable business segment.

 

Major components of (loss) earnings from discontinued operations:

 

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

$

 

 

$

 

Sales

 

 

154

 

 

 

266

 

Operating expenses

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

111

 

 

 

196

 

Depreciation and amortization

 

 

10

 

 

 

14

 

Selling, general and administrative

 

 

24

 

 

 

36

 

Closure and restructuring costs

 

 

1

 

 

 

 

Other operating loss, net

 

 

1

 

 

 

 

 

 

 

147

 

 

 

246

 

Operating income

 

 

7

 

 

 

20

 

Net loss on disposition of discontinued operations

 

 

(32

)

 

 

 

(Loss) earnings from discontinued operations before income taxes

 

 

(25

)

 

 

20

 

Income tax benefit

 

 

(3

)

 

 

 

Net (loss) earnings from discontinued operations

 

 

(22

)

 

 

20

 

 

 


10

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

 

 

Major classes of assets and liabilities classified as held for sale in the accompanying Balance Sheets were as follows:

 

 

 

At

 

 

 

December 31,

 

 

 

2020

 

 

 

$

 

Assets

 

 

 

 

Receivables

 

 

110

 

Inventories

 

 

138

 

Prepaid expenses

 

 

3

 

Income and other taxes receivable

 

 

3

 

Property, plant and equipment, net

 

 

351

 

Operating lease right-of-use assets

 

 

15

 

Intangible assets, net (2)(3)

 

 

554

 

Other assets

 

 

2

 

Total assets

 

 

1,176

 

Loss on classification as held for sale

 

 

(43

)

Total assets of the disposal group classified as held for sale on the

Consolidated Balance Sheets (1)

 

 

1,133

 

 

 

 

 

 

Liabilities

 

 

 

 

Trade and other payables

 

 

128

 

Income and other taxes payable

 

 

12

 

Operating lease liabilities due within one year

 

 

8

 

Long-term debt

 

 

1

 

Operating lease liabilities

 

 

8

 

Deferred income taxes and other

 

 

130

 

Other liabilities and deferred credits

 

 

8

 

Total liabilities of the disposal group classified as held for sale on the

Consolidated Balance Sheets (1)

 

 

295

 

 

 

(1)

Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company’s Consolidated Balance Sheet at December 31, 2020.

 

(2)

Intangible assets, net at December 31, 2020 are comprised of $290 million of indefinite-lived assets and $264 million of definite-lived assets.

 

(3)

Indefinite-lived intangible assets of the disposal group held for sale consists of trade names ($248 million) and catalog rights ($42 million) following the business acquisitions in the Company’s former Personal Care segment.

 

Cash Flows from Discontinued Operations:

 

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

$

 

 

$

 

Cash flows from operating activities

 

 

16

 

 

 

6

 

Cash flows used for investing activities

 

 

(3

)

 

 

(8

)

 

 

 

 

 

 

 

 

 

 


11

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

 

 

Use of proceeds

 

As previously announced, the Company intends to use $600 million of the proceeds of the sale to reduce debt and $300 million to repurchase shares.

During the quarter, the Company used $223 million of the proceeds to repurchase shares and repaid the $294 million of outstanding indebtedness under its Term Loan Agreement.

Additionally, on April 8, 2021, the Company redeemed the 4.4% Notes, originally due in 2022, at a redemption price of 100 percent of the principal amount of $300 million, plus accrued and unpaid interest, as well as a make-whole premium of $11 million. As at March 31, 2021, the 4.4% Notes were reclassified and presented under Long-term debt due within one year on the Consolidated Balance Sheets. The debt extinguishment as well as the related loss on debt extinguishment, will be recognized in the second quarter of 2021.

 

 

 

12

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(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, 2021, two customers located in the U.S. represented 13% or $59 million, and 11% or $51 million, respectively, of the Company’s receivables (December 31, 2020 – two customers located in the U.S. represented 15% or $58 million, and 12% or $46 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.

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 33 months.

 

13

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. 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, 2021 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021 (1)

 

 

6,575,000

 

 

 

$

19

 

 

 

37%

 

2022

 

 

9,270,000

 

 

 

$

25

 

 

 

35%

 

2023

 

 

4,210,000

 

 

 

$

12

 

 

 

15%

 

 

(1)

Represents the remaining nine months of 2021

(2)

MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of March 31, 2021.

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States and Canada. As a result, it is exposed to movements in foreign currency exchange rates in Canada. Moreover, certain assets and liabilities are denominated in Canadian dollars 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. 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.

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, 2021 to hedge forecasted purchases and sales:

 

Currency exposure hedged

 

Year of

maturity

 

Notional

contractual value

 

Percentage of

forecasted net

exposures under

contracts

 

 

Average

Protection rate

 

Average

Obligation rate

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

2021 (1)

 

555 CAD

 

78%

 

 

1 USD = 1.3334

 

1 USD = 1.3520

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

2022

 

442 CAD

 

47%

 

 

1 USD = 1.3327

 

1 USD = 1.3405

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

2023

 

66 CAD

 

7%

 

 

1 USD = 1.2685

 

1 USD = 1.2685

 

(1)

Represents the remaining nine months of 2021

 

The foreign exchange derivative contracts were effective as of March 31, 2021.

14

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements and disclosures, establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

Level 2

Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3

Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

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) and (c) below) at March 31, 2021 and December 31, 2020, 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, 2021

 

 

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

 

 

34

 

 

 

 

 

 

34

 

 

 

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

14

 

 

 

 

 

 

14

 

 

 

 

(a)

Other assets

Total Assets

 

 

49

 

 

 

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

4

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

   liability awards

 

 

4

 

 

 

4

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

   liability awards

 

 

13

 

 

 

13

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Equity swap contracts

 

 

5

 

 

 

5

 

 

 

 

 

 

 

 

Other assets

Long-term debt due within

   one year

 

 

312

 

 

 

 

 

 

312

 

 

 

 

(b)

Long-term debt due within one year

Long-term debt

 

 

632

 

 

 

 

 

 

632

 

 

 

 

(c)

Long-term debt

 

The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $2 million at March 31, 2021, which will be recognized in Cost of sales upon maturity of the derivatives at the then prevailing values, which may be different from those at March 31, 2021.


15

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

 

The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $47 million at March 31, 2021, of which a gain of $33 million will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at March 31, 2021.

 

Fair Value of financial instruments at:

 

December 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

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

Derivatives designated as

   hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

31

 

 

 

 

 

 

31

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

16

 

 

 

 

 

 

16

 

 

 

 

(a)

Other assets

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other assets

Total Assets

 

 

48

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

3

 

 

 

 

 

 

3

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

6

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation -

   liability awards

 

 

5

 

 

 

5

 

 

 

 

 

 

 

 

Trade and other payables

Stock-based compensation -

   liability awards

 

 

11

 

 

 

11

 

 

 

 

 

 

 

 

Other liabilities and deferred credits

Equity swap contracts

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

 

Other assets

Long-term debt due within

   one year

 

 

13

 

 

 

 

 

 

13

 

 

 

 

(b)

Long-term debt due within one year

Long-term debt

 

 

1,221

 

 

 

 

 

 

1,221

 

 

 

 

(c)

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 March 31, 2021 and December 31, 2020. The carrying value of the Company’s long-term debt due within one year is $301 million and $13 million at March 31, 2021 and December 31, 2020, respectively.

(c)

The carrying value of the Company’s long-term debt is $503 million and $1,084 million at March 31, 2021 and December 31, 2020, 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.

 

16

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 5.

_________________

(LOSS) EARNINGS PER COMMON SHARE

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

 

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

Loss from continuing operations

 

$

(7

)

 

$

(15

)

(Loss) earnings from discontinued operations, net of taxes

 

$

(22

)

 

$

20

 

Net (loss) earnings

 

$

(29

)

 

$

5

 

Weighted average number of common shares

   outstanding (millions)

 

 

53.5

 

 

 

56.1

 

Effect of dilutive securities (millions)

 

 

 

 

 

0.1

 

Weighted average number of diluted common shares

   outstanding (millions)

 

 

53.5

 

 

 

56.2

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

    Loss from continuing operations

 

$

(0.13

)

 

$

(0.27

)

   (Loss) earnings  from discontinued operations

 

$

(0.41

)

 

$

0.36

 

   Basic net (loss) earnings per common share

 

$

(0.54

)

 

$

0.09

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

    Loss from continuing operations

 

$

(0.13

)

 

$

(0.27

)

   (Loss) earnings from discontinued operations

 

$

(0.41

)

 

$

0.36

 

   Diluted net (loss) earnings per common share

 

$

(0.54

)

 

$

0.09

 

 

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

 

 

March 31,

 

 

March 31,

 

 

2021

 

 

2020

 

Options to purchase common shares

 

191,720

 

 

 

410,547

 

 


17

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(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 and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three months ended March 31, 2021, the pension expense was $10 million (2020 – $11 million).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. that 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:

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

$

 

 

$

 

Service cost

 

 

7

 

 

 

7

 

Interest expense

 

 

8

 

 

 

11

 

Expected return on plan assets

 

 

(16

)

 

 

(17

)

Amortization of net actuarial loss

 

 

2

 

 

 

2

 

Net periodic benefit cost

 

 

1

 

 

 

3

 

 

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 (Loss) and Comprehensive (Loss) Income.

 

For the three months ended March 31, 2021, the Company contributed $3 million (2020 – $2 million) to the pension plans and $1 million (2020 – $1 million) to the other post-retirement benefit plans.


18

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 7.

_________________

OTHER OPERATING (INCOME) LOSS, NET

Other operating (income) loss, 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 (income) loss, net includes the following:

 

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

$

 

 

$

 

Bad debt expense

 

 

(2

)

 

 

4

 

Environmental provision

 

 

1

 

 

 

1

 

Foreign exchange loss (gain)

 

 

1

 

 

 

(2

)

Other

 

 

(2

)

 

 

(1

)

Other operating (income) loss, net

 

 

(2

)

 

 

2

 

 

 

 

 


19

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 8.

_________________

INCOME TAXES

 

For the first quarter of 2021, the Company had no income tax expense or benefit, as $1 million of current income tax benefit was offset by the deferred income tax expense of $1 million. This compares to an income tax expense of $3 million in the first quarter of 2020, consisting of $3 million of current income tax benefit and a deferred income tax expense of $6 million. The Company received refunds, net of income tax payments, of $7 million during the first quarter of 2021. The effective tax rate was 0% compared with an effective tax rate of -27% in the first quarter of 2020. The effective tax rate for the first quarter of 2021 was impacted by additional tax expense on stock-based compensation which vested during the quarter. Also, a weaker US dollar resulted in an increase in the Company’s deferred tax liability on unremitted foreign earnings. The effective tax rate for the first quarter of 2020 was impacted by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits.

 

 


20

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 9.

_________________

INVENTORIES

The following table presents the components of inventories:

 

 

 

March 31,

 

 

December 31,

 

 

2021

 

 

2020

 

 

$

 

 

$

Work in process and finished goods

 

 

292

 

 

321

Raw materials

 

 

103

 

 

107

Operating and maintenance supplies

 

 

205

 

 

202

 

 

 

600

 

 

630

 


21

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 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 12 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

 

 

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Operating lease expense

 

 

6

 

 

 

5

 

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

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

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

6

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

1

 

 

 

2

 

 

 

 

22

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 10. LEASES (CONTINUED)

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Operating leases

 

 

 

 

 

 

 

 

 

 

Operating leases right-of-use assets

 

 

55

 

 

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease liabilities due within one year

 

 

19

 

 

 

20

 

 

 

Long-term operating lease liabilities

 

 

47

 

 

 

50

 

 

 

 

 

 

66

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

11

 

 

 

11

 

 

 

Accumulated depreciation

 

 

(3

)

 

 

(3

)

 

 

 

 

 

8

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due within one year

 

 

1

 

 

 

1

 

 

 

Long-term debt

 

 

9

 

 

 

9

 

 

 

 

 

 

10

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

4.7 years

 

 

4.7 years

 

 

 

 

Finance leases

 

8.6 years

 

 

8.8 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

4.4

%

 

 

4.4

%

 

 

 

Finance leases

 

 

6.1

%

 

 

6.1

%

 

 

Maturities of lease liabilities at March 31, 2021 were as follows:

 

 

 

 

 

 

Operating leases

 

 

Finance leases

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

2021

 

 

2021

 

 

 

 

 

 

 

$

 

 

$

 

 

2021 (1)

 

 

 

 

 

15

 

 

 

1

 

 

2022

 

 

 

 

 

18

 

 

 

2

 

 

2023

 

 

 

 

 

15

 

 

 

2

 

 

2024

 

 

 

 

 

10

 

 

 

2

 

 

2025

 

 

 

 

 

6

 

 

 

1

 

 

Thereafter

 

 

 

 

 

9

 

 

 

5

 

 

Total lease payments

 

 

 

 

 

73

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Imputed interest

 

 

 

 

 

7

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease liabilities

 

 

 

 

 

66

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the remaining nine months of 2021.

 

23

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 11.

_________________

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 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 shut down at the end of February 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. During the quarter, the Company also completed the conversion of the Ashdown mill to 100% softwood and fluff pulp, which was necessary for an eventual expansion into containerboard. For the three months ended March 31, 2021, the Company recorded $6 million of accelerated depreciation under Impairment of long-lived assets, and $3 million of severance and termination costs under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, the Company recorded $8 million under Asset conversion costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) as part of the conversion of its Kingsport, Tennessee mill to a linerboard mill.


24

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 12.

_________________

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component(1) for the three months ended March 31, 2021 and the year ended December 31, 2020:

 

 

 

Net derivative

gains (losses) on

cash flow hedges

 

 

Pension items(2)

 

 

Post-retirement

benefit items(2)

 

 

Foreign currency

items

 

 

Total

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at December 31, 2019

 

 

(5

)

 

 

(197

)

 

 

11

 

 

 

(202

)

 

 

(393

)

Natural gas swap contracts

 

 

1

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

1

 

Currency options

 

 

3

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

3

 

Foreign exchange forward contracts

 

 

23

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

23

 

Net loss

 

N/A

 

 

 

(21

)

 

 

(1

)

 

N/A

 

 

 

(22

)

Foreign currency items

 

N/A

 

 

N/A

 

 

N/A

 

 

 

63

 

 

 

63

 

Other comprehensive income (loss)

   before reclassifications

 

 

27

 

 

 

(21

)

 

 

(1

)

 

 

63

 

 

 

68

 

Amounts reclassified from Accumulated

   other comprehensive loss

 

 

12

 

 

 

11

 

 

 

(2

)

 

 

 

 

 

21

 

Net current period other comprehensive

   income (loss)

 

 

39

 

 

 

(10

)

 

 

(3

)

 

 

63

 

 

 

89

 

Balance at December 31, 2020

 

 

34

 

 

 

(207

)

 

 

8

 

 

 

(139

)

 

 

(304

)

Natural gas swap contracts

 

 

1

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

1

 

Currency options

 

 

1

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

1

 

Foreign exchange forward contracts

 

 

7

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

7

 

Foreign currency items

 

N/A

 

 

N/A

 

 

N/A

 

 

 

72

 

 

 

72

 

Other comprehensive income

   before reclassifications

 

 

9

 

 

 

 

 

 

 

 

 

72

 

 

 

81

 

Amounts reclassified from Accumulated

   other comprehensive loss

 

 

(2

)

 

 

5

 

 

 

 

 

 

 

 

 

3

 

Net current period other comprehensive

   income

 

 

7

 

 

 

5

 

 

 

 

 

 

72

 

 

 

84

 

Balance at March 31, 2021

 

 

41

 

 

 

(202

)

 

 

8

 

 

 

(67

)

 

 

(220

)

 

(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.

 

 

25

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

 

The following table presents reclassifications out of Accumulated other comprehensive loss:

 

Details about Accumulated other comprehensive loss components

 

Amounts reclassified from

Accumulated other

comprehensive loss

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

$

 

 

$

 

Net derivative losses on cash flow hedge

 

 

 

 

 

 

 

 

Natural gas swap contracts (1)

 

 

 

 

 

(5

)

Currency options and forwards (1)

 

 

10

 

 

 

(4

)

Net investment hedge (2)

 

 

(9

)

 

 

 

Total before tax

 

 

1

 

 

 

(9

)

Tax benefit

 

 

1

 

 

 

2

 

Net of tax

 

 

2

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension items

 

 

 

 

 

 

 

 

Amortization of net actuarial loss (3)

 

 

(2

)

 

 

(2

)

Discontinued operations

 

 

(4

)

 

 

 

Total before tax

 

 

(6

)

 

 

(2

)

Tax benefit

 

 

1

 

 

 

1

 

Net of tax

 

 

(5

)

 

 

(1

)

 

(1)

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

(2)

These amounts are included in (Loss) earnings from discontinued operations, net of taxes in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).

(3)

These amounts are included in the computation of net periodic benefit cost (see Note 6 “Pension Plans and Other Post-Retirement Benefit Plans” for more details).

 

 

 

 

26

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 13.

_________________

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. On May 5, 2020, due to the unprecedented market conditions and uncertainty caused by COVID-19, the Company 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.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to $1.6 billion. 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.

On February 11, 2021, the Company announced that it will resume its stock repurchase program. The Board of Directors will continue to evaluate the Company’s capital return program based upon customary considerations, including market conditions.

On March 2, 2021, the Company announced that it entered into an accelerated share repurchase (“ASR”) agreement with JPMorgan Chase Bank, N.A. to repurchase $200 million of its common stock with available cash on hand, including cash received from the divestiture of its Personal Care segment closed on March 1, 2021.

Under the ASR agreement, the Company paid $200 million in exchange for an initial delivery of 4,430,906 shares. The final number of shares to be repurchased by Domtar will be based on the average of the daily volume-weighted average stock prices of Domtar’s common stock during the valuation period of the agreement, less a discount and subject to adjustments. The resulting adjustments may affect the total amount spent by the Company or the aggregate number of shares it repurchases.

During the first quarter of 2021, in addition to the ASR, the Company repurchased 629,959 shares on the open market at an average price of $35.72 for a total cost of $23 million.

During the first quarter of 2020, the Company repurchased 1,798,306 shares at an average price of $33.05 for a total cost of $59 million.   

 


27

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 14.

_________________

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.

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 and discharged into the 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, including mercury, by the historical operators of the Dryden Property. This Indemnity subsequently was assigned to the Company in connection with its 2007 purchase of the Dryden Property.

As the current owner of the Dryden Property, the 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 never has been owned by 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 the Company has the benefit of the Indemnity. In addition to the Indemnity, Domtar has other recourses relating to the historical contamination.

The situation involving the historical contamination is continuing to develop, and the Company cannot predict its outcome. While the 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, 2021

 

 

 

$

 

Balance at beginning of year

 

 

47

 

Additions and other changes

 

 

1

 

Environmental spending

 

 

(1

)

Balance at end of period

 

 

47

 

 

 

28

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(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,” 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.

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, 2021, 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, compliance with laws, 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, 2021, 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, no 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, 2021 the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

CLIMATE CHANGE AND AIR QUALITY REGULATION

Various national and local laws and regulations relating to climate change have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments.

The EPA repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”) rule. The ACE rule was legally challenged in the U.S. Court of Appeals for the D.C. Circuit. The Court ruled the EPA wrongly understood the Clean Air Act and the ACE rule and its embedded repeal of the Clean Power Plan was vacated and sent back to the EPA for further consideration. Regardless of the outcome of the EPA’s further consideration, 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 Canadian Government has accepted Ontario’s program as an alternative to the federal program and work to transition has begun. The Company does not expect to be disproportionately affected compared with other pulp and paper producers located in Ontario.

29

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. 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.

 

 

 

30

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 15.

_________________

SEGMENT DISCLOSURES

Following the sale of the Company’s Personal Care business on March 1, 2021, the Company now operates as a single reportable segment as described below, which also represents its only operating segment:

Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, hardwood and fluff pulp and high quality airlaid and ultrathin laminated cores.

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

 

SEGMENT DATA

 

March 31, 2021

 

 

March 31, 2020

 

 

 

$

 

 

$

 

Sales by product group

 

 

 

 

 

 

 

 

Communication papers

 

 

488

 

 

 

623

 

Specialty and packaging papers

 

 

137

 

 

 

150

 

Market pulp

 

 

308

 

 

 

247

 

Absorbent core materials

 

 

11

 

 

 

11

 

Consolidated sales

 

 

944

 

 

 

1,031

 

Operating income (loss) from continuing operations (1)

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

12

 

 

 

4

 

Corporate

 

 

(10

)

 

 

(5

)

Consolidated operating income (loss) from continuing operations

 

 

2

 

 

 

(1

)

Interest expense, net

 

 

15

 

 

 

14

 

Non-service components of net periodic benefit cost

 

 

(6

)

 

 

(4

)

Loss before income taxes and equity loss

 

 

(7

)

 

 

(11

)

Income tax expense

 

 

 

 

 

3

 

Equity method investment loss, net of taxes

 

 

 

 

 

1

 

Loss from continuing operations

 

 

(7

)

 

 

(15

)

(Loss) earnings from discontinued operations, net of taxes

 

 

(22

)

 

 

20

 

Net (loss) earnings

 

 

(29

)

 

 

5

 

 

 

(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. For the three months ended March 31, 2021, the Company recognized $4 million as a reduction of costs related to this program (CDN $5 million) ($3 million in Cost of sales (CDN $4 million) and $1 million in Selling, general and administrative (CDN $1 million)).

 

 


31

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 16.

_________________

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 and EAM Corporation, (“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.

Prior to the sale of the Company’s Personal Care Business on March 1, 2021, Attends Healthcare Products Inc., Associated Hygienic Products LLC and Home Delivery Incontinent Supplies Co, were Guarantor Subsidiaries.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at March 31, 2021 and December 31, 2020, the Statements of Earnings (Loss) and Comprehensive Income (Loss) and Cash Flows for the three months ended March 31, 2021 and 2020 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

 

 

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

(LOSS) AND COMPREHENSIVE INCOME

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

 

 

 

 

814

 

 

 

403

 

 

 

(273

)

 

 

944

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

 

 

 

759

 

 

 

323

 

 

 

(273

)

 

 

809

 

Depreciation and amortization

 

 

 

 

 

38

 

 

 

16

 

 

 

 

 

 

54

 

Selling, general and administrative

 

 

2

 

 

 

29

 

 

 

33

 

 

 

 

 

 

64

 

Impairment of long-lived assets

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Closure and restructuring costs

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Asset conversion costs

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Other operating income, net

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

843

 

 

 

372

 

 

 

(273

)

 

 

942

 

Operating (loss) income

 

 

 

 

 

(29

)

 

 

31

 

 

 

 

 

 

2

 

Interest expense (income), net

 

 

16

 

 

 

14

 

 

 

(15

)

 

 

 

 

 

15

 

Non-service components of net periodic benefit cost

 

 

 

 

 

(2

)

 

 

(4

)

 

 

 

 

 

(6

)

(Loss) earnings before income taxes

 

 

(16

)

 

 

(41

)

 

 

50

 

 

 

 

 

 

(7

)

Income tax (benefit) expense

 

 

(9

)

 

 

(5

)

 

 

14

 

 

 

 

 

 

 

Share in earnings of equity accounted investees

 

 

(9

)

 

 

43

 

 

 

 

 

 

(34

)

 

 

 

(Loss) earnings from continuing operations

 

 

(16

)

 

 

7

 

 

 

36

 

 

 

(34

)

 

 

(7

)

(Loss) earnings from discontinued operations, net of taxes

 

 

(13

)

 

 

(16

)

 

 

7

 

 

 

 

 

 

(22

)

Net (loss) earnings

 

 

(29

)

 

 

(9

)

 

 

43

 

 

 

(34

)

 

 

(29

)

Other comprehensive income

 

 

84

 

 

 

82

 

 

 

76

 

 

 

(158

)

 

 

84

 

Comprehensive income

 

 

55

 

 

 

73

 

 

 

119

 

 

 

(192

)

 

 

55

 

 

32

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

 

 

 

For the three months ended

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

AND COMPREHENSIVE LOSS

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

 

 

 

 

910

 

 

 

349

 

 

 

(228

)

 

 

1,031

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

 

 

 

844

 

 

 

290

 

 

 

(228

)

 

 

906

 

Depreciation and amortization

 

 

 

 

 

43

 

 

 

15

 

 

 

 

 

 

58

 

Selling, general and administrative

 

 

2

 

 

 

4

 

 

 

60

 

 

 

 

 

 

66

 

Other operating loss (income), net

 

 

 

 

 

3

 

 

 

(1

)

 

 

 

 

 

2

 

 

 

 

2

 

 

 

894

 

 

 

364

 

 

 

(228

)

 

 

1,032

 

Operating (loss) income

 

 

(2

)

 

 

16

 

 

 

(15

)

 

 

 

 

 

(1

)

Interest expense (income), net

 

 

16

 

 

 

19

 

 

 

(21

)

 

 

 

 

 

14

 

Non-service components of net periodic benefit cost

 

 

 

 

 

(1

)

 

 

(3

)

 

 

 

 

 

(4

)

(Loss) earnings before income taxes and equity loss

 

 

(18

)

 

 

(2

)

 

 

9

 

 

 

 

 

 

(11

)

Income tax (benefit) expense

 

 

(2

)

 

 

7

 

 

 

(2

)

 

 

 

 

 

3

 

Equity method investment loss, net of taxes

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Share in earnings of equity accounted investees

 

 

21

 

 

 

26

 

 

 

 

 

 

(47

)

 

 

 

Earnings from continuing operations

 

 

5

 

 

 

16

 

 

 

11

 

 

 

(47

)

 

 

(15

)

Earnings from discontinued operations, net of taxes

 

 

 

 

 

5

 

 

 

15

 

 

 

 

 

 

20

 

Net earnings

 

 

5

 

 

 

21

 

 

 

26

 

 

 

(47

)

 

 

5

 

Other comprehensive loss

 

 

(115

)

 

 

(117

)

 

 

(73

)

 

 

190

 

 

 

(115

)

Comprehensive loss

 

 

(110

)

 

 

(96

)

 

 

(47

)

 

 

143

 

 

 

(110

)

 

 

33

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

 

 

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Assets

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

646

 

 

 

2

 

 

 

23

 

 

 

 

 

 

671

 

Receivables

 

 

2

 

 

 

127

 

 

 

321

 

 

 

 

 

 

450

 

Inventories

 

 

 

 

 

391

 

 

 

209

 

 

 

 

 

 

600

 

Prepaid expenses

 

 

5

 

 

 

43

 

 

 

5

 

 

 

 

 

 

53

 

Income and other taxes receivable

 

 

44

 

 

 

 

 

 

11

 

 

 

(6

)

 

 

49

 

Intercompany accounts

 

 

942

 

 

 

989

 

 

 

618

 

 

 

(2,549

)

 

 

 

Total current assets

 

 

1,639

 

 

 

1,552

 

 

 

1,187

 

 

 

(2,555

)

 

 

1,823

 

Property, plant and equipment, net

 

 

 

 

 

1,348

 

 

 

674

 

 

 

 

 

 

2,022

 

Operating lease right-of-use assets

 

 

 

 

 

44

 

 

 

11

 

 

 

 

 

 

55

 

Intangible assets, net

 

 

 

 

 

24

 

 

 

5

 

 

 

 

 

 

29

 

Investments in affiliates

 

 

2,746

 

 

 

1,834

 

 

 

 

 

 

(4,580

)

 

 

 

Intercompany long-term advances

 

 

5

 

 

 

 

 

 

1,266

 

 

 

(1,271

)

 

 

 

Other assets

 

 

17

 

 

 

39

 

 

 

148

 

 

 

(12

)

 

 

192

 

Total assets

 

 

4,407

 

 

 

4,841

 

 

 

3,291

 

 

 

(8,418

)

 

 

4,121

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Trade and other payables

 

 

20

 

 

 

333

 

 

 

151

 

 

 

 

 

 

504

 

Intercompany accounts

 

 

859

 

 

 

667

 

 

 

1,023

 

 

 

(2,549

)

 

 

 

Income and other taxes payable

 

 

10

 

 

 

9

 

 

 

3

 

 

 

(6

)

 

 

16

 

Operating lease liabilities due within one year

 

 

 

 

 

14

 

 

 

5

 

 

 

 

 

 

19

 

Long-term debt due within one year

 

 

300

 

 

 

 

 

 

1

 

 

 

 

 

 

301

 

Total current liabilities

 

 

1,189

 

 

 

1,027

 

 

 

1,183

 

 

 

(2,555

)

 

 

844

 

Long-term debt

 

 

494

 

 

 

 

 

 

9

 

 

 

 

 

 

503

 

Operating lease liabilities

 

 

 

 

 

41

 

 

 

6

 

 

 

 

 

 

47

 

Intercompany long-term loans

 

 

609

 

 

 

662

 

 

 

 

 

 

(1,271

)

 

 

 

Deferred income taxes and other

 

 

1

 

 

 

238

 

 

 

97

 

 

 

(12

)

 

 

324

 

Other liabilities and deferred credits

 

 

23

 

 

 

127

 

 

 

162

 

 

 

 

 

 

312

 

Shareholders' equity

 

 

2,091

 

 

 

2,746

 

 

 

1,834

 

 

 

(4,580

)

 

 

2,091

 

Total liabilities and shareholders' equity

 

 

4,407

 

 

 

4,841

 

 

 

3,291

 

 

 

(8,418

)

 

 

4,121

 

34

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantor

 

 

Guarantor

 

 

Consolidating

 

 

 

 

 

CONDENSED CONSOLIDATING BALANCE SHEET

 

Parent

 

 

Subsidiaries

 

 

Subsidiaries

 

 

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

208

 

 

 

5

 

 

 

96

 

 

 

 

 

 

309

 

Receivables

 

 

 

 

 

65

 

 

 

315

 

 

 

 

 

 

380

 

Inventories

 

 

 

 

 

425

 

 

 

205

 

 

 

 

 

 

630

 

Prepaid expenses

 

 

8

 

 

 

37

 

 

 

5

 

 

 

 

 

 

50

 

Income and other taxes receivable

 

 

36

 

 

 

 

 

 

18

 

 

 

 

 

 

54

 

Intercompany accounts

 

 

759

 

 

 

902

 

 

 

433

 

 

 

(2,094

)

 

 

 

Asset held for sale

 

 

 

 

 

488

 

 

 

648

 

 

 

(3

)

 

 

1,133

 

Total current assets

 

 

1,011

 

 

 

1,922

 

 

 

1,720

 

 

 

(2,097

)

 

 

2,556

 

Property, plant and equipment, net

 

 

 

 

 

1,348

 

 

 

675

 

 

 

 

 

 

2,023

 

Operating lease right-of-use assets

 

 

 

 

 

48

 

 

 

11

 

 

 

 

 

 

59

 

Intangible assets, net

 

 

 

 

 

24

 

 

 

5

 

 

 

 

 

 

29

 

Investments in affiliates

 

 

3,558

 

 

 

2,169

 

 

 

 

 

 

(5,727

)

 

 

 

Intercompany long-term advances

 

 

5

 

 

 

 

 

 

1,157

 

 

 

(1,162

)

 

 

 

Other assets

 

 

11

 

 

 

41

 

 

 

143

 

 

 

(6

)

 

 

189

 

Total assets

 

 

4,585

 

 

 

5,552

 

 

 

3,711

 

 

 

(8,992

)

 

 

4,856

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade and other payables

 

 

26

 

 

 

294

 

 

 

167

 

 

 

(3

)

 

 

484

 

Intercompany accounts

 

 

677

 

 

 

491

 

 

 

926

 

 

 

(2,094

)

 

 

 

Income and other taxes payable

 

 

3

 

 

 

11

 

 

 

1

 

 

 

 

 

 

15

 

Operating lease liabilities due within one year

 

 

 

 

 

15

 

 

 

5

 

 

 

 

 

 

 

20

 

Long-term debt due within one year

 

 

12

 

 

 

 

 

 

1

 

 

 

 

 

 

13

 

Liabilities held for sale

 

 

 

 

 

121

 

 

 

174

 

 

 

 

 

 

295

 

Total current liabilities

 

 

718

 

 

 

932

 

 

 

1,274

 

 

 

(2,097

)

 

 

827

 

Long-term debt

 

 

1,075

 

 

 

 

 

 

9

 

 

 

 

 

 

1,084

 

Operating lease liabilities

 

 

 

 

 

44

 

 

 

6

 

 

 

 

 

 

50

 

Intercompany long-term loans

 

 

509

 

 

 

653

 

 

 

 

 

 

(1,162

)

 

 

 

Deferred income taxes and other

 

 

 

 

 

237

 

 

 

90

 

 

 

(6

)

 

 

321

 

Other liabilities and deferred credits

 

 

23

 

 

 

128

 

 

 

163

 

 

 

 

 

 

314

 

Shareholders' equity

 

 

2,260

 

 

 

3,558

 

 

 

2,169

 

 

 

(5,727

)

 

 

2,260

 

Total liabilities and shareholders' equity

 

 

4,585

 

 

 

5,552

 

 

 

3,711

 

 

 

(8,992

)

 

 

4,856

 

 

35

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

CONDENSED CONSOLIDATING STATEMENT OF

   CASH FLOWS

 

Parent

 

 

Guarantor

Subsidiaries

 

 

Non-

Guarantor

Subsidiaries

 

 

Consolidating

Adjustments

 

 

Consolidated

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

(29

)

 

 

(9

)

 

 

43

 

 

 

(34

)

 

 

(29

)

Changes in operating and intercompany assets and

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

   earnings

 

(7

)

 

 

96

 

 

 

(61

)

 

 

34

 

 

 

62

 

Cash flows (used for) provided from operating activities

 

 

(36

)

 

 

87

 

 

 

(18

)

 

 

 

 

 

33

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

 

 

 

(40

)

 

 

(11

)

 

 

 

 

 

(51

)

Proceeds from sale of business, net of cash disposed

 

 

 

 

 

 

 

 

897

 

 

 

 

 

 

897

 

Cash flows (used for) provided from investing activities

 

 

 

 

 

(40

)

 

 

886

 

 

 

 

 

 

846

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock repurchase

 

 

(223

)

 

 

 

 

 

 

 

 

 

 

 

(223

)

Net change in bank indebtedness

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Repayments of long-term debt

 

 

(294

)

 

 

 

 

 

 

 

 

 

 

 

(294

)

Increase in long-term advances to related parties

 

 

 

 

 

(54

)

 

 

(940

)

 

 

994

 

 

 

 

Decrease in long-term advances to related parties

 

 

994

 

 

 

 

 

 

 

 

 

(994

)

 

 

 

Other

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

Cash flows provided from (used for) financing activities

 

 

474

 

 

 

(50

)

 

 

(940

)

 

 

 

 

 

(516

)

Net increase (decrease) in cash and cash equivalents

 

 

438

 

 

 

(3

)

 

 

(72

)

 

 

 

 

 

363

 

Impact of foreign exchange on cash

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Cash and cash equivalents at beginning of period

 

 

208

 

 

 

5

 

 

 

96

 

 

 

 

 

 

309

 

Cash and cash equivalents at end of period

 

 

646

 

 

 

2

 

 

 

23

 

 

 

 

 

 

671

 

36

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

 

 

 

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

 

 

 

 

37

 


 

 

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, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021. 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 “outlook”, “Forward-looking statements”, as well as in item 1A, Risk Factors, in Part II of this report. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers 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 periods ended March 31, 2021 and 2020. The three month periods are also referred to as the first quarter of 2021 and 2020. References to notes refer to footnotes to the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q.

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

 

Overview

 

Highlights for the three-month period ended March 31, 2021

 

COVID-19 update and Outlook

 

Cost Reduction Program

 

Review of Continuing Operations

 

Discontinued Operations of our Personal Care Business

 

Liquidity and Capital Resources

Sale of Personal Care Business

On March 1, 2021, we completed the previously announced sale of our Personal Care business to American Industrial Partners (“AIP”) for a purchased price of $920 million in cash, including elements of working capital estimated at $130 million, subject to customary adjustments. We received a net amount of $897 million, which represents the selling price minus the estimated settlements of the net indebtedness and other elements of working capital adjustments. For financial reporting purposes, our former Personal Care business is presented as a discontinued operation. For more information, refer to Item 1, Financial Statements and Supplemental Data, under Note 3, “Discontinued Operations”.

OVERVIEW

We design, manufacture, market and distribute a wide variety of fiber-based products, including communication papers, specialty and packaging papers. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. Approximately 40% of our pulp production is consumed internally to manufacture paper, 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. To learn more, visit www.domtar.com.

38

 


 

We operate as a single reportable segment as described below, which also represents our only operating segment.

Pulp and Paper: Consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, hardwood and fluff pulp and high quality airlaid and ultrathin laminated cores.

Our segment measure of profit (operating income (loss) from continuing operations) is used by management to evaluate performance and make operational decisions. Management believes that this measure allows for a better understanding of cost trends, operating efficiencies, prices and volume. Business segment operating income (loss) is defined as earnings (loss) from continuing operations before income taxes and equity losses, excluding corporate items, interest expense, net, and non-service components of net periodic benefit cost. Corporate expenses are allocated to our segment with the exception of certain discretionary charges and credits, which we present under “Corporate” and do not allocate to the segment.

HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2021

 

We reported operating income of $2 million, compared to operating loss of $1 million in first quarter of 2020  

 

We reported a loss from continuing operations of $7 million compared to a loss from continuing operations of $15 million in first quarter of 2020

 

Loss from discontinued operations, net of taxes amounted to $22 million in first quarter of 2021, including a loss on disposition from discontinued operations of $32 million

 

Sales decreased by 8% from the first quarter of 2020. Our manufactured paper volumes were down while our pulp volumes and our net average selling prices for pulp and paper were up from the first quarter of 2020  

 

Recognition of closure and restructuring charges and asset conversion costs of $3 million and $8 million respectively, related to our cost reduction program and previously announced decision to repurpose assets at our Kingsport facility

 

Repaid the $294 million of outstanding indebtedness under our Term Loan Agreement and repurchased $223 million of our common stock

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

Variance

 

FINANCIAL HIGHLIGHTS

 

March 31, 2021

 

 

March 31, 2020

 

 

$

 

 

%

 

(In millions of dollars, unless otherwise noted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

944

 

 

$

1,031

 

 

$

(87

)

 

 

(8

%)

Operating income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

12

 

 

 

4

 

 

 

8

 

 

 

200

%

Corporate

 

 

(10

)

 

 

(5

)

 

 

(5

)

 

 

(100

%)

Operating income (loss)

 

 

2

 

 

 

(1

)

 

 

3

 

 

 

300

%

(Loss) from continuing operations

 

 

(7

)

 

 

(15

)

 

 

8

 

 

 

53

%

(Loss) earnings from discontinued operations, net of taxes

 

 

(22

)

 

 

20

 

 

 

(42

)

 

 

(210

%)

Net (loss) earnings

 

 

(29

)

 

 

5

 

 

 

(34

)

 

 

(680

%)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) from continuing operations

 

$

(0.13

)

 

$

(0.27

)

 

$

0.14

 

 

 

 

 

(Loss) earnings from discontinued operations

 

$

(0.41

)

 

$

0.36

 

 

$

(0.77

)

 

 

 

 

Basic net (loss) earnings

 

$

(0.54

)

 

$

0.09

 

 

$

(0.63

)

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) from continuing operations

 

$

(0.13

)

 

$

(0.27

)

 

$

0.14

 

 

 

 

 

(Loss) earnings from discontinued operations

 

$

(0.41

)

 

$

0.36

 

 

$

(0.77

)

 

 

 

 

Diluted net (loss) earnings

 

$

(0.54

)

 

$

0.09

 

 

$

(0.63

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2021

 

 

At December 31, 2020

 

Total assets

 

 

 

 

 

 

 

 

 

$

4,121

 

 

$

4,856

 

Total long-term debt, including current portion

 

 

 

 

 

 

 

 

 

$

804

 

 

$

1,097

 

 

(a)

See Note 5 "(Loss) Earnings per Common Share" of the financial statements in this Quarterly Report on Form 10-Q for more information on the calculation of net earnings per common share.

39

 


 

COVID-19 UPATE

First identified in people in late 2019, COVID-19 spread rapidly throughout the world and, in March 2020, the World Health Organization characterized COVID-19 as a pandemic. With the unprecedented and rapid spread of COVID-19 and social distancing measures implemented throughout the world due to the pandemic, this virus has had a profound impact 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 our employees, operations, customers, suppliers, liquidity and capital resources.

We took a variety of actions during 2020 to help mitigate the financial impact, including a cost reduction program, reducing our capital spending, suspended our regular quarterly dividend, and proactively managing our working capital.

Our focus has been on the health and safety of our employees throughout the pandemic and we will continue to maintain the safety protocols we established. As guidance from authorities such as the U.S. Centers for Disease Control evolves, we will update our practices accordingly, as we have done throughout the pandemic.

Our operations are 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. However, demand for our paper has declined significantly since the beginning of April 2020, 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 the second quarter of 2021. Beyond the second quarter of 2021, paper demand will depend largely on when, and the extent to which, work-from-home subsides and on the timing of the return to normal global economic activities. Overall, for the first quarter of 2021, our paper shipments were lower by approximately 20% when compared to the first quarter of 2020.

The Government of Canada created the CEWS to provide financial support for businesses during the COVID-19 pandemic and prevent large layoffs. For the three months ended March 31, 2021, we recognized $4 million as a reduction of costs related to this program (CDN $5 million) ($3 million in Cost of sales (CDN $4 million) and $1 million in Selling, general and administrative (CDN $1 million)).

OUTLOOK

Paper demand will remain dependent upon recovery from COVID-19, but demand is expected to continue to rebound through the year as people return to schools and offices. Near-term pulp markets should remain balanced due to steady demand growth and limited new supply. Recently announced price increases in both pulp and paper will positively impact our results. The second quarter will be affected by seasonally higher maintenance costs in our Pulp and Paper business as we move into the planned outages at some of our major facilities.

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 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 cross-functional collaboration, leveraging more efficient business processes.

Our cost reduction program included 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 the converting center in Ridgefields, Tennessee. These actions reduced our annual uncoated freesheet paper capacity by approximately 721,000 short tons and resulted 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 Ridgefields converting center ceased operations at the end of the third quarter of 2020, while our Port Huron mill ceased operations in 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.


40

 


 

 

Ashdown, Arkansas mill

We completed the conversion of our Ashdown mill to 100% softwood and fluff pulp, which was necessary for an eventual expansion into containerboard. Following the fiberline conversion, Ashdown has annual production capacity of 775,000 tons of fluff and softwood pulp.

For the three months ended March 31, 2021, we recorded $6 million of accelerated depreciation under Impairment of long-lived assets, and $3 million of severance and termination costs under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, we recorded $8 million under Asset conversion costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) as part of the conversion of our Kingsport, Tennessee mill to a linerboard facility.

REVIEW OF OPERATIONS

This section presents a discussion and analysis of our first quarter of 2021 and 2020 sales, operating income (loss) and other information relevant to the understanding of our results from continuing operations.

 

ANALYSIS OF NET SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

Variance

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

$

 

 

%

 

Sales

 

 

944

 

 

 

1,031

 

 

 

(87

)

 

(8%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shipments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paper - manufactured (in thousands of ST)

 

 

546

 

 

 

679

 

 

 

(133

)

 

(20%)

 

Communication Papers

 

 

453

 

 

 

569

 

 

 

(116

)

 

(20%)

 

Specialty and Packaging papers

 

 

93

 

 

 

110

 

 

 

(17

)

 

(15%)

 

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

 

 

18

 

 

 

22

 

 

 

(4

)

 

(18%)

 

Paper - total (in thousands of ST)

 

 

564

 

 

 

701

 

 

 

(137

)

 

(20%)

 

Pulp (in thousands of ADMT)

 

 

481

 

 

 

422

 

 

 

59

 

 

14%

 

 

 

ANALYSIS OF CHANGES IN SALES

 

 

 

 

 

 

 

First quarter of 2021 versus First quarter of 2020

 

 

 

% Change in Sales due to

 

 

 

Net Price

 

 

Volume / Mix

 

 

Total

 

Sales

 

 

3

%

 

 

(11

%)

 

 

(8

%)

 

Sales in the first quarter of 2021 decreased by $87 million, or 8% when compared to sales in the first quarter of 2020. This decrease in sales is mostly due to a decrease in our paper sales volumes related to work-from-home rules and the overall economic slowdown due to the pandemic and was partially offset by an increase in our pulp sales volumes and in our net average selling prices for pulp and paper.

 

ANALYSIS OF CHANGE IN OPERATING INCOME (LOSS)

 

First quarter of 2021 versus

First quarter of 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ Change in Operating Income (Loss) due to

 

 

 

Volume/Mix

 

 

Net Price

 

 

Input Costs (a)

 

 

Operating

Expenses  (b)

 

 

Currency

 

Depreciation/

Impairment (c)

 

 

Restructuring/

Conversion (d)

 

 

Other Income/

Expense (e)

 

 

Total

 

Pulp and Paper

 

 

(31

)

 

 

29

 

 

 

(17

)

 

 

34

 

 

 

2

 

 

(1

)

 

 

(10

)

 

 

2

 

 

 

8

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

 

(1

)

 

 

2

 

 

 

(5

)

Operating income (loss)

 

 

(31

)

 

 

29

 

 

 

(17

)

 

 

28

 

 

 

2

 

 

(1

)

 

 

(11

)

 

 

4

 

 

 

3

 

 

(a)

Includes raw materials (such as fiber and chemicals) and energy costs.

(b)

Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs.

41

 


 

 

(c)

Depreciation charges were lower by $5 million in the first quarter of 2021, excluding foreign currency impact. In the first quarter of 2021, we recorded $6 million of accelerated depreciation under Impairment of long-lived assets, related to our cost reduction program. There were no accelerated depreciation charges in the first quarter of 2020.

(d)

We recorded $3 million of restructuring charges in the first quarter of 2021 related to severance and termination costs  under Closure and restructuring costs. There were no restructuring charges in the first quarter of 2020. We also recorded $8 million of asset conversion costs at our Kingsport mill as part of the conversion to a linerboard facility.

(e) First quarter of 2021 operating expenses/income includes:

First quarter of 2020 operating expenses/income includes:

- Environmental provision ($1 million)

- Bad debt expense recovery ($2 million)

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

- Other income ($2 million)

 

- Environmental provision ($1 million)

- Bad debt expense ($4 million)

- Foreign currency gain on working capital items ($2 million)

- Other income ($1 million)

Commentary – First quarter of 2021 compared to First quarter of 2020

Operating income in our Pulp and Paper business amounted to $12 million in first quarter of 2021, an increase of $8 million, when compared to operating income of $4 million in first quarter of 2020. Our results were positively impacted by:

 

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

 

Lower operating expenses ($34 million) mostly related to lower maintenance costs in part due to the timing of some major maintenance, and lower costs due to our 2020 cost reduction program, including lower salaries and wages

 

Positive impact of our foreign currency hedging program partially offset by a stronger Canadian dollar on our Canadian dollar denominated expenses ($2 million)

 

Higher other income ($2 million)

These increases were partially offset by:

 

Higher input costs ($17 million) mostly related to higher cost of chemicals in part due to a business acquisition in the second quarter of 2020 and higher energy costs mostly due to severe weather issues in the first quarter of 2021

 

Lower volume and mix ($31 million)

 

Higher depreciation/impairment charges ($1 million). We recorded $6 million of accelerated depreciation under Impairment of long-lived assets, related to our cost reduction program in the first quarter of 2021 and there were no accelerated depreciation charges in the first quarter of 2020. Depreciation charges were lower by $5 million when compared to the first quarter of 2020

 

Higher restructuring and conversion charges ($10 million) in the first quarter of 2021 due to our 2020 cost reduction program including the conversion of our Kingsport mill to a linerboard facility. There were no restructuring charges or conversion costs in the first quarter of 2020.

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 pricing of other pulp products.

The high degree of uncertainty and volatility day-to-day and the longer-term potential impacts of the economic slowdown remain unclear. Paper demand will remain dependent upon recovery from COVID-19, but demand is expected to continue to rebound through the year as people return to schools and offices. Near-term pulp markets should remain balanced due to steady demand growth and limited new supply. Recently announced price increases in both pulp and paper will positively impact our results. The second quarter will be affected by seasonally higher maintenance costs in our Pulp and Paper business as we move into the planned outages at some of our major facilities.

42

 


 

OTHER FACTORS

Corporate

We incurred $10 million of corporate charges in the first quarter of 2021, an increase of $5 million compared to corporate charges of $5 million in the first quarter of 2020. This increase was mostly due to higher SG&A expenses as a result of greater variable compensation in the first quarter of 2021 when compared to the first quarter of 2020 as well as $1 million of restructuring charges in the first quarter of 2021 related to  severance and termination costs  under Closure and restructuring costs. There were no restructuring charges in the first quarter of 2020.

Interest Expense, net

We incurred $15 million of net interest expense in the first quarter of 2021, an increase of $1 million compared to net interest expense of $14 million in the first quarter of 2020. The net interest expense was impacted by the accelerated debt issuance expense recognized upon the early repayment in March 2021 of the 5 years Term Loan borrowed in May 2020. This increase was partially offset by reduced interest expense due to a decrease in borrowings under the revolving credit facility.

Income Taxes

In the first quarter of 2021, we had no income tax expense or benefit, as $1 million of current income tax benefit was offset by the deferred income tax expense of $1 million. This compares to an income tax expense of $3 million in the first quarter of 2020, consisting of $3 million of current income tax benefit and a deferred income tax expense of $6 million. We received refunds, net of income tax payments, of $7 million during the first quarter of 2021. The effective tax rate was 0% compared with an effective tax rate of -27% in the first quarter of 2020. The effective tax rate for the first quarter of 2021 was impacted by additional tax expense on stock-based compensation which vested during the quarter. Also, a weaker US dollar resulted in an increase in our deferred tax liability on unremitted foreign earnings. The effective tax rate for the first quarter of 2020 was significantly impacted by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits.

 DISCONTINUED OPERATION

On March 1, 2021, we completed the sale of our Personal Care business. Its results of operations are reported as discontinued operations for all periods presented. For the first quarter of 2021, we reported a loss from discontinued operations, net of taxes, of $22 million (first quarter of 2020 – earnings from discontinued operations, net of taxes of $20 million). For more information, refer to Item 8, Financial Statements and Supplemental Data, under Note 3, “Discontinued Operations”.

STOCK-BASED COMPENSATION EXPENSE

For the first quarter of 2021, stock-based compensation expense recognized in our results from continuing and discontinued operations was $4 million for all outstanding awards which includes the mark-to-market recovery, net of hedging, related to liability awards of nil. This compares to a stock-based compensation income from continuing and discontinued operations of $3 million for all outstanding awards which includes the mark-to-market recovery, net of hedging, related to liability awards of $7 million in the first quarter of 2020. 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 $700 million credit facility, of which $645 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $131 million is currently undrawn and available. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.

Our ability to make payments on the requirements mentioned above will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our credit and receivable securitization facilities and debt indentures impose various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

A portion of our cash is held outside the U.S. by foreign subsidiaries. The earnings of the foreign subsidiaries reflect full provision for local income taxes. We remain indefinitely reinvested in the outside basis differences of our foreign subsidiaries. 


43

 


 

 

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, including discontinued operations, totaled $33 million in the first quarter of 2021, a $55 million decrease compared to cash flows from operating activities of $88 million in the first quarter of 2020. This decrease in cash flows from operating activities is primarily due to a decrease in profitability as well as an increase in working capital requirements in the first quarter of 2021 when compared to the first quarter of 2020. We received income tax refunds, net of payments, of $7 million during the first quarter of 2021 compared to income tax refunds, net of payments, of $25 million in the first quarter of 2020.  

Investing Activities

Cash flows provided from investing activities, including discontinued operations, totaled $846 million in the first quarter of 2021, a $908 million increase compared to cash flows used for investing activities of $62 million in the first quarter of 2020.

The source of cash provided from investing activities in the first quarter of 2021 was attributable to the proceeds from the sale of our Personal Care business ($897 million) and was partially offset by additions to property, plant and equipment of $51 million.

The use of cash in the first quarter of 2020 was attributable to additions to property, plant and equipment of $62 million.

Our annual capital expenditures for 2021 should increase due mostly to our Kingsport mill conversion and are expected to be between $310 million and $330 million.

Financing Activities

Cash flows used for financing activities, including discontinued operations, totaled $516 million in the first quarter of 2021 compared to cash flows provided from financing activities of $67 million in the first quarter of 2020.

The use of cash flows for financing activities in the first quarter of 2021, was for the repayment of the Term Loan ($294 million) as well as for the repurchase of our common stock ($223 million) of which a $200 million payment was made under the ASR agreement. This was partially offset by an increase in bank indebtedness ($4 million).

In the first quarter of 2020, we increased our net proceeds from borrowings under our credit facilities (revolver and receivables securitization) ($165 million). This was partially offset by the use of cash primarily due to the repurchase of our common stock ($59 million), dividend payments ($26 million) and a decrease in bank indebtedness ($10 million).

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $137 million as of March 31, 2021 compared to $788 million as of December 31, 2020.

Use of proceeds from the sale of our Personal Care business

On April 8, 2021, we redeemed the 4.4% Notes, originally due in March 2022, at a redemption price of 100% of the principal amount of $300 million, plus accrued and unpaid interest, as well as a make-whole premium of $11 million. As of March 31, 2021, the 4.4% Notes were reclassified and presented under Long-term debt due within one year on the Consolidated Balance Sheet. The debt extinguishment as well as the related loss on debt extinguishment, will be recognized in the second quarter of 2021.

On March 11, 2021, we repaid $294 million remaining under our Term Loan Agreement that had an original maturity in May 2025. A write-off of $2 million of unamortized debt issuance costs is included in the Interest Expense line item on the Consolidated Statement of Earnings.

Revolving Credit Facility

We have an unsecured $700 million revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks that 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.

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Borrowings under the Credit Agreement bear interest at LIBOR, EURIBOR, Canadian bankers' acceptance or prime rate, as applicable, plus a margin linked to our credit rating. In addition, we pay facility fees quarterly at rates dependent on our credit ratings. The 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, 2021, we were in compliance with these financial covenants, and had no borrowings under the Credit Agreement (March 31, 2020 – $220 million). At March 31, 2021, we had $55 million of outstanding letters of credit (March 31, 2020 – nil), leaving $645 million unused and available under this facility (March 31, 2020 – $480 million).

 

Receivables Securitization

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

At March 31, 2021, we had no borrowings under the receivables securitization facility, and we had $1 million of letters of credit under the program (March 31, 2020 – $80 million and $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, 2021, we had $131 million unused and available under the receivable securitization facility.

Common Stock

On May 5, 2020, due to the unprecedented market conditions cause by COVID-19, we suspended the payment of our regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment. On February 11, 2021, we announced that we resumed our stock repurchase program. Our Board of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

During 2020, we declared one quarterly dividend of $0.455 per share, to holders of our common stock. Total dividends aggregating $25 million were paid on April 15, 2020 to shareholders of record as of April 2, 2020.  

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, 2021, 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, 2021, 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

45

 


 

measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes 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, 2020.

There has not been any material change to our policies since December 31, 2020. 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 occur, what effect they will have on our 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 or divestitures, including facility closures;

 

failure to achieve our cost containment goals, conversion costs 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 general economy, particularly in the U.S., and Canada;

 

performance of our manufacturing operations, including unexpected maintenance requirements;

 

the level of competition from domestic and foreign producers;

 

cyberattacks 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 or other reasons;

 

changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar;

 

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, 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

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the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2020.

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, 2020. There has not been any material change in our exposure to market risk since December 31, 2020. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 4 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of March 31, 2021, 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, 2021, 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 II OTHER INFORMATION

See Note 14 “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, 2020.

ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2020, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. There were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2020.

 


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

Share repurchase activity under our share repurchase program was as follows during the three-month period ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2021

 

 

 

 

$

 

 

 

 

 

$

343,601

 

February 1 through February 28, 2021

 

 

547,013

 

 

$

35.65

 

 

 

547,013

 

 

$

324,100

 

March 1 through March 31, 2021

 

 

82,946

 

 

$

36.17

 

 

 

82,946

 

 

$

321,100

 

     Accelerated Repurchase Program (1)

 

 

4,430,906

 

 

 

 

 

 

 

4,430,906

 

 

$

121,100

 

 

 

 

5,060,865

 

 

 

 

 

 

 

5,060,865

 

 

 

 

 

(1)

In March 2021, we entered into an ASR agreement under which we paid an aggregate of $200 million and received an aggregate initial share delivery of 4,430,906 shares of our common stock, which were immediately retired. The final number of shares to be repurchased under the ASR agreement and the average price paid per share will be determined upon settlement of the agreement during the third quarter of 2021. For more information, refer to Item 1, Financial Statements and Supplemental Data, under Note 13, “Shareholders’ Equity”.

On February 11, 2021 we announced we would resume our share buyback program, which was suspended since May 2020. During the first quarter of 2021, in addition to the ASR, we repurchased 629,959 shares on the open market at an average price of $35.72 for a total cost of $23 million under our stock repurchase program (the “Program”).

As of March 31, 2021, we have $121 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. The Program has no set expiration date. We repurchase our common stock 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 quarter of 2020, we repurchased 1,798,306 shares at an average price of $33.05 for a total cost of $59 million.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS

 

  

 

 

 

 

 

    Incorporated  by reference to:

Exhibit

Number

 

Exhibit Description

 

 

Form

Exhibit

Filing Date

 

 

 

 

10.1

 

Uncollared Accelerated Share Repurchase Agreement among JPMorgan Chase Bank and Domtar Corporation dated March 1, 2021

 

 

8-K

10.1

03/03/2021

 

 

 

 

 

 

 

 

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)

 

 

 

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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 6, 2021

 

 

By:

/s/ Daniel Buron

 

Daniel Buron

 

Executive Vice President and Chief Financial Officer

 

 

By:

/s/ Nancy Klembus

 

Nancy Klembus

 

Senior Vice President, General Counsel and Corporate Secretary

 

 

 

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