UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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 |
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20-5901152 |
(State of Incorporation) |
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(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 |
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Accelerated filer |
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Non-accelerated filer |
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Small reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
At April 30, 2019,
DOMTAR CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 31, 2019
INDEX
PART I. |
3 |
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ITEM 1. |
3 |
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CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME |
3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
37 |
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ITEM 3. |
45 |
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ITEM 4. |
45 |
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PART II |
45 |
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ITEM 1. |
45 |
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ITEM 1A. |
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ITEM 2. |
46 |
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ITEM 3. |
46 |
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ITEM 4. |
46 |
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ITEM 5. |
46 |
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ITEM 6. |
47 |
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
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Three months ended |
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Three months ended |
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March 31, |
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March 31, |
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2019 |
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2018 |
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(Unaudited) |
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$ |
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$ |
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Sales |
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Operating expenses |
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Cost of sales, excluding depreciation and amortization |
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Depreciation and amortization |
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Selling, general and administrative |
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Impairment of property, plant and equipment (NOTE 11) |
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— |
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Closure and restructuring costs (NOTE 11) |
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— |
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Other operating income, net (NOTE 6) |
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( |
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( |
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Operating income |
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Interest expense, net |
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Non-service components of net periodic benefit cost (NOTE 5) |
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( |
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( |
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Earnings before income taxes and equity loss |
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Income tax expense (NOTE 7) |
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Equity loss, net of taxes |
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— |
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Net earnings |
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Per common share (in dollars) (NOTE 4) |
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Net earnings |
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Basic |
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Diluted |
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Weighted average number of common shares outstanding (millions) |
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Basic |
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Diluted |
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Cash dividends per common share |
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Net earnings |
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Other comprehensive income (loss) (NOTE 12): |
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Net derivative gains (losses) on cash flow hedges: |
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Net gains (losses) arising during the period, net of tax of $( |
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( |
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Less: Reclassification adjustment for losses (gains) included in net earnings, net of tax of nil (2018 – $ |
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( |
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Foreign currency translation adjustments |
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( |
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Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $( |
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Other comprehensive income (loss) |
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( |
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Comprehensive income |
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The accompanying notes are an integral part of the consolidated financial statements.
3
DOMTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
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At |
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March 31, |
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December 31, |
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2019 |
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2018 |
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(Unaudited) |
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$ |
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$ |
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Assets |
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Current assets |
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Cash and cash equivalents |
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Receivables, less allowances of $ |
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Inventories (NOTE 8) |
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Prepaid expenses |
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Income and other taxes receivable |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets (NOTE 9) |
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— |
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Intangible assets, net (NOTE 10) |
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Other assets |
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Total assets |
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Liabilities and shareholders' equity |
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Current liabilities |
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Bank indebtedness |
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— |
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Trade and other payables |
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Income and other taxes payable |
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Operating lease liabilities due within one year (NOTE 9) |
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— |
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Long-term debt due within one year |
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Total current liabilities |
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Long-term debt |
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Operating lease liabilities (NOTE 9) |
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— |
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Deferred income taxes and other |
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Other liabilities and deferred credits |
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Commitments and contingencies (NOTE 14) |
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Shareholders' equity (NOTE 13) |
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Common stock $ |
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Treasury stock $ |
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— |
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— |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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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)
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Issued and outstanding common shares (millions of shares) |
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Common stock, at par |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total shareholders' equity |
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(Unaudited) |
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$ |
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$ |
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$ |
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$ |
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$ |
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Balance at December 31, 2018 |
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( |
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Stock-based compensation, net of tax |
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— |
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— |
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— |
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Net earnings |
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— |
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— |
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— |
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— |
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Net derivative gains on cash flow hedges: |
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Net gains arising during the period, net of tax of $( |
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— |
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— |
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— |
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— |
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Less: Reclassification adjustment for losses included in net earnings, net of tax of nil |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustments |
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— |
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— |
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— |
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— |
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Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $( |
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— |
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— |
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— |
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— |
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Cash dividends declared |
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— |
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— |
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— |
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( |
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— |
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( |
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Balance at March 31, 2019 |
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The accompanying notes are an integral part of the consolidated financial statements.
5
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
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For the three months ended |
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March 31, 2019 |
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March 31, 2018 |
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(Unaudited) |
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$ |
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$ |
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Operating activities |
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Net earnings |
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Adjustments to reconcile net earnings to cash flows from operating activities |
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Depreciation and amortization |
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Deferred income taxes and tax uncertainties |
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( |
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( |
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Impairment of property, plant and equipment |
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— |
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Net gains on disposals of property, plant and equipment |
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— |
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( |
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Stock-based compensation expense |
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Equity loss, net |
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— |
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Other |
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— |
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( |
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Changes in assets and liabilities |
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Receivables |
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( |
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( |
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Inventories |
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( |
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( |
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Prepaid expenses |
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— |
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( |
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Trade and other payables |
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( |
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( |
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Income and other taxes |
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Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense |
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— |
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Other assets and other liabilities |
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( |
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Cash flows from operating activities |
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Investing activities |
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Additions to property, plant and equipment |
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( |
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( |
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Proceeds from disposals of property, plant and equipment |
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— |
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Other |
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— |
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( |
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Cash flows used for investing activities |
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( |
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Financing activities |
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Dividend payments |
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( |
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Net change in bank indebtedness |
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— |
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Proceeds from receivables securitization facility |
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Repayments of receivables securitization facility |
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( |
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Other |
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( |
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— |
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Cash flows used for financing activities |
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( |
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( |
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Net (decrease) increase in cash and cash equivalents |
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( |
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Impact of foreign exchange on cash |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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Supplemental cash flow information |
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Net cash payments for: |
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Interest |
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Income taxes |
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The accompanying notes are an integral part of the consolidated financial statements.
6
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 |
8 |
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NOTE 2 |
9 |
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NOTE 3 |
DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT |
11 |
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NOTE 4 |
15 |
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NOTE 5 |
16 |
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NOTE 6 |
17 |
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NOTE 7 |
18 |
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NOTE 8 |
19 |
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NOTE 9 |
20 |
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NOTE 10 |
23 |
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NOTE 11 |
CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT |
24 |
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NOTE 12 |
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT |
25 |
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NOTE 13 |
27 |
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NOTE 14 |
28 |
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NOTE 15 |
30 |
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NOTE 16 |
31 |
7
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(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, 2018, as filed with the Securities and Exchange Commission. The December 31, 2018 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.
On January 1, 2019, upon the adoption of ASU 2016-02, “Leases”, the Company’s accounting policy related to leases became as follows:
LEASES
At inception of an arrangement, the Company determines whether the arrangement contains a lease. A lease conveys the right to control the use of identified property, plant, or equipment (asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the Company has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.
For each lease arrangement that has an original lease term of more than 12 months, a right-of-use asset and a lease liability are recorded in the Consolidated Balance Sheets. The right-of-use asset represents the Company’s right to use an underlying asset for the lease term while the lease liability represents the obligation to make lease payments arising from the lease. The right-of-use asset and the lease liability are initially recorded at the same amount at the lease commencement date based on the present value of the remaining lease payments discounted using the rate implicit in the lease when readily determined or, in most cases, the Company’s incremental borrowing rate. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The right-of-use asset is tested for impairment in accordance with ASC 360 – “Property, Plant and Equipment”.
The terms of a lease arrangement determine how a lease is classified (operating or finance), the resulting recognition pattern in the Consolidated Statements of Earnings and Comprehensive Income and the classification in the Consolidated Balance Sheets.
Finance lease expense is represented by the interest on the lease liability determined using the effective interest method and the amortization of the finance lease right-of-use asset calculated using the straight-line method over the estimated useful life of the identified asset. Finance lease related balances are included in the Consolidated Balance Sheets in Property, plant and equipment, net, Long-term debt due within one year and Long-term debt.
Operating lease expense is recorded on a straight-line basis over the lease term by adding interest expense determined using the effective interest method to the amortization of the right-of-use asset. Operating lease related balances are included in the Consolidated Balance Sheets in Operating lease right-of-use assets, Operating lease liabilities due within one year and Operating lease liabilities. Operating lease right-of-use assets exclude previously recognized liabilities relating to unfavorable terms of leases acquired as part of a business combination.
For operating lease arrangements with lease and non-lease components, the Company accounts for the lease and non-lease components as a single lease component.
8
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2.
_________________
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING CHANGES IMPLEMENTED
LEASES
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize right-of-use assets and lease liabilities for all of their operating leases while continuing to recognize expenses in the Consolidated Statement of Earnings and Comprehensive Income in a manner similar to previous accounting standards. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The Company elected to initially apply the new leases standard as of January 1, 2019 with certain available practical expedients which are discussed below. No cumulative-effect adjustments on retained earnings were necessary as of January 1, 2019. The most significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting for finance leases remains substantially unchanged.
In transitioning to the new standard, the Company elected to use the practical expedient package. Accordingly, we did not reassess the following:
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Whether existing or expired contracts are or contained a lease (including executory contracts). |
|
• |
The lease classification of existing or expired leases previously made by management. |
|
• |
Whether initial direct costs for existing leases would qualify under the new standard. |
Furthermore, the Company elected to use the hindsight practical expedient in determining the lease term and assessing impairment of the right-of-use assets.
For all comparative periods prior to the adoption of the new leases standard, the Company will continue to report operating leases in the consolidated financial statements under ASC 840 “Leases” and provide the related required disclosures.
COMPREHENSIVE INCOME
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, regarding the reclassification of certain income tax effects reported in accumulated comprehensive income (loss) in response to the U.S. Tax Reform enacted on December 22, 2017. For businesses, one of the main provisions of the U.S. Tax Reform was the reduction in the corporate federal income tax rate to
This guidance became effective for the Company on January 1, 2019. The Company has decided not to elect this option, as permitted in the new guidance.
9
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
FUTURE ACCOUNTING CHANGES
IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. Under the guidance, implementation costs for cloud computing arrangements (“CCA”) should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software and expensed over the term of the hosting arrangement. The ASU also provides the following guidance on presentation and disclosure:
• |
Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted CCA service, if any (generally as an “other asset”). |
• |
The amortization of capitalized implementation costs should be presented in the same statement of earnings line item as the fees associated with the hosted CCA service. Accordingly, the amortization of capitalized implementation costs should not be included with depreciation or amortization expense related to property, plant, and equipment or intangible assets. |
• |
Cash flows related to capitalized implementation costs should be presented as operating activities, consistent with the presentation of cash flows for the fees related to the hosted CCA service. |
• |
Entities are required to disclose the nature of the hosting arrangements that are service contracts and significant judgments made when applying the guidance. Additionally, companies are required to provide quantitative disclosures, including amounts capitalized, amortized, and impaired. |
This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
While the Company is still evaluating the impact of adopting the new standard, it does not expect this new guidance to have a material impact on the consolidated financial statements.
10
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3.
_________________
DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
HEDGING PROGRAMS
The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, and interest rates. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.
Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The ineffective portion of the qualifying instrument is immediately recognized to earnings. The amount of ineffectiveness recognized was immaterial for all periods presented. The Company does not hold derivative financial instruments for trading purposes.
CREDIT RISK
The Company is exposed to credit risk on 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, 2019,
The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.
INTEREST RATE RISK
The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, bank indebtedness, revolving credit facility and securitization, term loan and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.
COST RISK
Cash flow hedges:
The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next
11
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of March 31, 2019 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 (1) |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
(1) |
Represents the remaining nine months of 2019 |
(2) |
MMBTu: Millions of British thermal units |
The natural gas derivative contracts were fully effective as of March 31, 2019. There were
FOREIGN CURRENCY RISK
Cash flow hedges:
The Company has manufacturing operations in the United States, Canada and Europe. As a result, it is exposed to movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and European currencies. The Company’s European subsidiaries are also exposed to movements in foreign currency exchange rates on transactions denominated in a currency other than their Euro functional currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to
Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian subsidiary over the next
The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of March 31, 2019 to hedge forecasted purchases and sales:
Currency exposure hedged |
|
Business Segment |
|
Year of maturity |
|
Notional contractual value |
|
Percentage of forecasted net exposures under contracts |
|
|
Average Protection rate |
|
Average Obligation rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD/USD |
|
Pulp and Paper |
|
2019 (1) |
|
|
|
|
|
|
1 USD = 1.2914 |
|
1 USD = 1.3176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD/USD |
|
Pulp and Paper |
|
2020 |
|
|
|
|
|
|
1 USD = 1.2944 |
|
1 USD = 1.3028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD/USD |
|
Pulp and Paper |
|
2021 |
|
|
|
|
|
|
1 USD = 1.3124 |
|
1 USD = 1.3124 |
(1) |
Represents the remaining nine months of 2019 |
12
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The foreign exchange derivative contracts were fully effective as of March 31, 2019. There were
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) below) at March 31, 2019 and December 31, 2018, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Fair Value of financial instruments at: |
|
March 31, 2019 |
|
|
Quoted prices in active markets for identical assets (Level 1) |
|
|
Significant observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
|
Balance sheet classification |
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Prepaid expenses |
Natural gas swap contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Other assets |
Total Assets |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Trade and other payables |
Natural gas swap contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Trade and other payables |
Currency derivatives |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Other liabilities and deferred credits |
Natural gas swap contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Other liabilities and deferred credits |
Total Liabilities |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation - liability awards |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Trade and other payables |
Stock-based compensation - liability awards |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Other liabilities and deferred credits |
Long-term debt |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(b) |
Long-term debt |
The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts is $
13
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The net cumulative loss recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $
Fair Value of financial instruments at: |
|
December 31, 2018 |
|
|
Quoted prices in active markets for identical assets (Level 1) |
|
|
Significant observable inputs (Level 2) |
|
|
Significant unobservable inputs (Level 3) |
|
|
Balance sheet classification |
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Prepaid expenses |
Natural gas swap contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Prepaid expenses |
Total Assets |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Trade and other payables |
Natural gas swap contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Trade and other payables |
Currency derivatives |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Other liabilities and deferred credits |
Natural gas swap contracts |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(a) |
Other liabilities and deferred credits |
Total Liabilities |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation - liability awards |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Trade and other payables |
Stock-based compensation - liability awards |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Other liabilities and deferred credits |
Long-term debt |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
(b) |
Long-term debt |
(a) |
Fair value of the Company’s derivatives are classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows: |
|
- |
For currency derivatives: Fair value is measured using techniques derived from the Black-Scholes pricing model. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques. |
|
- |
For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates. |
(b) |
Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at March 31, 2019 and December 31, 2018. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is $ |
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.
14
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 4.
_________________
EARNINGS PER COMMON SHARE
The following table provides the reconciliation between basic and diluted earnings per common share:
|
|
For the three months ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
Net earnings |
|
$ |
|
|
|
$ |
|
|
Weighted average number of common shares outstanding (millions) |
|
|
|
|
|
|
|
|
Effect of dilutive securities (millions) |
|
|
|
|
|
|
|
|
Weighted average number of diluted common shares outstanding (millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per common share (in dollars) |
|
$ |
|
|
|
$ |
|
|
Diluted net earnings per common share (in dollars) |
|
$ |
|
|
|
$ |
|
|
The following table provides the securities that could potentially dilute basic earnings per common share in the future, but were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive:
|
|
For the three months ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
Options |
|
|
|
|
|
|
|
|
15
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 5.
_________________
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, 2019, the pension expense was $
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 and other post-retirement benefit plans:
|
|
For the three months ended |
|
|||||
|
|
March 31, 2019 |
|
|||||
|
|
Pension plans |
|
|
Other post-retirement benefit plans |
|
||
|
|
$ |
|
|
$ |
|
||
Service cost |
|
|
|
|
|
|
— |
|
Interest expense |
|
|
|
|
|
|
— |
|
Expected return on plan assets |
|
|
( |
) |
|
|
— |
|
Amortization of net actuarial loss |
|
|
|
|
|
|
— |
|
Amortization of prior year service costs |
|
|
|
|
|
|
— |
|
Net periodic benefit cost |
|
|
|
|
|
|
— |
|
Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:
|
|
For the three months ended |
|
|||||
|
|
March 31, 2018 |
|
|||||
|
|
Pension plans |
|
|
Other post-retirement benefit plans |
|
||
|
|
$ |
|
|
$ |
|
||
Service cost |
|
|
|
|
|
|
— |
|
Interest expense |
|
|
|
|
|
|
— |
|
Expected return on plan assets |
|
|
( |
) |
|
|
— |
|
Amortization of net actuarial loss |
|
|
|
|
|
|
— |
|
Amortization of prior year service costs |
|
|
|
|
|
|
— |
|
Net periodic benefit cost |
|
|
|
|
|
|
— |
|
The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than the service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statements of Earnings and Comprehensive Income.
For the three months ended March 31, 2019, the Company contributed $
16
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 6.
_________________
OTHER OPERATING INCOME, NET
Other operating income, net is an aggregate of both recurring and occasional loss or income items and, as a result, can fluctuate from period to period.
|
|
For the three months ended |
|
|||||
|
|
March 31, |
|
|
March 31, |
|
||
|
|
2019 |
|
|
2018 |
|
||
|
|
$ |
|
|
$ |
|
||
Gain on sale of property, plant and equipment |
|
|
— |
|
|
|
( |
) |
Bad debt expense |
|
|
— |
|
|
|
|
|
Environmental provision |
|
|
|
|
|
|
— |
|
Foreign exchange loss (gain) |
|
|
|
|
|
|
( |
) |
Other |
|
|
( |
) |
|
|
( |
) |
Other operating income, net |
|
|
( |
) |
|
|
( |
) |
17
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 7.
_________________
INCOME TAXES
For the first quarter of 2019, the Company’s income tax expense was $
18
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 8.
_________________
INVENTORIES
The following table presents the components of inventories:
|
|
March 31, |
|
|
December 31, |
|
|
|
2019 |
|
|
2018 |
|
|
|
$ |
|
|
$ |
|
Work in process and finished goods |
|
|
|
|
|
|
Raw materials |
|
|
|
|
|
|
Operating and maintenance supplies |
|
|
|
|
|
|
|
|
|
|
|
|
|
19
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 9.
_________________
LEASES
In the normal course of business, the Company enters into operating and finance leases mainly for manufacturing and warehousing facilities, corporate offices, motor vehicles, mobile equipment and manufacturing equipment.
While the Company’s lease payments are generally fixed over the lease term, some leases may include price escalation terms that are fixed at the lease commencement date.
The Company has remaining lease terms ranging from
The components of lease expense were as follows:
|
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|
|
|
|
For the three months ended |
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|
|
|
|
|
|
|
March 31, |
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|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
$ |
|
|
Operating lease expense |
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|
|||||
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|
|
|||||
Finance lease expense: |
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|
|||||
Amortization of right-of-use assets |
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— |
|
|||||
Interest on lease liabilities |
|
— |
|
|||||
Total finance lease expense |
|
— |
|
For the three months ended March 31, 2018, total operating lease expense amounted to $
Supplemental cash flow information related to leases was as follows:
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For the three months ended |
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March 31, |
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|
|
|
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2019 |
|
|
|
|
|
|
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$ |
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
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|
|||||
|
Operating cash flows from operating leases |
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|
||||
|
Operating cash flows from finance leases |
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— |
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||||
|
Financing cash flows from finance leases |
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— |
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||||
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|
|||||
Right-of-use assets obtained in exchange for lease liabilities: |
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|
|||||
|
Operating leases |
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|
||||
|
Finance leases |
|
— |
|
20
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 9. LEASES (CONTINUED)
Supplemental balance sheet information related to leases was as follows:
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|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
|
|
$ |
|
|
Operating leases |
|
|
|
|||||
|
Operating leases right-of-use assets |
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|
|
||||
|
|
|
|
|
||||
|
Lease liabilities due within one year |
|
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|
||||
|
Operating lease liabilities |
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|
||||
|
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|
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|
||||
|
|
|
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|
||||
Finance leases |
|
|
|
|||||
|
Property, plant and equipment |
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|
||||
|
Accumulated depreciation |
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( |
) |
||||
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||||
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|
||||
|
Long-term debt due within one year |
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||||
|
Long-term debt |
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|
||||
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|
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|
||||
|
|
|
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|
||||
|
Weighted-average remaining lease term |
|
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|
||||
|
|
Operating leases |
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|
||||
|
|
Finance leases |
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|
||||
|
|
|
|
|
|
|||
|
Weighted-average discount rate |
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|
||||
|
|
Operating leases |
|
|
% |
|||
|
|
Finance leases |
|
|
% |
Maturities of lease liabilities at March 31, 2019 were as follows:
|
|
|
|
Operating leases |
|
|
Finance leases |
|
||
|
|
|
|
$ |
|
|
$ |
|
||
|
|
2019 (1) |
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Imputed interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities |
|
|
|
|
|
|
|
|
|
(1) |
Represents the remaining nine months of 2019. |
21
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 9. LEASES (CONTINUED)
Maturities of lease commitments at December 31, 2018 were as follows:
|
|
|
|
Operating leases |
|
|
Capital leases |
|
||
|
|
|
|
$ |
|
|
$ |
|
||
|
|
2019 |
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
Total lease payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Imputed interest |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities |
|
N/A |
|
|
|
|
|
22
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 10.
_________________
INTANGIBLE ASSETS
The following table presents the components of intangible assets:
|
|
|
|
March 31, 2019 |
|
|
December 31, 2018 |
|
||||||||||||||||||
|
|
Estimated useful lives (in years) |
|
Gross carrying amount |
|
|
Accumulated amortization |
|
|
Net |
|
|
Gross carrying amount |
|
|
Accumulated amortization |
|
|
Net |
|
||||||
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Definite-lived intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water rights |
|
40 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Customer relationships |
|
10 – 40 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Technology |
|
7 – 20 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Non-Compete |
|
9 |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
License rights |
|
12 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Indefinite-lived intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water rights |
|
|
|
|
|
|
|
|
— |
|
|
|
4 |
|
|
|
|
|
|
|
— |
|
|
|
4 |
|
Trade names |
|
|
|
|
|
|
|
|
— |
|
|
|
235 |
|
|
|
|
|
|
|
— |
|
|
|
238 |
|
License rights |
|
|
|
|
|
|
|
|
— |
|
|
|
6 |
|
|
|
|
|
|
|
— |
|
|
|
6 |
|
Catalog rights |
|
|
|
|
|
|
|
|
— |
|
|
|
38 |
|
|
|
|
|
|
|
— |
|
|
|
38 |
|
Total |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Amortization expense related to intangible assets for the three months ended March 31, 2019 was $
Amortization expense for the next five years related to intangible assets is expected to be as follows:
|
|
2019 |
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
2023 |
|
||||
|
|
$ |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amortization expense related to intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents twelve months of amortization |
23
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 11.
_________________
CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
Waco, Texas facility
On November 1, 2018, the Company announced a margin improvement plan within the Personal Care Division. As part of this plan, the Board of Directors approved the permanent closure of its Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of its manufacturing assets and a workforce reduction across the division. The Waco, Texas facility is expected to cease operations in the third quarter of 2019.
For the three months ended March 31, 2019, the Company recorded $
24
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 12.
_________________
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
The following table presents the changes in Accumulated other comprehensive loss by component(1) for the three months ended March 31, 2019 and the year ended December 31, 2018:
|
|
Net derivative gains (losses) on cash flow hedges |
|
|
Pension items(2) |
|
|
Post-retirement benefit items(2) |
|
|
Foreign currency items |
|
|
Total |
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Balance at December 31, 2017 |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Natural gas swap contracts |
|
|
|
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|||
Currency options |
|
|
( |
) |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
( |
) |
|||
Foreign exchange forward contracts |
|
|
( |
) |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
( |
) |
|||
Net (gain) loss |
|
N/A |
|
|
|
( |
) |
|
|
|
|
|
N/A |
|
|
|
( |
) |
||
Foreign currency items |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
( |
) |
|
|
( |
) |
|||
Other comprehensive (loss) income before reclassifications |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Amounts reclassified from Accumulated other comprehensive loss |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
Net current period other comprehensive (loss) income |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Balance at December 31, 2018 |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Natural gas swap contracts |
|
|
|
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|||
Currency options |
|
|
|
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|||
Foreign exchange forward contracts |
|
|
|
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|||
Foreign currency items |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|||
Other comprehensive income before reclassifications |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Amounts reclassified from Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Net current period other comprehensive income |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Balance at March 31, 2019 |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
(1) |
All amounts are after tax. Amounts in parentheses indicate losses. |
(2) |
The accrued benefit obligation is actuarially determined on an annual basis as of December 31. |
25
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(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(1) |
|
|||||
|
|
For the three months ended |
|
|||||
|
|
March 31, 2019 |
|
|
March 31, 2018 |
|
||
|
|
$ |
|
|
$ |
|
||
Net derivative gains (losses) on cash flow hedge |
|
|
|
|
|
|
|
|
Natural gas swap contracts (2) |
|
|
— |
|
|
|
( |
) |
Currency options and forwards (2) |
|
|
|
|
|
|
( |
) |
Total before tax |
|
|
|
|
|
|
( |
) |
Tax benefit |
|
|
— |
|
|
|
|
|
Net of tax |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items |
|
|
|
|
|
|
|
|
Amortization of net actuarial loss (3) |
|
|
|
|
|
|
|
|
Amortization of prior year service cost (3) |
|
|
|
|
|
|
|
|
Total before tax |
|
|
|
|
|
|
|
|
Tax expense |
|
|
( |
) |
|
|
( |
) |
Net of tax |
|
|
|
|
|
|
|
|
(1) |
Amounts in parentheses indicate losses. |
(2) |
These amounts are included in Cost of Sales in the Consolidated Statements of Earnings and Comprehensive Income. |
(3) |
These amounts are included in the computation of net periodic benefit cost (see Note 5 “Pension Plans and Other Post-Retirement Benefit Plans” for more details). |
26
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 13.
_________________
SHAREHOLDERS’ EQUITY
On
On
STOCK REPURCHASE PROGRAM
The Company’s Board of Directors has authorized a stock repurchase program (the “Program”) of up to $
The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company may enter into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements would require the Company to make up-front payments to the counterparty financial institutions, which would result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.
During the first quarter of 2019 and 2018, there were
Since the inception of the Program, the Company has repurchased
27
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(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.
In connection with alleged contamination of a site bordering Burrard Inlet in North Vancouver, on February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan International Ltd. and the Company, in order to define and implement an action plan to address soil, sediment and groundwater issues. Construction began in January 2017 and was completed in the first quarter of 2019. The Company previously recorded an environmental reserve to address its estimated exposure. The possible cost in excess of the reserve is not considered to be material for this matter.
The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:
|
|
March 31, 2019 |
|
|
|
|
$ |
|
|
Balance at beginning of year |
|
|
|
|
Additions and other changes |
|
|
|
|
Environmental spending |
|
|
( |
) |
Balance at end of period |
|
|
|
|
The U.S. Environmental Protection Agency (the “EPA”) and/or various state agencies have notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a number of operating sites due to possible soil, sediment or groundwater contamination.
Climate change regulation
Various national and local laws and regulations relating to climate change have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments.
The EPA Clean Power Plan regulation is being litigated and has been stayed. The EPA has proposed to repeal and replace the Clean Power Plan. The proposed replacement rule, entitled the “Affordable Clean Energy” (“ACE”) rule, was published on August 31, 2018, and the EPA plans to finalize the rule in the first part of 2019. Regardless of the outcome for the Clean Power Plan and ACE, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.
The 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 with other pulp and paper producers located in these jurisdictions.
28
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In October 2018, the Government of Canada proposed to establish a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. This system is expected to become effective in 2019. The Government of Canada is seeking to impose its carbon pricing program for regulating GHG emissions in Ontario. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario has entered into discussions with the Canadian Government on adopting a Made-in-Ontario provincial program. Additional environmental costs may result from this effort which cannot be reasonably estimated at this time.
CONTINGENCIES
In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at March 31, 2019, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
INDEMNIFICATIONS
In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At March 31, 2019, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly,
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, 2019 the Company has
29
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 15.
_________________
SEGMENT DISCLOSURES
The Company’s
• |
Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp. |
• |
Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent hygiene products. |
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, 2019 |
|
|
March 31, 2018 |
|
||
|
|
$ |
|
|
$ |
|
||
Sales by segment |
|
|
|
|
|
|
|
|
Pulp and Paper |
|
|
|
|
|
|
|
|
Personal Care |
|
|
|
|
|
|
|
|
Total for reportable segments |
|
|
|
|
|
|
|
|
Intersegment sales |
|
|
( |
) |
|
|
( |
) |
Consolidated sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales by product group |
|
|
|
|
|
|
|
|
Communication papers |
|
|
|
|
|
|
|
|
Specialty and packaging papers |
|
|
|
|
|
|
|
|
Market pulp |
|
|
|
|
|
|
|
|
Absorbent hygiene products |
|
|
|
|
|
|
|
|
Consolidated sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Pulp and Paper |
|
|
|
|
|
|
|
|
Personal Care |
|
|
|
|
|
|
|
|
Total for reportable segments |
|
|
|
|
|
|
|
|
Impairment of property, plant and equipment - Personal Care |
|
|
|
|
|
|
— |
|
Consolidated depreciation and amortization and impairment of property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|
Pulp and Paper |
|
|
|
|
|
|
|
|
Personal Care |
|
|
( |
) |
|
|
|
|
Corporate |
|
|
( |
) |
|
|
( |
) |
Consolidated operating income |
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
Non-service components of net periodic benefit cost |
|
|
( |
) |
|
|
( |
) |
Earnings before income taxes and equity loss |
|
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
Equity loss, net of taxes |
|
|
|
|
|
|
— |
|
Net earnings |
|
|
|
|
|
|
|
|
30
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(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
The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at March 31, 2019 and December 31, 2018, the Statements of Earnings and Comprehensive Income and Cash Flows for the three months ended March 31, 2019 and 2018 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, 2019 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|||
AND COMPREHENSIVE INCOME |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Sales |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Depreciation and amortization |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Impairment of property, plant and equipment |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Closure and restructuring costs |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Other operating (income) loss, net |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Operating (loss) income |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Interest expense (income), net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
Non-service components of net periodic benefit cost |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
(Loss) earnings before income taxes |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Income tax (benefit) expense |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Equity loss, net of taxes |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Share in earnings of equity accounted investees |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
31
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
|
For the three months ended |
|
|||||||||||||||||
|
|
March 31, 2018 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|||
AND COMPREHENSIVE INCOME |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Sales |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Depreciation and amortization |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Other operating income, net |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Operating (loss) income |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Interest expense (income), net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
Non-service components of net periodic benefit cost |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
(Loss) earnings before income taxes |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Income tax (benefit) expense |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Share in earnings of equity accounted investees |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
32
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
|
March 31, 2019 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|||
CONDENSED CONSOLIDATING BALANCE SHEET |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Assets |
|
|
|
|||||||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Receivables |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Inventories |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Income and other taxes receivable |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Intercompany accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Operating lease right-of-use assets |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Intangible assets, net |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Investments in affiliates |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Intercompany long-term advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Trade and other payables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Intercompany accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Income and other taxes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Operating lease liabilities due within one year |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Long-term debt due within one year |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Long-term debt |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Operating lease liabilities |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Intercompany long-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Deferred income taxes and other |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Other liabilities and deferred credits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Total liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
33
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
|
December 31, 2018 |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Consolidating |
|
|
|
|
|
|||
CONDENSED CONSOLIDATING BALANCE SHEET |
|
Parent |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Consolidated |
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Receivables |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Inventories |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Income and other taxes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Intercompany accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Total current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Property, plant and equipment, net |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Intangible assets, net |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Investments in affiliates |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Intercompany long-term advances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Intercompany accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Income and other taxes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Long-term debt due within one year |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Long-term debt |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Intercompany long-term loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
Deferred income taxes and other |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Other liabilities and deferred credits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Total liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
The Company has revised the Receivables balance within the December 31, 2018 Guarantor Subsidiaries column (decreased) and Non-Guarantor Subsidiaries column (increased) by $
34
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
|
For the three months ended |
|
|||||||||||||||||
|
|
March 31, 2019 |
|
|||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
|
Parent |
|
|
Guarantor Subsidiaries |
|
|
Non- Guarantor Subsidiaries |
|
|
Consolidating Adjustments |
|
|
Consolidated |
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
Cash flows (used for) provided from operating activities |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash flows used for investing activities |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net change in bank indebtedness |
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Proceeds from receivables securitization facility |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Repayments of receivables securitization facility |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Increase in long-term advances to related parties |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
— |
|
Decrease in long-term advances to related parties |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Other |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Cash flows provided from (used for) financing activities |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Impact of foreign exchange on cash |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash and cash equivalents at beginning of period |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
35
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
|
For the three months ended |
|
|||||||||||||||||
|
|
March 31, 2018 |
|
|||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
|
Parent |
|
|
Guarantor Subsidiaries |
|
|
Non- Guarantor Subsidiaries |
|
|
Consolidating Adjustments |
|
|
Consolidated |
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Proceeds from disposals of property, plant and equipment |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Other |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Cash flows used for investing activities |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Repayments of receivables securitization facility |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Increase in long-term advances to related parties |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
|
— |
|
Decrease in long-term advances to related parties |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Cash flows (used for) provided from financing activities |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net (decrease) increase in cash and cash equivalents |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Impact of foreign exchange on cash |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Cash and cash equivalents at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
36
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q. This MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 22, 2019. 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, 2019 and 2018. The three month periods are also referred to as the first quarter of 2019 and 2018. Reference to notes refers 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, 2019 |
|
• |
Outlook |
|
• |
Consolidated Results of Operations and Segment Review |
|
• |
Liquidity and Capital Resources |
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize right-of-use assets and lease liabilities for all of their operating leases while continuing to recognize expenses in the Consolidated Statement of Earnings and Comprehensive Income in a manner similar to previous accounting standards. The Company elected to initially apply the new leases standard as of January 1, 2019 with certain available practical expedients. No cumulative-effect adjustments on retained earnings were necessary as of January 1, 2019. The most significant impact of adopting the new standard was the recognition of right-of-use assets and lease liabilities for operating leases. The accounting for finance leases remains substantially unchanged. For all comparative periods prior to the adoption of the new leases standard, the Company will continue to report operating leases in the consolidated financial statements under ASC 840 “Leases” and provide the related required disclosures.
For more details, refer to Note 2 “Recent Accounting Pronouncements” and Note 9 “Leases” of the financial statements in this Form 10-Q.
OVERVIEW
We design, manufacture, market and distribute a wide variety of fiber-based products including communication papers, specialty and packaging papers and absorbent hygiene products. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. More than 50% of our pulp production is consumed internally to manufacture paper and other consumer products, with the balance sold as market pulp. We are the largest integrated marketer of uncoated freesheet paper in North America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers, converters and end-users. We are also a marketer and producer of a broad line of incontinence care products as well as infant diapers. To learn more, visit www.domtar.com.
We have two reportable segments as described below, which also represent our two operating segments. Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies. The following summary briefly describes the operations included in each of our reportable segments.
37
Pulp and Paper: Our Pulp and Paper segment consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.
Personal Care: Our Personal Care segment consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.
HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2019
|
• |
Operating income and net earnings increased by 49% and 48%, respectively, from the first quarter of 2018 |
|
• |
Sales increased by 2% from the first quarter of 2018. Net average selling prices for pulp and paper were up from the first quarter of 2018. Our manufactured paper volume and pulp volume were down and our Personal Care business had unfavorable mix and lower volume when compared to the first quarter of 2018 |
|
• |
We paid $27 million in dividends |
|
|
Three months ended |
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|||||
FINANCIAL HIGHLIGHTS |
|
March 31, 2019 |
|
|
March 31, 2018 |
|
|
$ |
|
|
% |
|
|
||||
(In millions of dollars, unless otherwise noted) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,376 |
|
|
$ |
1,345 |
|
|
$ |
31 |
|
|
|
2 |
% |
|
Operating income |
|
115 |
|
|
|
77 |
|
|
|
38 |
|
|
|
49 |
% |
|
|
Net earnings |
|
|
80 |
|
|
|
54 |
|
|
$ |
26 |
|
|
|
48 |
% |
|
Net earnings per common share (in dollars)1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.27 |
|
|
$ |
0.86 |
|
|
$ |
0.41 |
|
|
|
48 |
% |
|
Diluted |
|
$ |
1.27 |
|
|
$ |
0.86 |
|
|
$ |
0.41 |
|
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2019 |
|
|
At December 31, 2018 |
|
|
||
Total assets |
|
|
|
|
|
|
|
|
|
$ |
5,022 |
|
|
$ |
4,925 |
|
|
Total long-term debt, including current portion |
|
|
|
|
|
|
|
|
|
$ |
854 |
|
|
$ |
854 |
|
|
1 |
See Note 4 “Earnings per Common Share” of the financial statements in this Quarterly Report on Form 10-Q for more information on the calculation of net earnings per common share. |
OUTLOOK
Our paper shipments should benefit from higher demand from our customers following the industry capacity closures while our paper prices will further improve as we continue to implement our recently announced price increases. The second quarter will be adversely affected by seasonally higher maintenance activity in our Pulp and Paper business as we move into the annual shutdowns at some of our major facilities. Personal Care is expected to benefit from our margin improvement plan and the ramp-up of a new customer, partially offset by further raw material cost inflation.
38
CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW
This section presents a discussion and analysis of our first quarter of 2019 and 2018 sales, operating income (loss) and other information relevant to the understanding of our results of operations.
ANALYSIS OF NET SALES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Business Segment |
|
Three months ended |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
Variance |
|
|||||
|
|
March 31, 2019 |
|
|
March 31, 2018 |
|
|
$ |
|
|
% |
|
||||
Pulp and Paper |
|
$ |
1,147 |
|
|
$ |
1,100 |
|
|
|
47 |
|
|
4% |
|
|
Personal Care |
|
|
247 |
|
|
|
262 |
|
|
|
(15 |
) |
|
-6% |
|
|
Total for reportable segments |
|
|
1,394 |
|
|
|
1,362 |
|
|
|
32 |
|
|
2% |
|
|
Intersegment sales |
|
|
(18 |
) |
|
|
(17 |
) |
|
|
(1 |
) |
|
|
|
|
Consolidated |
|
|
1,376 |
|
|
|
1,345 |
|
|
|
31 |
|
|
2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paper - manufactured (in thousands of ST) |
|
|
736 |
|
|
|
769 |
|
|
|
(33 |
) |
|
-4% |
|
|
Communication Papers |
|
|
615 |
|
|
|
640 |
|
|
|
(25 |
) |
|
-4% |
|
|
Specialty and Packaging |
|
|
121 |
|
|
|
129 |
|
|
|
(8 |
) |
|
-6% |
|
|
Paper - sourced from third parties (in thousands of ST) |
|
|
23 |
|
|
|
28 |
|
|
|
(5 |
) |
|
-18% |
|
|
Paper - total (in thousands of ST) |
|
|
759 |
|
|
|
797 |
|
|
|
(38 |
) |
|
-5% |
|
|
Pulp (in thousands of ADMT) |
|
|
349 |
|
|
|
374 |
|
|
|
(25 |
) |
|
-7% |
|
ANALYSIS OF CHANGES IN SALES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter of 2019 versus First quarter of 2018 |
|
|||||||||||||
|
|
% Change in Net Sales due to |
|
|||||||||||||
|
|
Net Price |
|
|
Volume / Mix |
|
|
Currency |
|
|
Total |
|
||||
Pulp and Paper |
|
|
9 |
% |
|
|
-5 |
% |
|
|
- |
% |
|
|
4 |
% |
Personal Care |
|
|
- |
% |
|
|
-2 |
% |
|
|
-4 |
% |
|
|
-6 |
% |
Consolidated sales |
|
|
7 |
% |
|
|
-4 |
% |
|
|
-1 |
% |
|
|
2 |
% |
ANALYSIS OF OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|||||||||||||
By Business Segment |
|
|
|
|
|
|
|
|
|
Variance |
|
|||||
|
|
March 31, 2019 (a) |
|
|
March 31, 2018 |
|
|
$ |
|
|
% |
|
||||
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp and Paper |
|
|
144 |
|
|
|
76 |
|
|
|
68 |
|
|
|
89 |
% |
Personal Care |
|
|
(8 |
) |
|
|
8 |
|
|
|
(16 |
) |
|
|
-200 |
% |
Corporate |
|
|
(21 |
) |
|
|
(7 |
) |
|
|
(14 |
) |
|
|
-200 |
% |
Consolidated operating income |
|
|
115 |
|
|
|
77 |
|
|
|
38 |
|
|
|
49 |
% |
(a) |
Includes closure and restructuring charge and accelerated depreciation under Impairment of property, plant and equipment related to our announced margin improvement plan within our Personal Care segment of $4 million and $10 million, respectively. |
First quarter of 2019 versus First quarter of 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Change in Segmented Operating Income (Loss) due to |
|
||||||||||||||||||||||||||||||||
|
|
Volume/Mix |
|
|
Net Price |
|
|
Input Costs (a) |
|
|
Operating Expenses (b) |
|
|
Currency |
|
Depreciation/ Impairment (c) |
|
|
Restructuring (d) |
|
|
Other Income/ Expense (e) |
|
|
Total |
|
|||||||||
Pulp and Paper |
|
|
(9 |
) |
|
|
97 |
|
|
|
(9 |
) |
|
|
(14 |
) |
|
|
4 |
|
|
3 |
|
|
|
— |
|
|
|
(4 |
) |
|
|
68 |
|
Personal Care |
|
|
(5 |
) |
|
|
1 |
|
|
|
— |
|
|
|
4 |
|
|
|
(2 |
) |
|
(9 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
|
|
(16 |
) |
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
(14 |
) |
Consolidated operating income (loss) |
|
|
(14 |
) |
|
|
98 |
|
|
|
(9 |
) |
|
|
(25 |
) |
|
|
2 |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
38 |
|
39
(a) |
Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy costs. |
(b) |
Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs. |
(c) |
Depreciation charges were lower by $4 million in the first quarter of 2019, excluding foreign currency impact. In our Personal Care segment, in the first quarter of 2019, we recorded $10 million of accelerated depreciation under Impairment of property, plant and equipment related to our margin improvement plan. |
(d) |
We recorded $ |
(e)
First quarter of 2019 operating expenses/income includes: |
First quarter of 2018 operating expenses/income includes: |
- Environmental provision ($1 million) - Foreign currency loss on working capital items ($1 million) - Other income ($3 million)
|
- Gain on sale of property, plant and equipment ($1 million) - Foreign currency gain on working capital items ($3 million) - Bad debt expense ($1 million) - Other income ($2 million) |
Commentary – First quarter of 2019 compared to First quarter of 2018
Interest Expense, net
We incurred $13 million of net interest expense in the first quarter of 2019 compared to net interest expense of $16 million in the first quarter of 2018. The net interest expense was impacted by the repayment of the $300 million Term Loan in the fourth quarter of 2018.
Income Taxes
In the first quarter of 2019, our income tax expense was $24 million, consisting of $27 million of current income tax expense and a deferred income tax benefit of $3 million. This compares to an income tax expense of $11 million in the first quarter of 2018, consisting of $14 million of current income tax expense and a deferred income tax benefit of $3 million. We made income tax payments, net of tax refunds, of $6 million during the first quarter of 2019. The effective tax rate was 23% compared with an effective tax rate of 17% in the first quarter of 2018. The effective tax rate for 2019 was impacted by the inclusion of additional forecasted tax expense for 2019 related to Global Intangible Low-Taxed Income and for forecasted withholding tax on unremitted foreign earnings. The effective tax rate for the first quarter of 2019 was also favorably impacted by the recognition of a $1 million research and development credit in a U.S. state. The effective tax rate for the first quarter of 2018 was favorably impacted by the recognition of $1 million of previously unrecognized tax benefits due to a statute expiration in a foreign jurisdiction.
Commentary – Segment Review
Pulp and Paper Segment
Sales in our Pulp and Paper segment increased by $47 million, or 4%, when compared to sales in the first quarter of 2018. This increase in sales is mostly due to an increase in net average selling prices for pulp and paper. This increase was partially offset by a decrease in our sales volumes.
Operating income in our Pulp and Paper segment amounted to $144 million in the first quarter of 2019, an increase of $68 million, when compared to operating income of $76 million in the first quarter of 2018. Our results were positively impacted by:
|
• |
Higher net average selling prices for pulp and paper ($97 million) |
|
• |
Positive impact of a weaker Canadian dollar on our Canadian dollar denominated expenses, net of our hedging program ($4 million) |
|
• |
Lower depreciation charges ($3 million) due to certain assets being fully depreciated |
These increases were partially offset by:
|
• |
Higher operating expenses ($14 million) mostly related to higher maintenance costs due to the timing of major maintenance as well as higher SG&A and freight charges, partially offset by higher production when compared to the first quarter of 2018 |
|
• |
Higher input costs ($9 million) mostly related to higher costs of fiber due to weather-related wood supply shortage as well as unfavorable market conditions |
|
• |
Lower volume and mix ($9 million) |
|
• |
Lower other income ($4 million) |
The markets in which our pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. Most of our products are commodities that are widely available from other producers as well. Because commodity
40
products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. We also compete on the basis of product quality, breadth of offering and service solutions. Further, we compete against electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products.
The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and competitively priced pulp products.
Our paper shipments should benefit from higher demand from our customers following the industry capacity closures while our paper prices will further improve as we continue to implement our recently announced price increases. The second quarter will be adversely affected by seasonally higher maintenance activity in our Pulp and Paper business as we move into the annual shutdowns at some of our major facilities.
Personal Care Segment
Sales in our Personal Care segment decreased by $15 million, or 6%, when compared to sales in the first quarter of 2018. This decrease in sales was driven by unfavorable foreign currency exchange, mostly due to the fluctuation between the U.S dollar and the Euro, as well as unfavorable mix and lower volume.
Operating income decreased by $16 million, or 200%, in the first quarter of 2019 compared to the first quarter of 2018. Our results were negatively impacted by:
|
• |
Higher depreciation/impairment charges ($9 million) mostly due to the non-cash impairment of property, plant and equipment charge of $10 million recorded in the first quarter of 2019, related to our margin improvement plan |
|
• |
Unfavorable mix and lower volume ($5 million) |
|
• |
Higher closure and restructuring charges ($4 million) related to our margin improvement plan |
|
• |
Unfavorable foreign exchange impact, net of our hedging program ($2 million) |
|
• |
Lower other income ($1 million) |
These decreases were partially offset by:
|
• |
Lower operating expenses ($4 million) mostly due to lower SG&A |
|
• |
Favorable net average selling prices ($1 million) |
In our absorbent hygiene products business, we compete in an industry with fundamental drivers for long-term growth; however, competitive market pressures in the healthcare and retail markets grew significantly in recent years. Although the impact of such pressures presents some uncertainties, we expect them to result in lower than previously anticipated sales and operating margins.
While we are expected to benefit from the overall increase in healthcare spending due to an aging population, the pressures to limit spending on healthcare may impact overall consumption or the channels in which consumption occurs. Additionally, excess industry capacity has increased pricing pressure in all markets and instigated a shift in the infant and adult private label retail space as competitors historically almost absent in our markets have increased their presence in such markets.
The principal methods and elements of competition remain brand recognition and loyalty, product innovation, quality and performance, price and marketing and distribution capabilities.
Personal Care is expected to benefit from our margin improvement plan and the ramp-up of a new customer, partially offset by further raw material cost inflation.
Margin Improvement Plan
On November 1, 2018, we announced a margin improvement plan within our Personal Care segment. As part of this plan, the Board of Directors approved the permanent closure of our Waco, Texas Personal Care manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction across the division. The Waco, Texas facility is expected to cease operations in the third quarter of 2019.
For the three months ended March 31, 2019, we recorded $10 million of accelerated depreciation under Impairment of property, plant and equipment on the Consolidated Statement of Earnings and Comprehensive Income. We also recorded $3 million of severance and termination costs and a $1 million write-down of inventory under Closure and restructuring costs.
41
STOCK-BASED COMPENSATION EXPENSE
For the first quarter of 2019, stock-based compensation expense recognized in our results of operations was $16 million for all outstanding awards which includes the mark-to-market expense related to liability awards of $12 million. This compares to a stock-based compensation expense of $1 million for all outstanding awards which includes the mark-to-market recovery related to liability awards of $3 million in the first quarter of 2018. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.
LIQUIDITY AND CAPITAL RESOURCES
Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our contractually committed $700 million credit facility, of which $700 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $47 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.
Operating Activities
Our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials, including fiber and energy, and other expenses such as income tax and property taxes.
Cash flows from operating activities totaled $55 million in the first quarter of 2019, a $35 million decrease compared to cash flows from operating activities of $90 million in the first quarter of 2018. This decrease in cash flows from operating activities is primarily due to an increase in working capital requirements in the first quarter of 2019 when compared to the first quarter of 2018 partially offset by an increase in profitability. We made income tax payments, net of refunds, of $6 million during the first quarter of 2019 compared to income tax payments, net of refunds, of $4 million in the first quarter of 2018.
Investing Activities
Cash flows used for investing activities in the first quarter of 2019 amounted to $46 million, a $18 million increase compared to cash flows used for investing activities of $28 million in the first quarter of 2018.
The use of cash in the first quarter of 2019 was attributable to additions to property, plant and equipment of $46 million.
The use of cash in the first quarter of 2018 was attributable to additions to property, plant and equipment of $25 million and additions to a joint venture investment of $4 million, partially offset by proceeds of disposals of property, plant and equipment of $1 million.
Our capital expenditures for 2019 are expected to be between $220 million and $240 million.
Financing Activities
Cash flows used for financing activities totaled $25 million in the first quarter of 2019 compared to cash flows used for financing activities of $51 million in the first quarter of 2018.
The use of cash in the first quarter of 2019 was primarily the result of dividend payments ($27 million).
The use of cash in the first quarter of 2018 was primarily the result of dividend payments ($26 million) and net repayments of borrowings under our credit facilities (revolver and receivables securitization) ($25 million).
Capital Resources
Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $763 million as of March 31, 2019 compared to $743 million as of December 31, 2018.
42
Term Loan
In the fourth quarter of 2018, we repaid the $300 million unsecured Term Loan that had been entered into in 2015 by a wholly-owned subsidiary of Domtar with certain domestic banks.
Revolving Credit Facility
In August 2018, we amended and restated our unsecured revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks, extending the Credit Agreement’s maturity date from August 18, 2021 to August 22, 2023. The amount available under the Credit Agreement remained at $700 million.
Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic subsidiaries. Borrowings by foreign borrowers under the Credit Agreement are guaranteed by the Company, our significant domestic subsidiaries and certain of our significant foreign subsidiaries.
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 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, 2019 and March 31, 2018, we were in compliance with these financial covenants, and had no borrowings. At March 31, 2019 and March 31, 2018, we had no outstanding letters of credit, leaving $700 million unused and available under this facility.
Receivables Securitization
We have a $150 million receivables securitization facility that matures in November 2021 .
At March 31, 2019, borrowings under the receivables securitization facility amounted to $50 million, and we had $53 million of letters of credit under the program (March 31, 2018– nil and $51 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, 2019, we had $47 million unused and available under the receivable securitization facility.
Common Stock
On February 19, 2019, our Board of Directors approved a quarterly dividend of $0.435 per share, to be paid to holders of our common stock. Total dividends of approximately $28 million were paid on April 15, 2019 to shareholders of record on April 2, 2019.
On May 8, 2019, our Board of Directors approved a quarterly dividend of $0.455 per share, an increase of $0.02 or 4.6%, to be paid to holders of our common stock. This dividend is to be paid on July 16, 2019, to shareholders of record on July 2, 2019.
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, 2019, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.
Pension Plans
We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized
43
instructions. These indemnifications survive the termination of such agreements. At March 31, 2019, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 “Recent Accounting Pronouncements,” of the financial statements in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes 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, 2018.
There has not been any material change to our policies since December 31, 2018 except for the adoption of ASU 2016-02, “Leases” on January 1, 2019. For more details, refer to Note 2 “Recent Accounting Pronouncements” and Note 9 “Leases” of the financial statements in this Quarterly Report on Form 10-Q.
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 and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate”, “believe”, “expect”, “intend”, “aim”, “target”, “plan”, “continue”, “estimate”, “project”, “may”, “will”, “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occurs, what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors include, but are not limited to:
|
• |
continued decline in usage of fine paper products in our core North American market; |
|
• |
our ability to implement our business diversification initiatives, including repurposing of assets and strategic acquisitions; |
|
• |
product selling prices; |
|
• |
raw material prices, including wood fiber, chemical and energy; |
|
• |
conditions in the global capital and credit markets, and the economy generally, particularly in the U.S., Canada and Europe; |
|
• |
performance of Domtar Corporation’s manufacturing operations, including unexpected maintenance requirements; |
|
• |
the level of competition from domestic and foreign producers; |
|
• |
cyberattack 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; |
44
|
• |
the loss of current customers or the inability to obtain new customers; |
|
• |
legal proceedings; |
|
• |
changes in asset valuations, including impairment of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons; |
|
• |
changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar and European currencies; |
|
• |
the effect of timing of retirements and changes in the market price of Domtar Corporation’s common stock on charges for stock-based compensation; |
|
• |
performance of pension fund investments and related derivatives, if any; and |
|
• |
the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2018. |
You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. Unless specifically required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking statements to reflect new events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2018. There has not been any material change in our exposure to market risk since December 31, 2018. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 3 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of March 31, 2019, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2019, our disclosure controls and procedures were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, 2018.
45
ITEM 1A. RISK FACTORS
Our Annual Report on Form 10-K for the year ended December 31, 2018, 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, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the first quarter of 2019, we did not repurchase any shares under our stock repurchase program (the “Program”). We currently have $323 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, from time to time, in part to reduce the dilutive effects of our stock options and awards and to improve shareholders’ returns. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions, availability under the program as well as corporate and regulatory considerations. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.
During 2018, there were no shares repurchased under the Program. As of December 31, 2018, the approximate dollar value of shares that may yet be purchased under the Program was $323 million.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
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Incorporated by reference to: |
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Exhibit Number |
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Exhibit Description |
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Form |
Exhibit |
Filing Date |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
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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. |
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101.SCH |
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XBRL Taxonomy Extension Schema |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
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XBRL Extension Presentation Linkbase |
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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 |
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Date: May 9, 2019 |
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By: |
/s/ Daniel Buron |
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Daniel Buron |
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Senior Vice-President and Chief Financial Officer |
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By: |
/s/ Razvan L. Theodoru |
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Razvan L. Theodoru |
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Vice-President, Corporate Law and Secretary |
48