Docoh
Loading...

UFS Domtar

Filed: 28 Feb 21, 7:00pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                                         

Commission File Number:  001-33164

 

Domtar Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-5901152

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

234 Kingsley Park Drive

Fort Mill, SC

29715

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:  (803) 802-7500

 

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.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  No 

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 S-T (§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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

☐  

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The New York Stock Exchange on June 30, 2020, was $1,165,096,948.

The number of shares of Registrant’s Common Stock outstanding as of February 19, 2021 was 55,066,504.

Portions of the Registrant’s Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 5, 2021, are incorporated by reference into Part III of this Report.

 

 

 


 

DOMTAR CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2020

TABLE OF CONTENTS

 

 

 

PAGE

PART I

ITEM 1

BUSINESS

4

 

 

General

4

 

 

COVID-19

5

 

 

Availability of Information

5

 

 

Our Corporate Structure

5

 

 

Our Business Overview

5

 

 

Our Strategic Initiatives and Financial Priorities

9

 

 

Our Competition

10

 

 

Our Human Capital

10

 

 

Our Approach to Sustainability

11

 

 

Our Environmental Compliance

11

 

 

Our Intellectual Property

12

 

 

Our Executive Officers

12

 

 

Forward-looking Statements

14

 

 

 

 

ITEM 1A

RISK FACTORS

15

 

 

 

 

ITEM 1B

UNRESOLVED STAFF COMMENTS

22

 

 

 

 

ITEM 2

PROPERTIES

23

 

 

 

 

ITEM 3

LEGAL PROCEEDINGS

24

 

 

 

 

ITEM 4

MINE SAFETY DISCLOSURES

24

 

 

 

 

PART II

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

25

 

 

Market Information

25

 

 

Holders

25

 

 

Dividends and Stock Repurchase Program

25

 

 

Performance Graph

26

 

 

 

 

ITEM 6

SELECTED FINANCIAL DATA

27

 

 

 

 

ITEM 7

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

28

 

 

Overview

29

 

 

2020 Highlights

29

 

 

Impact of the COVID-19 Pandemic

30

 

 

Outlook

31

 

 

Cost Reduction Program

32

 

 

Review of Operations

32

 

 

Discontinued Operations

37

 

 

Liquidity and Capital Resources

37

 

 

Recent Accounting Pronouncements and Critical Accounting Estimates and Policies

40

 

 

 

 

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

45

 

 

 

 

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

47

 

 

Management’s Reports to Shareholders of Domtar Corporation

47

 

 

Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm

48

 

 

Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss)

50

 

 

Consolidated Balance Sheets

51

 

 

Consolidated Statement of Shareholders’ Equity

52

 

 

Consolidated Statements of Cash Flows

53

 

 

Notes to Consolidated Financial Statements

54

 

 

 

 

2


 

 

3


 

PART I

ITEM 1.  BUSINESS

GENERAL

We design, manufacture, market and distribute a wide variety of fiber-based products, including communication papers, specialty and packaging papers. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. Approximately 40% of our pulp production is consumed internally to manufacture paper, with the balance sold as market pulp. We are the largest integrated marketer of uncoated freesheet paper in North America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers, converters and end-users. To learn more, visit www.domtar.com.

Throughout this Annual Report on Form 10-K, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refer to Domtar Corporation, its subsidiaries, as well as its investments.

2020 was a year of significant challenges for Domtar. During 2020, we undertook various strategic initiatives, including a cost reduction program, executed on our asset conversion roadmap, reviewed our strategic alternatives for our Personal Care business and faced unprecedented operating and market challenges due to the COVID-19 pandemic.  

While our strategy will take some time to execute, we made good progress in 2020 that provides us with a strong foundation on which to build. We are executing on a clear plan to create long-term shareholder value by refocusing our portfolio around Paper, Pulp and Packaging. We also have begun to execute our strategic plan to enter the containerboard market with highly competitive assets and a differentiated go-to-market strategy.

Sale of Personal Care business

On January 7, 2021, we agreed to sell our Personal Care business to American Industrial Partners (AIP), for a purchase price of $920 million in cash (the “Transaction”). The Transaction is expected to close in the first quarter of 2021. Based on its magnitude and because we are exiting the Personal Care business, the sale represents a significant strategic shift that has a material effect on our operations and financial results. Accordingly, all periods presented reflect the Personal Care business as a discontinued operation. Our Personal Care business was previously disclosed as a separate reportable segment. For more information on our discontinued operations, refer to Item 8, Financial Statements and Supplementary Data, under Note 3, “Discontinued Operations”.

 

Execution of our asset conversion roadmap

On August 7, 2020, we announced our decision to repurpose assets at our Kingsport, Tennessee and Ashdown, Arkansas, facilities, following a review of our manufacturing footprint. This conversion program is consistent with the roadmap that we made public in 2018. The previously announced multi-mill conversion roadmap is designed to adjust our paper capacity to align with our customer demand. Through this process, we have identified up to four large scale paper machine/mill repurposing projects that can produce 2.5 million tons of containerboard and/or 570,000 ADMT of additional market softwood and fluff pulp. We plan to enter the linerboard market with the conversion of our Kingsport paper machine. Once in full operation, the mill will produce and market approximately 600,000 tons annually of high-quality recycled linerboard and medium, providing us with a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the fourth quarter of 2022. We expect to complete the conversion of our Ashdown mill to 100% softwood and fluff pulp in early 2021. The Ashdown mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. The conversion of the fiberline to 100% softwood is necessary for an eventual expansion into containerboard. Following the fiberline conversion, Ashdown will have annual production capacity of 775,000 tons of fluff and softwood pulp.

 

Cost reduction program

On August 7, 2020, we announced the implementation of a cost reduction program, targeting $200 million in annual run-rate cost savings to be realized by the end of 2021. The goal of the program is to build a stronger business operation, enhance our cost efficiency, improve operating margins and maximize productivity and cash flow. For more information on our cost reduction program, refer to “Cost Reduction Program” section included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Purchase of Appvion Point of Sale business

On April 27, 2020, we completed the acquisition of the Point of Sale paper business from Appvion Operations, Inc. The business includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property. The results of this business have been included in the consolidated financial statements as of April 27, 2020. For more information, refer to Item 8, Financial Statements and Supplementary Data, under Note 4 “Acquisition of Business”.


4


 

COVID-19

First identified in people in late 2019, COVID-19 spread rapidly throughout the world and, in March 2020, the World Health Organization characterized COVID-19 as a pandemic. With the unprecedented and rapid spread of COVID-19 and social distancing measures implemented throughout the world due to the pandemic, this virus has had a profound impact on human health, the global economy and society in general. We are actively monitoring the impact of COVID-19 on all aspects of our business, including our employees, operations, customers, suppliers, liquidity and capital resources. The health and safety of our employees and customers remains our top priority.

 

Prior to mid-March 2020, our results were largely in line with expectations. We began to experience a decline in shipment of paper in March 2020, when volume declined in response to shelter-in-place orders and other market restrictions. Overall, for 2020, our paper shipments were lower by approximately 19% when compared to 2019. COVID-19 is discussed in more detail under the COVID-19 section of the Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

AVAILABILITY OF INFORMATION

In this Annual Report on Form 10-K, we incorporate by reference certain information contained in other documents filed with the Securities and Exchange Commission (“SEC”) and we refer you to such information. We file annual, quarterly and current reports and other information with the SEC. The SEC maintains a website at www.sec.gov that contains these filings. You also may access, free of charge, our reports filed with the SEC through our website. Reports filed with the SEC will be available through our website as soon as reasonably practicable after they are filed. The information contained on or connected to our website, www.domtar.com, is not incorporated by reference into this Form 10-K and should in no way be construed as a part of this or any other report that we filed with the SEC.

OUR CORPORATE STRUCTURE

At December 31, 2020, Domtar Corporation had a total of 55,194,538 shares of common stock issued and outstanding.

Our common stock is traded on the New York Stock Exchange and the Toronto Stock Exchange under the symbol “UFS”.

Information regarding our common stock is included in Item 8, Financial Statements and Supplementary Data under Note 21 “Shareholders’ Equity”.

OUR BUSINESS OVERVIEW

Following our agreement to sell our Personal Care business, we now operate as a single reportable segment as described below, which also represents our only operating segment.

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

Information regarding our reportable segment is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as Item 8, Financial Statements and Supplementary Data under Note 24 “Segment Disclosures”. Geographic information is also included under Note 24 of the Financial Statements and Supplementary Data.

 

 

5


 

PULP AND PAPER

 

Our Manufacturing Operations

We produce approximately 3.8 million metric tons of softwood, fluff and hardwood pulp at 11 mills. Approximately 40% of our pulp is consumed internally to manufacture paper, with the balance being sold as market pulp. We also purchase limited papergrade pulp from third parties for specific grades and to optimize the logistics of our pulp capacity while reducing transportation costs.

We are the largest integrated manufacturer and marketer of uncoated freesheet paper in North America. We have seven integrated pulp and paper mills (five in the United States and two in Canada), with an annual paper production capacity of approximately 2.2 million tons of uncoated freesheet paper. Our paper manufacturing operations are supported by 11 converting and forms manufacturing operations (including a network of 9 plants located offsite from our paper making operations). Approximately 68% of our paper production capacity is in the United States and 32% is located in Canada.

We produce market pulp in excess of our internal requirements at our pulp and paper mills in Espanola, Hawesville, Windsor, Marlboro and Nekoosa. We also produce papergrade, fluff and specialty pulps at our four stand-alone pulp mills in Ashdown, Kamloops, Dryden and Plymouth. We can sell approximately 2.1 million metric tons of pulp per year depending on market conditions. Approximately 58% of our pulp production capacity is in the U.S. and 42% is in Canada.

The table below lists our operating pulp and paper mills and their annual production capacity:

 

 

 

 

 

 

 

 

 

 

 

Saleable

 

PRODUCTION FACILITY (1)

 

Fiberline Pulp Capacity

 

 

Paper

 

 

 

# lines

 

 

('000 ADMT) (2)

 

 

# machines

 

 

Category (3)

 

('000 ST) (4)

 

Uncoated freesheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Windsor, Quebec

 

 

1

 

 

 

447

 

 

 

2

 

 

Communication

 

 

642

 

Hawesville, Kentucky

 

 

1

 

 

 

412

 

 

 

2

 

 

Communication

 

 

596

 

Marlboro, South Carolina

 

 

1

 

 

 

320

 

 

 

1

 

 

Specialty & Packaging

 

 

274

 

Johnsonburg, Pennsylvania

 

 

1

 

 

 

228

 

 

 

2

 

 

Communication

 

 

344

 

Nekoosa, Wisconsin

 

 

1

 

 

 

155

 

 

 

3

 

 

Specialty & Packaging

 

 

168

 

Rothschild, Wisconsin

 

 

1

 

 

 

65

 

 

 

1

 

 

Communication

 

 

131

 

Espanola, Ontario

 

 

1

 

 

 

280

 

 

 

2

 

 

Specialty & Packaging

 

 

69

 

Total Uncoated freesheet

 

 

7

 

 

 

1,907

 

 

 

13

 

 

 

 

 

2,224

 

Pulp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ashdown, Arkansas (5)

 

 

3

 

 

 

775

 

 

 

 

 

 

 

 

 

 

 

Kamloops, British Columbia

 

 

1

 

 

 

408

 

 

 

 

 

 

 

 

 

Dryden, Ontario

 

 

1

 

 

 

327

 

 

 

 

 

 

 

 

 

Plymouth, North Carolina

 

 

1

 

 

 

390

 

 

 

 

 

 

 

 

 

Total Pulp

 

 

6

 

 

 

1,900

 

 

 

 

 

 

 

 

 

Total

 

 

13

 

 

 

3,807

 

 

 

13

 

 

 

 

 

2,224

 

Total Trade Pulp (6)

 

 

 

 

 

 

2,149

 

 

 

 

 

 

 

 

 

 

 

 

(1)

On August 7, 2020, we announced the permanent closure of the uncoated freesheet manufacturing at our Kingsport, Tennessee and Port Huron, Michigan mills, and the remaining paper machine at our Ashdown, Arkansas mill. Our Kingsport and Ashdown paper machines, were idled in April 2020, while our Port Huron mill is expected to shut down by the end of the first quarter of 2021. These closures are reflected in the table above.

(2)

ADMT refers to an air dry metric ton and ST refers to short ton.

(3)

Represents the majority of the capacity at each of these facilities.

(4)

Paper capacity is based on an operating schedule of 360 days and the production at the winder.

(5)

We will complete the conversion of our Ashdown mill to 100% softwood and fluff pulp in early 2021. The mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. This conversion is reflected in the table above.

(6)

Estimated third-party shipments dependent upon market conditions.

 

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

 

6


 

Our Raw Materials

The manufacturing of pulp and paper requires wood fiber, chemicals and energy. We discuss these three major raw materials used in our manufacturing operations below.

Wood Fiber

United States pulp and paper mills

The fiber used by our pulp and paper mills in the U.S. is softwood and hardwood, both readily available in the market from multiple third-party sources. The mills obtain fiber from a variety of sources, depending on their location. These sources include a combination of supply contracts, wood lot management arrangements, advance stumpage purchases and spot market purchases.

Canadian pulp and paper mills

The fiber used at our Windsor pulp and paper mill is hardwood originating from a variety of sources, including purchases on the open market in Canada and the U.S., contracts with Quebec wood producers’ marketing boards, public land where we have wood supply allocations and from Domtar’s private lands. The softwood and hardwood fiber for our Espanola pulp and paper mill and the softwood fiber for our Dryden pulp mill are obtained from third parties, directly or indirectly from public lands and through designated wood supply allocations. The fiber used at our Kamloops pulp mill is all softwood, originating mostly from third-party sawmill operations in the southern-interior part of British Columbia.

Cutting rights on public lands related to our pulp and paper mills in Canada represent about 1.7 million cubic meters of softwood and 0.8 million cubic meters of hardwood per year. Access to harvesting of fiber on public lands in Ontario and Quebec is subject to licenses and review by the respective governmental authorities.

Chemicals

We use various chemical compounds in our pulp and paper manufacturing operations that we purchase, primarily on a centralized basis, through contracts varying between one and ten years in length to ensure product availability. Most of the contracts have pricing that fluctuates based on prevailing market conditions. For pulp manufacturing, we use numerous chemicals including caustic soda, sodium chlorate, sulfuric acid, lime and peroxide. For paper manufacturing, we also use several chemical products including starch, precipitated calcium carbonate, optical brighteners, dyes and aluminum sulfate.

Energy

Our operations produce and consume substantial amounts of energy. Our primary energy sources include: biomass, natural gas and electricity. Approximately 73% of the total energy required to manufacture our products comes from renewable fuels such as bark and spent pulping liquor, generated as byproducts from our manufacturing processes. The remainder of the energy comes from smaller amounts of other fossil fuels and purchased steam procured under supply contracts. Under most of these contracts, suppliers are committed to provide quantities within predetermined ranges that provide us with our needs for a particular type of fuel at a specific facility. Most of these contracts have pricing that fluctuate based on prevailing market conditions. Biomass and fossil fuels are consumed primarily to produce steam that is used in the manufacturing process and, to a lesser extent, to provide direct heat used in the chemical recovery process.

We have cogenerating assets at all of our integrated pulp and paper mills, as well as hydro assets at three locations: Espanola, Nekoosa and Rothschild. These generating assets produce approximately 71% of the electricity requirements of our manufacturing operations, with the balance supplied from local utilities. Electricity is primarily used to drive motors, pumps and other equipment, as well as provide lighting.  

Our Transportation

Transportation of raw materials, wood fiber, chemicals and pulp into our mills is mostly done by rail and trucks, although barges are used in certain circumstances. We rely on third parties for the transportation of our pulp and paper products between our mills, converting operations, distribution centers and customers. Our paper products are shipped mostly by truck, with logistics operations and procurement being managed centrally in collaboration with each location. Our pulp is either shipped by vessel, rail or truck depending on destination and customer preference. We work with major railroads, ocean carriers, and approximately 300 trucking and third- party transportation companies in the U.S. and Canada. Service agreements are typically negotiated on an annual basis. We pay diesel fuel surcharges, which vary depending on the mode of transportation used and the cost of diesel fuel.


7


 


Our Product Offering and Go-to-Market Strategy

Paper

Our uncoated freesheet papers are categorized into both communication papers and specialty and packaging papers. Communication papers are further categorized into business papers and commercial printing and publishing papers.

Our business papers include copy and electronic imaging papers, which are used with inkjet and laser printers, photocopiers and plain-paper fax machines, as well as computer papers, preprinted forms and digital papers. These products are primarily for office and home use. Business papers accounted for approximately 41% of our shipments of paper products in 2020.

Our commercial printing and publishing papers include uncoated freesheet papers, such as offset papers and opaques. These uncoated freesheet grades are used in sheet and roll fed offset presses across the spectrum of commercial printing end-uses, including digital printing. Our publishing papers include tradebook and lightweight uncoated papers used primarily in book publishing applications such as textbooks, dictionaries, catalogs, magazines, hard cover novels and financial documents. These products also include converting papers, such as envelopes, tablets, business forms and data processing/computer forms. Commercial printing and publishing papers accounted for approximately 41% of our shipments of paper products in 2020.

Our specialty and packaging papers include papers used for thermal printing, flexible packaging, food packaging, medical packaging, medical gowns and drapes, sandpaper backing, carbonless printing, labels and other papers used for coating and laminating applications. We also manufacture papers for industrial and specialty applications including carrier papers, treated papers, security papers and specialized printing and converting applications. These specialty and packaging papers accounted for approximately 18% of our shipments of paper products in 2020. These grades of papers require a certain amount of innovation and agility in the manufacturing system.

The chart below illustrates our main uncoated freesheet paper products and their applications:

 

Communication Papers

 

Specialty and Packaging Papers

Category

 

Business Papers

 

Commercial Printing and Publishing Papers

 

 

Grade

 

Copy

 

Premium imaging

 

Offset

 

Opaques

 

Thermal papers

 

 

 

 

Technology papers

 

Colors

 

Premium opaques

 

Food packaging

 

 

 

 

 

 

Index

 

Lightweight

 

Bag stock

 

 

 

 

 

 

Tag

 

Tradebook

 

Security papers

 

 

 

 

 

 

Bristol

 

 

 

Imaging papers

 

 

 

 

 

 

 

 

 

 

Label papers

 

 

 

 

 

 

 

 

 

 

Medical disposables

 

 

 

 

 

 

 

 

 

 

 

Application

 

Photocopies

 

Presentations

 

Commercial printing

 

Stationery

 

Food & candy packaging

 

 

Office documents

 

Reports

 

Direct mail

 

Brochures

 

Fast food takeout bag stock

 

 

Presentations

 

 

 

Pamphlets

 

Annual reports

 

Check and security papers

 

 

 

 

 

 

Brochures

 

Books

 

Surgical gowns

 

 

 

 

 

 

Cards

 

Catalogs

 

 

 

 

 

 

 

 

Posters

 

Forms & Envelopes

 

 

 

Our paper sales channels are aligned to efficiently bring a competitive and complete product offering to our varied customers. Our customer service personnel work closely with sales, marketing and production staff to provide service and support to merchants, converters, end-users, stationers, printers and retailers. We sell our products directly to end-users and others who influence paper purchasing decisions in order to enhance brand recognition and increase product demand. In addition, our sales representatives work closely with mill-based product development personnel and undertake joint marketing initiatives with customers in order to better understand their business needs and to support their future requirements.

We sell business papers primarily to paper stationers, merchants, office equipment manufacturers and retail outlets. We distribute uncoated commercial printing and publishing papers to end-users and commercial printers, mainly through paper merchants, as well as selling directly to some end users. We sell our specialty and packaging papers mainly to converters, who apply a further production process such as coating, rewinding, folding or waxing to our papers before selling them to a variety of specialized end-users.


8


 

The chart below illustrates our channels of distribution for our paper products:

 

Communication Papers

 

Specialty and Packaging Papers

Category

 

Business Papers

 

Commercial Printing and Publishing Papers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domtar sells to:

 

Retailers

 

Merchants

 

Office Equipment Manufacturers / Stationers

 

Merchants

 

Converters

 

End-Users

 

 

Converters

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer sells to:

 

Printers /

 

Printers /

 

Retailers /

 

Printers /

 

Merchants /

 

 

 

End-users

 

 

End-users

 

Retailers /

 

Stationers /

 

Converters /

 

Retailers

 

 

 

 

 

 

 

 

End-users

 

End-users

 

End-users

 

 

 

 

 

 

 

Pulp

Our pulp products are comprised of softwood, fluff and hardwood kraft as well as high quality airlaid and ultrathin laminated cores. Our pulp grades are sold to customers in over 50 countries worldwide and are used in a variety of end products, such as diapers and personal hygiene products, bathroom and facial tissue, specialty and packaging papers, customers who make printing and writing grades, building products and electrical insulating papers. Our laminated cores are used in the manufacturing of baby diapers, adult incontinence and feminine hygiene products.

 

We sell market pulp to customers in North America mainly through a North American sales force, while sales to most overseas customers are made directly or through commission agents. We maintain pulp supplies at strategically located warehouses, which allow us to respond to customer orders on short notice.

Our Customers

Our ten largest customers represented approximately 41% of our sales in 2020. In 2020, Staples represented approximately 12% of our sales. The majority of our customers purchase products through individual purchase orders. In 2020, approximately 75% of our sales were in the United States, 9% were in Canada, and 16% were in other countries.

OUR STRATEGIC INITIATIVES AND FINANCIAL PRIORITIES

As a leading fiber-based technology company, Domtar is focused on driving innovation, enhancing our operating platforms, and delivering high quality products. To further bolster our position and drive enhanced value for our stockholders, Domtar is focused on four key business objectives: (1) driving value through strategic investment; (2) building on our core competencies in wood fiber to diversify and expand Domtar’s footprint in growth markets and industries; (3) maintaining a balanced and disciplined approach to capital allocation that allows for investments in growth opportunities and rewards stockholders with capital returns; and (4) operating with a focus on environmental responsibility and sustainability. We are confident that the continued focus on these objectives will bolster the competitive position of our business and drive value for our stakeholders, including stockholders, customers and employees.

Driving value. Fiber-based products remain the primary part of our growth plan, and we have strategies and operating priorities designed to maximize the value of the business. Our key priorities include: increasing productivity in our pulp business, pursuing new sources of paper consumption, pursuing asset repurposing opportunities and operating an optimal portfolio of strategic assets. We believe that execution on these priorities will enable Domtar to expand into complementary growth areas and protect its market position in Pulp and Paper.

Expanding into areas of growth and leveraging our fiber expertise. We are focused on optimizing and expanding our operations in markets with positive demand dynamics through investments for organic growth, the repurposing of assets and strategic acquisitions. Domtar has a history of proactively adapting to changing market conditions, and today, we are repositioning the Company towards areas of growth. We are well positioned to capitalize on new opportunities in the wood fiber market. The Company already has the financial resources, infrastructure, raw materials, technologies and expertise necessary to deliver new products. We believe that we have built a strong foundation for diversification and continue to make important, but disciplined, progress.

Maintaining a balanced and disciplined approach to capital allocation that allows for investments in growth opportunities and rewards stockholders with capital returns. We believe in a balanced and disciplined approach to capital allocation, and we are committed to deploying capital only to the areas that will achieve the best possible return for our stockholders. Domtar’s free cash flow allows us to invest in growth opportunities and maintain a strong and flexible financial position for operating and strategic

9


 

initiatives, while still returning capital to our stockholders. To continue generating free cash flow, we are focused on allocating our capital expenditures effectively and minimizing working capital requirements by reducing discretionary spending, reviewing procurement costs and pursuing the balance of production and inventory control.

Operating responsibly on behalf of all of Domtar’s stakeholders. We try to make a positive difference every day by pursuing sustainable growth, valuing relationships, and responsibly managing our resources. We aim to care for our customers, end-users and stakeholders in the communities where we operate, all seeking assurances that resources are managed in a sustainable manner. We strive to provide these assurances by certifying our distribution and manufacturing operations and measuring our performance against internationally recognized benchmarks. Domtar is committed to the responsible use of forest resources across our operations, and we are enrolled in programs and initiatives to encourage landowners to pursue certification to improve their market access and increase their revenue opportunities. We believe that each of these initiatives also creates value for our stockholders and is part of our larger business strategy and commitment to environmental sustainability.

OUR COMPETITION

The markets in which our businesses operate are highly competitive with well-established domestic and foreign manufacturers.

In the paper business, our paper production does not rely on proprietary processes or formulas, except in highly specialized papers or customized products. In uncoated freesheet, we compete primarily on the basis of product quality, breadth of offering, service solutions and competitively priced paper products, which include an extensive offering of high quality Forest Stewardship Council (“FSC”)-certified paper products. While we have a leading position in the North American uncoated freesheet market, we also compete with other paper grades, including coated freesheet, and with electronic transmission and document storage alternatives. As the use of these alternative products continues to grow, we continue to see a decrease in the overall demand for paper products. All of our pulp and paper manufacturing facilities are located in the U.S. or in Canada where we sell approximately 84% of our products. The five largest manufacturers of uncoated freesheet papers in North America (including Domtar) represent approximately 76% of total production capacity. On a global basis, there are hundreds of manufacturers that produce and sell uncoated freesheet paper. The level of competitive pressures from foreign producers in the North American market is highly dependent upon exchange rates, particularly the rate between the U.S. dollar and the Euro as well as the U.S. dollar and the Brazilian real.

The pulp we sell is fluff, softwood or hardwood pulp. The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and competitively priced pulp products. The fluff pulp we sell is used in absorbent products, incontinence products, diapers and feminine hygiene products. The softwood and hardwood pulp we sell is primarily slow growth northern bleached softwood and hardwood kraft, and we produce specialty engineered pulp grades with a predetermined mix of wood species. Our softwood and hardwood pulps are sold to customers that make a variety of products for specialty paper, packaging, tissue and industrial applications, and customers who make printing and writing grades. Airlaid and ultrathin laminated cores are highly customized and specialized for customer needs and have a relatively long and technical development, qualification and sales process. We also seek product differentiation through the certification of our pulp mills to the FSC chain-of-custody standard and the procurement of FSC-certified virgin fiber. All of our pulp production capacity is located in the U.S. or in Canada, and we sell approximately 54% of our pulp to other countries.

OUR HUMAN CAPITAL

We have approximately 6,600 employees, 61% are employed in the United States and 39% in Canada. 57% of our employees are covered by collective bargaining agreements, generally on a facility-by-facility basis.    

We are committed to fostering a workplace that attracts and retains talent. Through ongoing employee development, comprehensive compensation and benefits, and a focus on health, safety, employee well-being and community engagement, we aim to directly influence positive work behavior and on-the-job performance.

Diversity and Inclusion

Although we have a strict non-discrimination and anti-harassment policy, we view diversity and inclusion as more than just policies and practices. It is part of who we are, how we operate, and essential to our long-term sustainability. We strive to create an inclusive workplace where people can bring their authentic selves to work and feel valued and included.

Our commitment to diversity and inclusion starts at the top with a highly skilled and diverse board. We are committed to increasing representation of women and underrepresented minorities at Domtar overall, but particularly in leadership roles. The Domtar Diversity and Inclusion Council, provides guidance to leadership to help make Domtar more inclusive and diverse.  

To ensure leadership maintains a commitment to diversity and inclusion, each leader is responsible for focusing on how they can develop and support diversity within the workplace and within their scope of responsibilities. The Human Resources Committee of the Board also has ongoing oversight of diversity and inclusion programs.


10


 

Compensation and Pay Equity

Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals and create long-term value for our stockholders. We believe people should be paid for what they do and how they do it, regardless of their gender, race, or other personal characteristics. To deliver on that commitment, we benchmark and set pay ranges based on market data and consider factors such as an employee’s role, experience and their performance. We also regularly review our compensation practices, both in terms of our overall workforce and individual employees, to ensure our pay is fair and equitable.

Learning and Development

Hiring, developing and retaining employees is important to our operations and we are focused on creating experiences and programs that foster growth, performance and retention. We continually invest in our employees’ career growth and provide a wide range of development opportunities, including face-to-face, virtual, social and on-site learning, mentoring, coaching, and external development.

Health and Safety

The physical health, life balance and mental health of our employees is vital to Domtar’s success.  That is why we work relentlessly to physically eliminate hazards and minimize risk of injury, promote a safety culture, and invest in well-being programs to help our employees establish and maintain healthy lifestyles.

Throughout the COVID-19 pandemic, we have remained focused on protecting the health, safety, and well-being of our employees while meeting the needs of our customers. Shortly after the outset of COVID-19, we adopted enhanced safety measures and practices across our facilities to protect employee health and safety and ensured a reliable supply of essential products to our customers. We monitor the impact of the pandemic on our employees and within our operations, and proactively modify or adopt new practices to promote their health and safety.

Community Involvement

We make donations to charitable organizations in the communities where we live and work and believe that this commitment helps in our efforts to attract and retain employees. We also offer employees the opportunity to volunteer in their communities through our Domtar EarthChoice Ambassadors program. We focus our philanthropic efforts on three areas that align with our business: literacy, sustainability, and health and wellness.

OUR APPROACH TO SUSTAINABILITY

Domtar aims to deliver value to our customers, employees, shareholders and communities by viewing our business decisions within the larger context of sustainability. We take a long-term view on managing natural resources for the future. We strive to minimize waste and encourage recycling. We aim to have the highest standards for ethical conduct, for caring about the health and safety of each other, and for maintaining the environmental quality in the communities where we live and work. We value the partnerships we have formed with non-governmental organizations and believe they make us a better company. We focus on agility to respond to new opportunities, and we are committed to turning innovation into value creation. By embracing sustainability as our operating philosophy, we seek to internalize the fact that the choices we have and the impact of the decisions we make on our stakeholders are all interconnected. We believe that our business and the people and communities who depend on us are better served as we weave this focus on sustainability into the things we do.

Domtar executes this commitment to sustainability at every level and every location across the Company. With the support of the Board of Directors, our Management Committee empowers senior managers from manufacturing, technology, finance, sales and marketing and corporate staff functions to regularly come together and establish key sustainability performance metrics, and to routinely assess and report on progress. Our sustainability goals, challenges and progress are reported annually on the Company’s website and other published reports.

OUR ENVIRONMENTAL COMPLIANCE

Our business is subject to a wide range of general and industry-specific laws and regulations in the U.S. and other countries where we have operations, relating to the protection of the environment, including those governing wood harvesting, air emissions, climate change, waste water discharges, storage, management and disposal of hazardous substances and wastes, contaminated sites, landfill operation and closure obligations and health and safety matters. Compliance with these laws and regulations is a significant factor in the operation of our business. We may encounter situations in which our operations fail to maintain full compliance with applicable environmental requirements, possibly leading to civil or criminal fines, penalties or enforcement actions, including those that could result in governmental or judicial orders that stop or interrupt our operations or require us to take corrective measures at substantial costs, such as the installation of additional pollution control equipment or other remedial actions.

Compliance with environmental laws and regulations involves capital expenditures as well as additional operating costs. Additional information regarding environmental matters is included in Item 8, Financial Statements and Supplementary Data, under Note 22 “Commitments and Contingencies” and in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the section of Critical accounting estimates and policies, under the caption “Environmental Matters and Asset Retirement Obligations.”

11


 

OUR INTELLECTUAL PROPERTY

Many of our brand name products are protected by registered trademarks. Our key trademarks include Cougar®, Lynx® Opaque Ultra, Husky® Opaque Offset, First Choice®, EarthChoice®, Ariva®, NovaThin® and NovaZorb®. These brand names and trademarks are important to our business. Our numerous trademarks have been registered in the U.S. and/or in other countries where our products are sold. The current registrations of these trademarks are effective for various periods of time. These trademarks may be renewed periodically, provided that we, as the registered owner, and/or licensee comply with all applicable renewal requirements, including the continued use of the trademarks in connection with similar goods.

We own U.S. and foreign patents and have several pending patent applications. Our management regards these patents and patent applications as important but does not consider any single patent or group of patents to be materially important to our business as a whole.

OUR EXECUTIVE OFFICERS (“MANAGEMENT COMMITTEE”)

Name

Age

Position and Business Experience

John D. Williams

66

 

President and Chief Executive Officer of the Company since January 2009. He is also a member of the Board of Directors.

Previously, Mr. Williams served as President of SCA Packaging Europe between 2005 and 2008. Prior to assuming his leadership position with SCA Packaging Europe, Mr. Williams held increasingly senior management and operational roles in the packaging business and related industries.

Mr. Williams is Lead Independent Director of the Board of Directors of Owens Corning and the Non-Executive Chairman of Form Technologies, Inc., a privately held leading global group of precision component manufacturers based in Charlotte, North Carolina.

Daniel Buron

57

 

Executive Vice President and Chief Financial Officer of the Company since March 2007. Mr. Buron was previously Senior Vice-President and Chief Financial Officer of Domtar Inc. since May 2004. He joined Domtar Inc. in 1999. Prior to May 2004, he was Vice President, Finance, Pulp and Paper sales division and, prior to September 2002, he was Vice President and Controller. He has over 30 years of experience in finance. Mr. Buron is a Director of the McGill University Health Centre Foundation and also serves on the Board of Directors of Nouveau Monde Graphite Inc.

Maria Brennan

54

Senior Vice President, Procurement. Ms. Brennan has been with Domtar since 2014. Previously, she worked for ConAgra, PepsiCo and General Mills where she held various roles, including plant management, customer service, logistics and planning, and procurement. She is on the Board of Directors for the Humane Society of Charlotte and is also on the Board of Directors for the Supply Chain Council at West Virginia University.

James Edwards

56

Senior Vice President, Pulp and Paper Operations. Mr. Edwards has been with Domtar since 1996 and has held several mill and corporate positions including Vice President of Pulp and Paper manufacturing services team, general manager of our pulp and paper mill in Marlboro (Bennettsville), South Carolina, operations manager, linerboard and fluff pulp manager, and recycled linerboard superintendent. He is on the National Council for Air and Stream Improvement Board of Governors and on Western Michigan University’s Board of Trustees for their Paper Technology Foundation.


12


 

Steven Henry

48

Senior Vice President, Packaging. Mr. Henry has been with Domtar since 2011. Previously at Domtar he held the positions of Vice President, strategy and business analysis, and general manager at our Hawesville, Kentucky, pulp and paper mill. Throughout his 25-year career in the forest products and paper industry he has held a variety of mill and corporate positions at Georgia-Pacific, Weyerhaeuser and International Paper. He currently serves on the Board of Directors of Prisma Renewable Composites, LLC.

Zygmunt Jablonski

67

Senior Vice President and Chief Legal and Administrative Officer of the Company. Mr. Jablonski joined Domtar in 2008, after serving in various in-house counsel positions for major manufacturing and distribution companies in the paper industry for 13 years. From 1985 to 1994, he practiced law in Washington, DC. Mr. Jablonski will be departing April 2, 2021.

Nancy Klembus

60

Senior Vice President, General Counsel and Corporate Secretary, effective April 2, 2021. Ms. Klembus has been with Domtar since 2016. She has over 20 years of experience practicing law in the paper and personal care industry and previously worked in private practice and in-house at Kimberly-Clark. Prior to attending law school, she worked at General Motors in engineering, reliability, and manufacturing. She is licensed to practice law in Michigan and Georgia, as well before the United States Patent and Trademark Office. Ms. Klembus is on the Board of Directors of the Soccer Foundation of Charlotte.

Patrick Loulou

52

Senior Vice President, Business Development since he joined the Company in March 2007. Previously, he held a number of positions in the telecommunications sector as well as in management consulting. His over 20 year career has spanned a number of areas and functions such as corporate strategy, M&A, operations, business transformation and business development. Mr. Loulou is also a trustee of the Montreal Fine Arts Museum Foundation and sits on the Board of the Montreal Symphony Orchestra.

Stephen Makris

48

Senior Vice President, Business Transformation. Mr. Makris has been with Domtar since 2013. Previously at Domtar he held the positions of Vice President, Pulp and Vice President, strategy and global innovation for our former Personal Care division. Prior to joining Domtar, Mr. Makris worked for a project and technology development firm serving the forest products and energy sectors, where he was responsible for business development. He was also an associate partner at McKinsey & Company and a leader in the firm’s forest products practice based in Stockholm, Sweden.

Robert Melton

49

Senior Vice President, Pulp and Paper Commercial. Mr. Melton has been with Domtar since 1993. He has held multiple roles in the communication and specialty papers at Domtar. He serves as Chair of the Printing & Writing Committee of the American Forest and Paper Association, is on the Board of Directors of the Envelope Manufacturers Association Foundation and is also on the Board of Directors of the Paper & Packaging Board.

Richard McAtee

51

Senior Vice President, Human Resources, effective April 2, 2021. Mr. McAtee has been with Domtar since 2015 and has over 25 years of experience in labor relations, employment law and human resources. Prior to joining Domtar, Mr. McAtee was a managing partner with Jackson Lewis P. C., one of the largest employment and labor law firms in the United States. During this time, he opened and managed their Raleigh, North Carolina office and was elected to their Board of Directors.

13


 

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance, liquidity and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “aim,” “target,” “plan,” “continue,” “estimate,” “project,” “may,” “will,” “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occur, what effect they will have on our results of operations or financial condition. These factors include, but are not limited to:

 

continued decline in usage of fine paper products in our core North American market;

 

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

 

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

 

product selling prices;

 

raw material prices, including wood fiber, chemical and energy;

 

conditions in the global capital and credit markets, and the general economy, particularly in the U.S., and Canada;

 

performance of our manufacturing operations, including unexpected maintenance requirements;

 

the level of competition from domestic and foreign producers;

 

cyberattacks or other security breaches;

 

the effect of, or change in, forestry, land use, environmental and other governmental regulations and accounting regulations;

 

the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters;

 

transportation costs;

 

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

 

legal proceedings;

 

changes in asset valuations, including impairment of long-lived assets, inventory, accounts receivable or other assets or other reasons;

 

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

 

the effect of timing of retirements and changes in the market price of Domtar Corporation’s common stock on charges for stock-based compensation;

 

performance of pension fund investments and related derivatives, if any;

 

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

 

the other factors described under “Risk Factors,” Item 1A.

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 Annual Report on Form 10-K. Unless specifically required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking statements to reflect new events or circumstances.


14


 

ITEM 1A.  RISK FACTORS

You should carefully consider the risks described below in addition to the other information presented in this Annual Report on Form 10-K.

Risks Related to our Business

Failure to successfully implement the Company’s business diversification initiatives could have a material adverse effect on its business, results of operations and financial position.

The Company is pursuing strategic initiatives that management considers important to our long-term success. The intent of these initiatives is to help grow and diversify the business and counteract the secular decline in our North American paper business. These initiatives may involve organic growth, conversion of assets, select joint ventures and strategic acquisitions. The success of these initiatives will depend on, among other things, our ability to identify potential strategic initiatives, understand the key trends and principal drivers affecting those businesses and to execute the initiatives in a cost-effective manner. There are significant risks involved with the execution of such initiatives, including significant business, economic and competitive uncertainties, many of which are outside the Company’s control.

For example, we are currently converting one of our mills to a containerboard production facility and in the past, we have converted paper mills to fluff pulp production facilities. If circumstances warrant, in the future we may again convert mills to produce pulp or other products. Conversions can be capital intensive and can involve the shutdown of a facility for an extended period of time, followed by an extended ramp-up and customer certification process. In addition, the success of a conversion depends upon demand over time for the new product relative to the previously produced paper products, as well as costs and other factors, and there can be no assurance that a conversion will be as successful as expected.

Strategic acquisitions may expose the Company to additional risks. The Company may have to compete for acquisition targets and any acquisition it makes may fail to accomplish our strategic objectives or may not perform as expected. In addition, the costs of integrating an acquired business may exceed our estimates and may require significant time and attention from senior management. Accordingly, the Company cannot predict whether it will succeed in implementing these strategic initiatives. If it fails to successfully diversify our business, it may have a material adverse effect on the Company’s competitive position, financial condition and operating results.

The Company’s paper products are vulnerable to long-term declines in demand due to competing technologies or materials.

The Company’s paper business competes with electronic transmission and document storage alternatives, as well as with paper grades it does not produce, such as uncoated groundwood. As a result of such competition, the Company is experiencing ongoing decreasing demand for most of its existing paper products. As the use of these alternatives grows, demand for paper products is likely to decline further. Declines in demand for our paper products may adversely affect the Company’s business, results of operations and financial position.

The pulp and paper industry is highly cyclical. Fluctuations in the prices of and the demand for the Company’s pulp and paper products could result in lower sales and profit.

The pulp and paper industry is highly cyclical. Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume and margins for the Company’s pulp and paper products. The length and magnitude of industry cycles have varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of industry capacity. Most of the Company’s paper products are commodities that are widely available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand.

The overall levels of demand for the pulp and paper products that the Company manufactures and distributes, and consequently its sales and profitability, reflect fluctuations in levels of end-user demand, which depend in part on general macroeconomic conditions in North America and worldwide, the continuation of the current level of service and cost of postal services, as well as competition from electronic substitution. See “Conditions in the global political and economic environment, including the global capital and credit markets, can adversely affect the Company’s business, results of operations and financial position” and “The Company’s paper products are vulnerable to long-term declines in demand due to competing technologies or materials”.

Industry supply of pulp and paper products is also subject to fluctuation, as changing industry conditions can influence producers to idle or permanently close individual machines or entire mills. Such closures can result in significant cash and/or non-cash charges. In addition, to avoid substantial cash costs in connection with idling or closing a mill, some producers will choose to continue to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply also can result from producers introducing new capacity in response to favorable pricing trends or low-cost imports in response to exchange rates and other factors.

15


 

Industry supply of pulp and paper products is also influenced by overseas production capacity, which has grown in recent years and is expected to continue to grow.

As a result, prices for all of the Company’s pulp and paper products are driven by many factors outside of its control, and the Company has little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond the Company’s control determine the prices for its commodity products, the price for any one or more of these products may fall below its cash production costs, requiring the Company to either incur cash losses on product sales or cease production at one or more of its pulp and paper manufacturing facilities. The Company continuously evaluates potential adjustments to its production capacity, which may include additional closures of machines or entire mills, and the Company could recognize significant cash and/or non-cash charges relating to any such closures in future periods. Refer to Item 8, Financial Statements and Supplementary Data, under Note 16 “Closure and Restructuring Costs and Impairment of Long-Lived Assets” for more details. Therefore, the Company’s profitability with respect to these products depends on managing its cost structure, particularly wood fiber, chemical, transportation and energy costs, which represent the largest components of its operating costs and can fluctuate based upon factors beyond its control. If the prices or demand for its pulp and paper products decline, or if its wood fiber, chemical, transportation or energy costs increase, or both, this could adversely affect the Company’s results of operations and financial position.

The Company relies heavily on a small number of significant customers, including one customer that represented approximately 12% of the Company’s sales in 2020. A significant change in customer relationships or in customer demand for our products could materially adversely affect the Company’s business, financial condition or results of operations.

The Company heavily relies on a small number of significant customers. The Company’s largest customer, Staples, represented approximately 12% of the Company’s sales in 2020. A significant reduction in sales to any of the Company’s key customers could materially adversely affect the Company’s business, financial condition or results of operations, which could result from such customers further diversifying their product sourcing, experiencing financial difficulty or consolidating with each other.

The Company may have difficulty obtaining wood fiber at favorable prices, or at all.

Wood fiber is the principal raw material used by the Company’s Pulp and Paper business, comprising approximately 24% of the cost of sales in 2020. Wood fiber is a commodity, and prices historically have been impacted by a variety of factors. The primary source for wood fiber is timber. Environmental litigation and regulatory developments, alternative use for energy production and reduction in harvesting related to the housing market, have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest in the U.S. and Canada. In addition, future domestic or foreign legislation and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest health and the response to and prevention of catastrophic wildfires could also affect timber supplies. Availability of harvested timber may be further limited by adverse weather, fire, insect infestation, disease, ice storms, windstorms, flooding and other natural and man-made causes, thereby reducing supply and increasing prices. Wood fiber pricing is subject to regional market influences, and the Company’s cost of wood fiber may increase in particular regions due to market shifts in those regions. Any sustained increase in wood fiber prices would increase the Company’s operating costs, and the Company may be unable to increase prices for its products in response to increased wood fiber costs due to additional factors affecting the demand or supply of these products.

The Company currently meets its wood fiber requirements by purchasing wood fiber from third parties and by harvesting timber pursuant to its forest licenses and forest management agreements. If the Company’s cutting rights, pursuant to its forest licenses or forest management agreements are reduced, or any third-party supplier of wood fiber stops selling or is unable to sell wood fiber to the Company, its financial condition or results of operations could be materially and adversely affected.

An increase in the cost of the Company’s purchased energy or other raw materials would lead to higher manufacturing costs, thereby reducing its margins.

The Company’s operations consume substantial amounts of energy such as biomass, natural gas and electricity. Energy prices, particularly for electricity, natural gas and fuel oil, have been volatile in recent years. As a result, fluctuations in energy prices will impact the Company’s manufacturing costs and contribute to earnings volatility. While the Company purchases substantial portions of its energy under supply contracts, most of these contracts are based on market pricing.

Other raw materials the Company uses include various chemical compounds, such as precipitated calcium carbonate, sodium chlorate, sulfuric acid, dyes, peroxide, methanol and aluminum sulfate, super absorbent polymers and nonwovens. The costs of these other raw materials have been volatile historically, and they are influenced by capacity utilization, energy prices and other factors beyond the Company’s control.

Due to the commodity nature of the Company’s products, the relationship between supply and demand for these products, rather than changes in the cost of raw materials or purchased energy, will determine the Company’s ability to increase prices. Consequently, the Company may be unable to pass on increases in its operating costs to its customers. Any sustained increase in raw material or energy

16


 

prices without any corresponding increase in product pricing would reduce the Company’s operating margins and may have a material adverse effect on its business and results of operations.

The Company depends on third parties for transportation services.

The Company relies on third parties for transportation of the products it manufactures and/or distributes, as well as delivery of its raw materials. In particular, a significant portion of the goods it manufactures and raw materials it uses are transported by railroad, trucks or ocean barges. If any of its third-party transportation providers were to fail to deliver the goods that the Company manufactures or distributes in a timely manner, the Company may be unable to sell those products at full value, or at all. Similarly, if any of these providers were to fail to deliver raw materials to the Company in a timely manner, it may be unable to manufacture its products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with the Company, it may be unable to replace them at reasonable cost. Any failure of a third-party transportation provider to deliver raw materials or finished products in a timely manner could harm the Company’s reputation, negatively impact its customer relationships and may have a material adverse effect on its financial condition and results of operations.

The Company could experience disruptions in operations and/or increased labor costs due to labor disputes.

Approximately 57% of the Company’s employees are represented by unions through collective bargaining agreements generally negotiated on a facility-by-facility basis. In the future, the Company may not be able to negotiate acceptable new collective bargaining agreements, which could result in strikes or work stoppages or other labor disputes by affected workers. Renewal of collective bargaining agreements could also result in higher wages or benefits paid to union members. In addition, labor organizing activities could occur at any of the Company’s facilities. Therefore, the Company could experience a disruption of its operations or higher ongoing labor costs, which could have a material adverse effect on its business and results of operations.

A material disruption in the Company supply chain, manufacturing or distribution operations could prevent it from meeting customer demand, reduce its sales and/or negatively impact its results of operations.

The Company’s ability to manufacture, distribute and sell products is critical to its operations. These activities are subject to inherent risks such as:

 

unscheduled maintenance outages;

 

prolonged power failures;

 

equipment failure;

 

chemical spill or release;

 

malfunction of a boiler;

 

the effect of a drought or reduced rainfall on its water supply;

 

labor disputes;

 

government regulations;

 

disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels;

 

adverse weather, fires, floods, earthquakes, hurricanes or other catastrophes;

 

cyberattack or other security breaches;

 

failure of our IT systems, including any failure of our current systems and/or as a result of transitioning to additional or replacement IT system;

 

public health crises that impact trade or the general economy, including COVID-19 and other viruses, diseases or illnesses;

 

terrorism or threats of terrorism; or

 

other operational problems, including those resulting from the risks described in this section.

Events such as those listed above could disrupt the Company’s supply chain and impair its ability to manufacture or sell its products and have resulted in operating losses in the past. Any interruption or facility damage could prevent the Company from meeting customer demand for its products as well as require additional resources and/or require unplanned expenditures. If one or more of these machines or facilities were to incur significant downtime, it may have a material adverse effect on the Company’s results of operations and financial position.

17


 

The Company could encounter difficulties restructuring operations or closing or disposing of facilities or business.

The Company is continuously seeking the most cost-effective means and structure to serve our customers and to respond to changes in our markets. Accordingly, from time to time, the Company has, and is likely to again close facilities, sell non-core assets and otherwise restructure operations in an effort to improve cost competitiveness and profitability. As a result, restructuring and divestiture costs have been, and are expected to be, a recurring component of our operating costs, and may vary significantly from year to year depending on the scope of such activities. Divestitures and restructuring may also result in significant financial charges for the impairment of assets, including intangible assets. Furthermore, such activities may divert the attention of management, disrupt our ordinary operations, or result in a reduction in the volume of products produced and sold. There is no guarantee that any such activities will achieve its goal, and if the Company cannot successfully manage the associated risks, its financial condition and results of operations could be adversely affected.

Legal and Regulatory Risks

The Company could incur substantial costs as a result of compliance with, violations of or liabilities under applicable environmental laws and regulations. It could also incur costs as a result of asbestos-related personal injury litigation.

The Company is subject to a wide range of general and industry-specific laws and regulations in the U.S. and other countries where we have operations, relating to the protection of the environment and natural resources, including those governing air emissions, greenhouse gases and climate change, wastewater discharges, harvesting, silvicultural activities, storage, management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, landfill operation and closure obligations, forestry operations and endangered species habitat, and health and safety matters. In particular, the pulp and paper industry in the U.S. is subject to the United States Environmental Protection Agency’s (“EPA”) Cluster Rules.

The Company has incurred, and expects that it will continue to incur, significant capital, operating and other expenditures complying with applicable environmental laws and regulations as a result of remedial obligations. The Company incurred $62 million of operating expenses and $4 million of capital expenditures in connection with environmental compliance and remediation in 2020. As of December 31, 2020, the Company had a provision of $47 million for environmental expenditures, including certain asset retirement obligations (such as for landfill capping).

The Company could also incur substantial costs, such as civil or criminal fines, sanctions and enforcement actions (including orders limiting its operations or requiring corrective measures, installation of pollution control equipment or other remedial actions), cleanup and closure costs, and third-party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental laws and regulations. The Company’s ongoing efforts to identify potential environmental concerns that may be associated with its past and present properties may lead to future environmental investigations. Those efforts may result in the determination of additional environmental costs and liabilities which cannot be reasonably estimated at this time.

As the owner and operator of real estate, the Company may be liable under environmental laws for cleanup, closure and other damages resulting from the presence and release of hazardous substances, including asbestos, on or from its properties or operations, including properties that it no longer owns. The amount and timing of environmental expenditures is difficult to predict, and, in some cases, the Company’s liability may be imposed without regard to contribution or to whether it knew of, or caused, the release of hazardous substances and may exceed forecasted amounts or the value of the property itself. The discovery of additional contamination or the imposition of additional cleanup obligations at the Company’s or third-party sites may result in significant additional costs. Any material liability the Company incurs could adversely impact its financial condition or preclude it from making capital expenditures that would otherwise benefit its business.

In addition, the Company may be subject to asbestos-related personal injury litigation arising out of exposure to asbestos on or from its properties or operations and may incur substantial costs as a result of any defense, settlement, or adverse judgment in such litigation. The Company may not have access to insurance proceeds to cover costs associated with asbestos-related personal injury litigation.

Enactment of new environmental laws or regulations or changes in existing laws or regulations (such as changes in climate change regulation), or interpretation thereof, might require significant expenditures. For additional information, refer to Item 8, Financial Statements and Supplementary Data, under Note 22 “Commitments and Contingencies”. The Company may be unable to generate funds or other sources of liquidity and capital to fund environmental liabilities or expenditures.

Failure to comply with applicable laws and regulations could have a material adverse effect on our business, financial results or condition.

In addition to environmental laws, the Company’s business and operations are subject to a broad range of other laws and regulations in the U.S. and Canada as well as other jurisdictions in which the Company operates, including antitrust and competition laws, occupational health and safety laws, and employment laws. Many of these laws and regulations are complex and subject to evolving and differing interpretation. If the Company is determined to have violated any such laws or regulations, whether inadvertently or

18


 

willfully, it may be subject to civil and criminal penalties, including substantial fines, loss of authorizations to participate in or exclusion from government programs, claims for damages by third parties or fines or monetary penalties which may have a material adverse effect on the Company’s financial position, results of operations or cash flows. For additional information, refer to Item 8, Financial Statements and Supplementary Data, under Note 22 “Commitments and Contingencies.”

Financial Risks

The Company’s operations require substantial capital, and it may not have adequate capital resources to provide for all of its capital requirements.

The Company’s businesses are capital intensive and require ongoing capital expenditures in order to maintain its equipment, increase its operating efficiency and comply with environmental laws. In 2020, the Company’s total capital expenditures were $175 million.

If the Company’s available cash resources and cash generated from operations are not sufficient to fund its operating needs and capital expenditures, the Company would have to obtain additional funds from borrowings or other available sources or reduce or delay its capital expenditures. The Company may not be able to obtain additional funds on favorable terms, or at all. In addition, the Company’s debt service obligations will reduce its available cash flows. If the Company cannot maintain or upgrade its equipment as it requires or allocate funds to ensure environmental compliance, it could be required to curtail or cease some of its manufacturing operations, or it may become unable to manufacture products that compete effectively in one or more of its product lines.

The Company and its subsidiaries may incur substantially more debt. This could increase risks associated with its leverage.

The Company and its subsidiaries may incur substantial additional indebtedness in the future. Although the revolving credit facility contains restrictions on the incurrence of additional indebtedness, including secured indebtedness, these restrictions are subject to a number of qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be substantial. Refer to Item 8, Financial Statements and Supplementary Data, under Note 19 “Long-Term Debt” for more details.

The Company’s ability to generate the significant amount of cash needed to pay interest and principal on the Company’s unsecured long-term notes and service its other debt and financial obligations and its ability to refinance all or a portion of its indebtedness or obtain additional financing depends on many factors beyond the Company’s control.

In 2020, the Company paid approximately $59 million in interest and principal payments. The Company’s ability to make payments on and refinance its debt, including the Company’s unsecured long-term notes and amounts borrowed under its revolving credit facility and term loan, if any, and other financial obligations and to fund its operations will depend on its ability to generate substantial operating cash flow. The Company’s cash flow generation will depend on its future performance, which will be subject to prevailing economic conditions and to financial, business and other factors, many of which are beyond its control.

The Company’s business may not generate sufficient cash flow from operations and future borrowings may not be available to the Company under its revolving credit facility or otherwise in amounts sufficient to enable the Company to service its indebtedness, including the Company’s unsecured long-term notes, and borrowings, if any, under its revolving credit facility and securitization or to fund its other liquidity needs. If the Company cannot service its debt, the Company will have to take actions such as reducing or delaying capital investments, selling assets, restructuring or refinancing its debt or seek additional equity capital. Any of these remedies may not be executed on commercially reasonable terms, or at all, and may impede the implementation of its business strategy. Furthermore, the revolving credit facility may restrict the Company from adopting any of these alternatives. Because of these and other factors that may be beyond its control, the Company may be unable to service its indebtedness.

The Company has liabilities with respect to its pension plans and the actual cost of its pension plan obligations could exceed current provisions. As of December 31, 2020, the Company’s defined benefit plans had a surplus of $152 million on certain plans and a deficit of $124 million on others.

Since pension fund obligations are primarily long-term in nature, losses in pension fund investments, if any, would result in increased contributions by the Company, to be paid over 5 year or 10 year periods, depending upon the applicable legislation for funding pension deficits. Losses, if any, would also impact the Company’s results over a longer period of time and immediately increase liabilities and reduce equity.

The Company’s future funding obligations for its defined benefit pension plans depend upon changes to the level of benefits provided by the plans, the future performance of assets set aside in trusts for these plans, the level of interest rates used to determine minimum funding levels, actuarial data and experience, and any changes in government laws and regulations. As of December 31, 2020, the Company’s defined benefit pension plans held assets with a fair value of $1,594 million.


19


 

Market Risks

The Company faces intense competition in its markets, and the failure to compete effectively could have a material adverse effect on its business and results of operations.

The Company competes with U.S., Canadian, European and Asian producers and, for many of its product lines with global producers, some of which may have greater financial resources and lower production costs than the Company. The principal basis for competition is selling price. The Company’s ability to maintain satisfactory margins depends largely on its ability to control its costs. Our industries also are particularly sensitive to other factors including innovation, design, quality and service, with varying emphasis on these factors depending on the product line. The Company cannot provide assurance that it will compete effectively and maintain current levels of sales and profitability. If the Company cannot compete effectively, such failure could have a material adverse effect on its business and results of operations.

Conditions in the global political and economic environment, including the global capital and credit markets, can adversely affect the Company’s business, results of operations and financial position.

A significant or prolonged downturn in the general economic environment may affect the Company’s sales and profitability. The Company has exposure to counterparties with which it routinely executes transactions. Such counterparties include commercial banks, insurance companies and other financial institutions, some of which may be exposed to bankruptcy or liquidity risks. A bankruptcy or illiquidity event by one of its significant counterparties may materially and adversely affect the Company’s access to capital, future business and results of operations. In addition, the Company’s customers and suppliers may be adversely affected by severe economic conditions. This could result in reduced demand for its products or its inability to obtain necessary supplies at reasonable costs, or at all.

The Company may be negatively impacted by political issues or crisis in individual countries or regions, including sovereign risk related to a default by or deterioration in the credit worthiness of local governments. Any of these effects, and others the Company cannot anticipate, may have a negative effect and may adversely affect the Company’s business.

The Company is affected by changes in currency exchange rates.

The Company has manufacturing operations in the U.S. and Canada. As a result, it is exposed to movements in foreign currency exchange rates in Canada. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. As a result, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar relative to the U.S. dollar. Additionally, there has been, and may continue to be, volatility in currency exchange rates. The Company’s risk management policy allows hedging a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use foreign exchange derivative instruments to mitigate its exposure to fluctuations in foreign currency exchange rates. There can be no assurance that the Company will be protected against substantial foreign currency fluctuations. Currency exchange rates could adversely affect the Company’s results of operations and financial position.

General Risks

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

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

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

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

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

20


 

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

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

The Company’s financial results could be affected by changes in U.S. and foreign tax laws or in the mix of our U.S. and foreign earnings, as well as adjustments to our estimates of uncertain tax issues or results from audits by U.S. or foreign tax authorities.

The Company is subject to U.S. and foreign tax laws and regulations. Tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. International tax norms governing each country’s jurisdiction to tax cross-border international trade have evolved partly due to the Base Erosion and Profit Shifting project led by the Organization for Economic Cooperation and Development and supported by the G20. Changes in these laws and regulations, or any change in the position of tax authorities regarding their application, administration or interpretation could adversely affect the Company’s financial results. In addition, a number of countries are actively pursuing changes to their tax laws applicable to multinational corporations, such as the U.S. Tax Cuts and Jobs Acts (“U.S. Tax Reform”), enacted in 2017. Finally, foreign governments may enact tax laws in response to the U.S. Tax Reform that could result in further changes to global taxation and materially impact the Company’s financial results.

The U.S. Tax Reform significantly changes how the U.S. taxes corporations. The U.S. Tax Reform requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in interpretation of the provisions of the U.S Tax Reform and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the U.S. Tax Reform will be applied or otherwise administered that is different from the Company’s interpretation.

The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates or changes in the valuation of deferred tax assets and liabilities. The Company is also subject to the examination of its tax returns and other matters by tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes and as of December 31, 2020, has a reserve for liabilities relating to uncertain tax positions of $23 million. Taxing authorities may disagree with the positions the Company has taken regarding the tax treatment or characterization of its transactions. If any tax authorities were successful in challenging the tax treatment or characterization of any of the Company’s transactions, it could also adversely affect its financial results.

The Company’s intellectual property rights are valuable, and any inability to protect them could reduce the value of its products and its brands.

The Company relies on patent, trademark and other intellectual property laws of the U.S. and other countries to protect its intellectual property rights. However, the Company may be unable to prevent third parties from using its intellectual property without its authorization, which may reduce any competitive advantage it has developed. If the Company had to litigate to protect these rights, any proceedings could be costly, and it may not prevail. The Company cannot guarantee that any U.S. or foreign patents, issued or pending, will provide it with any competitive advantage or will not be challenged by third parties. Additionally, the Company has obtained and applied for U.S. and foreign trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of its pending patent or trademark applications will be approved by the applicable governmental authorities and, even if the applications are approved, third parties may seek to oppose or otherwise challenge these registrations. The failure to secure any pending patent or trademark applications may limit the Company’s ability to protect the intellectual property rights that these applications were intended to cover.

If the Company is unable to successfully retain and develop executive leadership and other key personnel, it may be unable to fully realize critical organizational strategies, goals and objectives.

The success of the Company is substantially dependent on the efforts and abilities of its key personnel, including its executive management team, to develop and implement its business strategies and manage its operations. The failure to retain key personnel or to develop successors with appropriate skills and experience for key positions in the Company could adversely affect the development and achievement of critical organizational strategies, goals and objectives. There can be no assurance that the Company will be able to retain or develop the key personnel it needs and the failure to do so may adversely affect its financial condition and results of operations.

21


 

Our operations could be adversely affected by disruptions to our Information Technology (IT) Services.

The Company’s IT systems, some of which are dependent on services provided by third parties, serve an important role in the efficient operation of its business. The protection of customers, employees and company data is critical to the Company’s business. This role includes ordering and managing materials from suppliers, managing its inventory, converting materials to finished products, facilitating order entry and fulfillment and processing of transactions, summarizing and reporting its financial results, facilitating internal and external communications, administering human resources functions, retaining certain personal information and providing other processes necessary to manage its business. The failure of the Company’s IT systems, including any failure of the Company’s current systems and/or as a result of transitioning to additional or replacement IT systems, as the case may be, to perform as the Company anticipates could disrupt the Company’s business and could result in, among other things, transactions errors, processing inefficiencies, disruption of production and/or deliveries, loss of data and the loss of sales and customers, which could have a material adverse effect on the Company’s business, financial position and results of operations and the effectiveness of our internal control over financial reporting could be negatively impact.

The Company is exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property or other sensitive information or may be the result of unintentional events. Like most companies, the Company's information technology systems may be vulnerable to interruption due to a variety of events beyond the Company's control, including, but not limited to, natural disasters, terrorist attacks, power and/or telecommunications failures, computer viruses, hackers and other security issues. The Company has technology security initiatives and disaster recovery plans in place to mitigate the Company's risk to these vulnerabilities, including protection of confidential or personal information, but these measures may not be adequate or implemented properly to ensure that the Company's operations are not disrupted. The Company’s IT systems have been, and will likely continue to be, subject to computer viruses or other malicious codes, unauthorized access attempts, phishing and other cyber-incidents. The Company cannot guarantee that its security efforts will prevent breaches or breakdowns to its IT systems or those of its third-party providers. Potential consequences of a material cyber incident, which could result in confidential or personal information being accessed, obtained, damaged or used by unauthorized or improper persons, include damage to the Company’s reputation, litigation, inefficiencies or production downtimes and increased cyber security protection and remediation costs. Such consequences could have a negative impact on the Company’s ability to meet customers’ orders, resulting in a delay or decrease to its revenue and a reduction to its operating margins.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

 


22


 

ITEM 2.  PROPERTIES

A description of our mills and related properties is included in Item I, Business.

Production facilities

We own substantially all of our production facilities. We lease substantially all of our sales offices, regional replenishment centers and warehouse facilities. We believe our properties are in good operating condition and are suitable and adequate for the operations for which they are used. We own substantially all of the equipment used in our facilities.

Forestlands

We manage approximately 5 million acres of forestlands that are directly licensed or owned by Domtar in Canada, through efficient management and the application of certified sustainable forest management practices. We also have access to fiber from an additional 25 million acres of public forestlands in Canada that are licensed and managed by third parties. We believe that these forestlands will provide a continuous supply of wood for future needs.

Listing of facilities and locations (1)

 

Corporate Offices

Fort Mill, South Carolina

Montreal, Quebec

 

Pulp & Paper

Division Headquarters

Fort Mill, South Carolina

 

Uncoated Freesheet

Espanola, Ontario

Hawesville, Kentucky

Johnsonburg, Pennsylvania

Marlboro (Bennettsville), South Carolina

Nekoosa, Wisconsin

Port Huron, Michigan (2)

Rothschild, Wisconsin

Windsor, Quebec

 

Pulp

Ashdown, Arkansas

Dryden, Ontario

Kamloops, British Columbia

Plymouth, North Carolina

 

Materials

Jesup, Georgia (3)

 

Packaging

Kingsport, Tennessee (4)

 

Chip Mills

Hawesville, Kentucky

Johnsonburg, Pennsylvania

Marlboro (Bennettsville), South Carolina

 

 

 

Converting and Distribution – Onsite

Ashdown, Arkansas

Rothschild, Wisconsin

Windsor, Quebec

 

Converting and Forms Manufacturing

Addison, Illinois

Brownsville, Tennessee

Dallas, Texas

DuBois, Pennsylvania

Owensboro, Kentucky

Rock Hill, South Carolina

Tatum, South Carolina

Washington Court House, Ohio

West Carrollton, Ohio

 

Local Distribution Centers

Buffalo, New York

Cincinnati, Ohio

Cleveland, Ohio

Denver, Colorado

Des Moines, Iowa

Omaha, Nebraska

Phoenix, Arizona

Plain City, Ohio

Salt Lake City, Utah

San Antonio, Texas

San Lorenzo, California

St. Louis, Missouri

Vancouver, Washington

Walton, Kentucky

Wisconsin Rapids, Wisconsin

 

 

 

Regional Replenishment Centers – United States

Charlotte, North Carolina

Chicago, Illinois

Dallas, Texas

Delran, New Jersey

Indianapolis, Indiana

Jacksonville, Florida

Mira Loma, California

Seattle, Washington

 

Regional Replenishment Centers  – Canada

Richmond, Quebec

Toronto, Ontario

Winnipeg, Manitoba

 

Representative Office – International

Hong Kong, China

 

Ariva – Canada

Halifax, Nova Scotia

Montreal, Quebec

Mount Pearl, Newfoundland and Labrador

Ottawa, Ontario

Quebec City, Quebec

Toronto, Ontario

 

 

 

(1)

On January 7, 2021, we agreed to sell our Personal Care business to American Industrial Partners (AIP). The Transaction is expected to close in the first quarter of 2021 and reflected in our list of facilities and locations above. For more information on this Transaction, refer to Item 8, Financial Statements and Supplementary Data, under Note 3, “Discontinued Operations”.

 

(2)

As part of our cost reduction program, we announced the permanent closure of the uncoated freesheet manufacturing at our Port Huron, Michigan mill, which is expected to shut down by the end of the first quarter of 2021.

 

(3)

Starting January 1, 2020, as a result of changes in our organizational structure, EAM Corporation, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under our former Personal Care segment is now presented under our Pulp and Paper business segment.

 

(4)

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

23


 

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. The Company periodically reviews the status of these proceedings and assesses the likelihood of any adverse judgments or outcomes of these legal proceedings, as well as analyzes probable losses. Although the final outcome of any legal proceeding is subject to a number of variables and cannot be predicted with any degree of certainty, management currently believes that the ultimate outcome of current legal proceedings will not have a material adverse effect on the Company’s long-term results of operations, cash flow or financial position. However, an adverse outcome in one or more of the significant legal proceedings could have a material adverse effect on the Company’s results, financial condition or cash flow in a given quarter or year.

For a discussion of commitments, legal proceedings and related contingencies, refer to Item 8, Financial Statements and Supplementary Data under, Note 22 “Commitments and Contingencies”.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

 

 

24


 

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Domtar Corporation’s common stock is traded on the New York Stock Exchange and the Toronto Stock Exchange under the symbol “UFS”.

HOLDERS

At February 5, 2021, the number of shareholders of record (registered and non-registered) of Domtar Corporation common stock was approximately 19,015.

DIVIDENDS AND STOCK REPURCHASE PROGRAM

During 2020, the Company declared one quarterly dividend of $0.455 per share, to holders of the Company’s common stock. Dividends aggregating $25 million were paid on April 15, 2020, to shareholders of record as of April 2, 2020.

On May 5, 2020, due to the unprecedented market conditions and uncertainty caused by COVID-19, the Company suspended the payment of its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment. On February 11, 2021, the Company announced that it will resume its stock repurchase program. The Board of Directors will continue to evaluate the Company’s capital return program based upon customary considerations, including market conditions.

During 2019, the Company declared one quarterly dividend of $0.435 and three quarterly dividends of $0.455 per share, to holders of the Company’s common stock. Dividends aggregating $28 million, $28 million, $27 million and $26 million were paid on April 15, 2019, July 16, 2019, October 15, 2019 and January 15, 2020, respectively, to shareholders of record as of April 2, 2019, July 2, 2019, October 2, 2019 and January 2, 2020, respectively.  

The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to $1.6 billion. At December 31, 2020, the Company had approximately $344 million of remaining availability under the Program. Under the Program, the Company is authorized to repurchase, from time to time, shares of its outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions, as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock in part to reduce the dilutive effects of our stock options, awards, and to improve shareholders’ returns. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

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

During 2019, the Company repurchased 6,220,658 shares at an average price of $35.29 for a total cost of $219 million.


25


 

Share repurchase activity under our stock repurchase program was as follows during the year ended December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(d) Approximate

 

 

 

 

 

 

 

 

 

 

 

(c) Total Number

 

 

Dollar Value of

 

 

 

 

 

 

 

 

 

 

 

of Shares

 

 

Shares that May

 

 

 

 

 

 

 

 

 

 

 

Purchased  as

 

 

Yet be Purchased

 

 

 

(a) Total Number

 

 

(b) Average

 

 

Part of Publicly

 

 

under the Plans

 

 

 

of Shares

 

 

Price Paid

 

 

Announced Plans

 

 

or Programs

 

Period

 

Purchased

 

 

per Share

 

 

or Programs

 

 

(in 000s)

 

January 1 through March 31, 2020

 

 

1,798,306

 

 

$

33.05

 

 

 

1,798,306

 

 

$

343,601

 

April 1 through June 30, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

July 1 through September 30, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

October 1 through October 31, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

November 1 through November 30, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

December 1 through December 31, 2020

 

 

 

 

$

 

 

 

 

 

$

343,601

 

 

 

 

1,798,306

 

 

$

33.05

 

 

 

1,798,306

 

 

 

 

 

 

PERFORMANCE GRAPH

This graph compares the return on a $100 investment in the Company’s common stock on December 31, 2015 with a $100 investment in an equally-weighted portfolio of a peer group (1), and a $100 investment in the S&P 400 MidCap Index. This graph assumes that returns are in local currencies and assumes quarterly reinvestment of dividends. The measurement dates are the last trading day of the period as shown.

 

 

(1)

On May 18, 2007, the Human Resources Committee of the Board of Directors established performance measures as part of the Performance Conditioned Restricted Stock Units (“PCRSUs”) Agreement including the achievement of a total shareholder return compared to a peer group.

 

The peer group includes: WestRock Company, Ontex Group NV, Glatfelter Corporation, International Paper Co., Kimberly-Clark Corporation, Neenah Paper, Inc., Packaging Corp. of America, Resolute Forest Products Inc., SCA, Sonoco Products Company, Stora Enso Oyj and UPM-Kymmene Corp.

 


26


 

ITEM 6.  SELECTED FINANCIAL DATA

The following sets forth selected historical financial data of the Company for the periods and as of the dates indicated. The selected financial data as of and for the fiscal years then ended have been derived from the audited financial statements of Domtar Corporation. All prior periods presented have been restated and prior period amounts have been adjusted to conform with current year presentation, if applicable.

The following table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data.  

 

 

 

Year ended

 

FIVE YEAR FINANCIAL SUMMARY

 

December 31,      2020

 

 

December 31,      2019

 

 

December 31,      2018

 

 

December 31,

2017

 

 

December 31,

2016

 

(In millions of dollars, except per share figures)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

3,652

 

 

$

4,369

 

 

$

4,565

 

 

$

4,258

 

 

$

4,291

 

Closure and restructuring costs and impairment

   of long-lived assets 1,2

 

 

235

 

 

 

54

 

 

 

 

 

 

31

 

 

 

60

 

Depreciation and amortization

 

 

223

 

 

 

231

 

 

 

241

 

 

 

257

 

 

 

287

 

Operating (loss) income 1,2

 

 

(177

)

 

 

179

 

 

 

395

 

 

 

172

 

 

 

157

 

(Loss) earnings from continuing operations

 

 

(145

)

 

 

85

 

 

 

281

 

 

 

239

 

 

 

77

 

Earnings (loss) from discontinued operations, net of taxes

 

 

18

 

 

 

(1

)

 

 

2

 

 

 

(497

)

 

 

51

 

Net (loss) earnings 3

 

 

(127

)

 

 

84

 

 

 

283

 

 

 

(258

)

 

 

128

 

Per common share (in dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   (Loss) earnings from continuing operations - Basic

 

$

(2.62

)

 

$

1.39

 

 

$

4.47

 

 

$

3.81

 

 

$

1.23

 

Earnings (loss) from discontinued operations - Basic

 

$

0.33

 

 

$

(0.02

)

 

$

0.03

 

 

$

(7.92

)

 

$

0.81

 

Basic net (loss) earnings

 

$

(2.29

)

 

$

1.37

 

 

$

4.50

 

 

$

(4.11

)

 

$

2.04

 

(Loss) earnings from continuing operations - Diluted

 

$

(2.62

)

 

$

1.39

 

 

$

4.45

 

 

$

3.81

 

 

$

1.23

 

Earnings (loss) from discontinued operations - Diluted

 

$

0.33

 

 

$

(0.02

)

 

$

0.03

 

 

$

(7.92

)

 

$

0.81

 

Diluted net (loss) earnings

 

$

(2.29

)

 

$

1.37

 

 

$

4.48

 

 

$

(4.11

)

 

$

2.04

 

Cash dividends paid per common share

 

$

0.91

 

 

$

1.78

 

 

$

1.72

 

 

$

1.66

 

 

$

1.63

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

309

 

 

$

61

 

 

$

111

 

 

$

139

 

 

$

125

 

Property, plant and equipment, net

 

 

2,023

 

 

 

2,223

 

 

 

2,229

 

 

 

2,354

 

 

 

2,434

 

Total assets

 

 

4,856

 

 

 

4,903

 

 

 

4,925

 

 

 

5,212

 

 

 

5,680

 

Long-term debt due within one year

 

 

13

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

63

 

Long-term debt

 

 

1,084

 

 

 

937

 

 

 

852

 

 

 

1,126

 

 

 

1,216

 

Total shareholders' equity

 

 

2,260

 

 

 

2,376

 

 

 

2,538

 

 

 

2,483

 

 

 

2,676

 

 

Discontinued operations: On January 7, 2021, we agreed to sell our Personal Care business. As a result, effective on December 31, 2020, we classified our Personal Care business as a discontinued operations and reclassified the Personal Care assets and liabilities to assets and liabilities held for sale on our balance sheets, for all periods presented.

 

1

In 2020, we recorded $136 million of accelerated depreciation under Impairment of long-lived assets related to our cost reduction program within. In addition, we recorded $99 million of Closure and restructuring costs in 2020 related to the cost reduction program. For additional information, refer to Item 8, Financial Statement and Supplementary Data, Note 16 “Closure and Restructuring Costs and Impairment of Long-Lived Assets.”

2

In 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets related to our decision to permanently close two paper machines. In addition, we recorded $22 million of Closure and restructuring costs in 2019 related to the aforementioned. For additional information, refer to Item 8, Financial Statement and Supplementary Data, under Note 16 “Closure and Restructuring Costs and Impairment of Long-Lived Assets.”

3

In 2017 and 2018, our net earnings (loss) and earnings (loss) per common share were impacted by the initial application of the U.S. Tax Reform of 2017.

 

27


 

ITEM 7. 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 audited consolidated financial statements and notes thereto included in Item 8, Financial Statements and Supplementary Data. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed in Item 1, Business, under “Forward-looking statements”, as well as in Item 1A, Risk Factors, in this report. 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-K 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 twelve-month periods ended December 31, 2020, 2019 and 2018. The twelve month periods are also referred to as 2020, 2019 and 2018. References to notes refer to footnotes to the consolidated financial statements and notes thereto included in Item 8, Financial Statements and Supplementary Data.

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

 

2020 Highlights

 

Impact of the COVID-19 Pandemic and Outlook

 

Cost Reduction Program

 

Review of Continuing Operations

 

Discontinued Operations of our Personal Care Business

 

Liquidity and Capital Resources

 

Recent Accounting Pronouncements and Critical Accounting Estimates and Policies

For a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, other than “Results of Operations”, please refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for year ended December 31, 2019, filed with the SEC on February 25, 2020.

Sale of Personal Care Business

On January 7, 2021, we agreed to sell our Personal Care business to American Industrial Partners (“AIP”), for a purchase price of $920 million in cash (the “Transaction”). The Transaction is expected to close in the first quarter of 2021. Based on its magnitude and because we are exiting the Personal Care business, the sale represents a significant strategic shift that has a material effect on our operations and financial results. Accordingly, all periods presented reflect the Personal Care business as a discontinued operation. Our Personal Care business was previously disclosed as a separate reportable segment. For more information on our discontinued operations, refer to Item 8, Financial Statements and Supplemental Data, under Note 3, “Discontinued Operations”.

Purchase of Appvion Point of Sale Business

On April 27, 2020, we completed the acquisition of the Point of Sale paper business from Appvion Operations Inc. The business includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property and assumed liabilities related to post-retirement benefits. The results of this business have been included in the consolidated financial statements as of April 27, 2020 and are presented in the Pulp and Paper business. For more information, refer to Item 8, Financial Statements and Supplemental Data, under Note 4 “Acquisition of Business”.


28


 

Change in Reporting for EAM Corporation

Starting January 1, 2020, as a result of changes in our organizational structure, EAM Corporation, a manufacturer of high quality airlaid and ultrathin laminated cores, previously reported under our former Personal Care segment is now presented under our Pulp and Paper business. Prior period results have been restated to the new presentation with no significant impact on results. For more information, refer to Item 8, Financial Statements and Supplemental Data, under Note 24 “Segment Disclosures”.

OVERVIEW

Following our agreement to sell our Personal Care business, we now operate as a single reportable segment as described below, which also represents our only operating segment.

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

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

2020 HIGHLIGHTS

 

We reported an operating loss of $177 million, compared to operating income of $179 million in 2019

 

We reported a loss from continuing operations of $145 million compared to earnings from continuing operations of $85 million in 2019

 

Earnings from discontinued operations, net of taxes amounted to $18 million in 2020, including a loss on classification as held for sale, net of tax, of $45 million

 

Sales decreased by 16% from 2019. Net average selling prices for pulp and paper were down from 2019. Our manufactured paper volume was down while our pulp volume was up when compared to 2019

 

Recognition of closure and restructuring charges and accelerated depreciation under Impairment of long-lived assets, of $99 million and $136 million, respectively, mostly related to our announced cost reduction program

 

Recognition of $36 million (CDN $48 million) from the Canada Emergency Wage Subsidy (“CEWS”) and received a $7 million payment from waiving the non-production clause related to the sale agreement of our Lebel-sur-Quévillon kraft pulp mill in 2012

 

We repurchased $59 million of our common stock and paid $51 million in dividends. Our capital return program, which includes our regular quarterly dividend and stock repurchase program, was suspended in the second quarter of 2020. On February 11, 2021, we announced that we will resume our stock repurchase program


29


 

 

 

 

Twelve months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

Variance 2020 vs. 2019

 

 

Variance 2019 vs. 2018

 

FINANCIAL HIGHLIGHTS

 

2020

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

$

 

 

%

 

(In millions of dollars, unless otherwise noted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

3,652

 

 

$

4,369

 

 

$

4,565

 

 

$

(717

)

 

 

-16

%

 

$

(196

)

 

 

-4

%

Operating (loss) income (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

(143

)

 

 

226

 

 

 

442

 

 

 

(369

)

 

 

-163

%

 

 

(216

)

 

 

-49

%

Corporate

 

 

(34

)

 

 

(47

)

 

 

(47

)

 

 

13

 

 

 

28

%

 

 

 

 

 

-

%

Operating (loss) income

 

 

(177

)

 

 

179

 

 

 

395

 

 

 

(356

)

 

 

-199

%

 

 

(216

)

 

 

-55

%

(Loss) Earnings from continuing operations

 

 

(145

)

 

 

85

 

 

 

281

 

 

 

(230

)

 

 

-271

%

 

 

(196

)

 

 

-70

%

Earnings (loss) from discontinued operations, net of taxes

 

 

18

 

 

 

(1

)

 

 

2

 

 

 

19

 

 

 

1900

%

 

 

(3

)

 

 

-150

%

Net (loss) earnings

 

 

(127

)

 

 

84

 

 

 

283

 

 

 

(211

)

 

 

-251

%

 

 

(199

)

 

 

-70

%

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations

 

$

(2.62

)

 

$

1.39

 

 

$

4.47

 

 

$

(4.01

)

 

 

 

 

 

$

(3.08

)

 

 

 

 

Earnings (loss) from discontinued operations

 

$

0.33

 

 

$

(0.02

)

 

$

0.03

 

 

$

0.35

 

 

 

 

 

 

$

(0.05

)

 

 

 

 

Basic net (loss) earnings

 

$

(2.29

)

 

$

1.37

 

 

$

4.50

 

 

$

(3.66

)

 

 

 

 

 

$

(3.13

)

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations

 

$

(2.62

)

 

$

1.39

 

 

$

4.45

 

 

$

(4.01

)

 

 

 

 

 

$

(3.06

)

 

 

 

 

Earnings (loss) from discontinued operations

 

$

0.33

 

 

$

(0.02

)

 

$

0.03

 

 

$

0.35

 

 

 

 

 

 

$

(0.05

)

 

 

 

 

Diluted net (loss) earnings

 

$

(2.29

)

 

$

1.37

 

 

$

4.48

 

 

$

(3.66

)

 

 

 

 

 

$

(3.11

)

 

 

 

 

 

 

 

At December 31,

 

 

At December 31,

 

 

 

2020

 

 

2019

 

Total assets

 

$

4,856

 

 

$

4,903

 

Total long-term debt, including current portion

 

$

1,097

 

 

$

938

 

 

 

(a)

Includes closure and restructuring charges and accelerated depreciation under Impairment of long-lived assets related to our announced cost reduction program of $96 million and $136 million, respectively as well as closure and restructuring charges of $3 million under Corporate in 2020. In 2019, we recognized closure and restructuring charges and accelerated depreciation under Impairment of long-lived assets of $22 million and $32 million, respectively associated with our decision to permanently close two paper machines. See Item 8, Financial Statements and Supplementary Data, under Note 16 “Closure and Restructuring Costs and Impairment of Long-Lived Assets” for more information. In 2018, we did not recognize any closure and restructuring charges or impairment of long-lived assets.

 

(b)

See Item 8, Financial Statements and Supplementary Data, under Note 6 "Earnings (Loss) per Common Share" for more information on the calculation of net earnings per common share.

IMPACT OF THE COVID-19 PANDEMIC

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

 

Our operations are considered to be essential services in the jurisdictions where we operate. Certain of our paper products are used in the testing for COVID-19 as well as for personal protection medical gowns. However, demand for our paper has declined significantly since the beginning of April, largely due to work-from-home rules and the overall economic slowdown. The length and severity of the reduction in paper demand is uncertain; at the current time, we expect the adverse impact to continue through the first quarter of 2021. Beyond the first quarter of 2021, paper demand will depend largely on when, and the extent to which, work-from-home subsides and on the timing of the return to normal global economic activities.

30


 

 

Effects from COVID-19 began for us at the end of the first quarter of 2020 but were not material to the three-month’s results ended March 31, 2020. Shipments of paper were lower by approximately 19% in 2020 when compared to 2019. As a result of the decrease in demand, on August 7, 2020, we announced the permanent closure of the uncoated freesheet manufacturing at our Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at our Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. These actions reduced our annual uncoated freesheet paper capacity by approximately 721,000 short tons, and resulted in a workforce reduction of approximately 750 employees. The Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations. Our Ridgefields converting center ceased operations at the end of the third quarter of 2020, while our Port Huron mill is expected to shut down by the end of the first quarter of 2021.

 

Our pulp shipments were higher by approximately 7% in 2020 when compared to 2019. We expect near-term pulp markets to gradually improve driven by better demand, maintenance outages and restocking in China.

 

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

 

Health and Safety of our Employees

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

 

Operations and Supply Chain

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

 

Cost Reduction Program

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

 

Liquidity and Capital Resources

We have taken actions and may take other actions, intended to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets. On May 5, 2020, we entered into a five-year $300 million term loan. We suspended our regular quarterly dividend and stock repurchase program in 2020 and on February 11, 2021, we announced that we would resume our stock repurchase program. In addition, we completed a review of all planned capital expenditures for 2020 and reduced or delayed spending without compromising on safety or regulatory compliance. Our capital expenditures for 2020 were $175 million, a decrease of approximately $75 million compared to our planned spending.

 

Government Assistance

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

 

The Government of Canada created the CEWS to provide financial support for businesses during the COVID-19 pandemic and to prevent large layoffs. CEWS allows eligible entities to receive a subsidy retroactive to March 15, 2020. We qualified and applied for all periods identified under CEWS, from March 15 through December 31, 2020 and recognized $36 million (CDN $48 million) of income related to this subsidy in 2020.

OUTLOOK

In 2021, paper demand remains uncertain and dependent upon the COVID-19 recovery, in particular quarantine measures impacting the return to office and school. We expect near-term pulp markets to gradually improve driven by better demand, maintenance outages and restocking in China. Overall raw material costs are expected to moderately increase and freight costs are also expected to be higher.  

31


 

COST REDUCTION PROGRAM

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

During 2020, we recorded $136 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, we recorded $34 million of severance and termination costs, $31 million of inventory obsolescence, $12 million of environmental costs, $4 million of pension curtailment and settlement charges and $18 million of licenses fees, write-offs and other costs, under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

Kingsport, Tennessee mill

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

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

Ashdown, Arkansas mill

We will complete the conversion of our Ashdown mill to 100% softwood and fluff pulp, which will require $15 to $20 million of capital investments and is expected to be completed in early 2021. The mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. The conversion of the fiberline to 100% softwood is also necessary for an eventual expansion into containerboard. Following the fiberline conversion, Ashdown will have annual production capacity of 775,000 tons of fluff and softwood pulp. Refer to Item 8, Financial Statements and Supplemental Data, under Note 16 “Closure and Restructuring Costs and Impairment of Long-Lived Assets” for more information.

REVIEW OF OPERATIONS

This section presents a discussion and analysis of our 2020, 2019 and 2018 sales, operating (loss) income and other information relevant to the understanding of our results from continuing operations. 

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

 

ANALYSIS OF SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twelve months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

Variance 2020 vs. 2019

 

 

Variance 2019 vs. 2018

 

 

 

2020

 

 

2019

 

 

2018

 

 

$

 

 

%

 

 

$

 

 

%

 

Sales

 

$

3,652

 

 

$

4,369

 

 

$

4,565

 

 

 

(717

)

 

 

-16

%

 

 

(196

)

 

 

-4

%

Shipments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paper - manufactured (in thousands of ST)

 

 

2,230

 

 

 

2,745

 

 

 

2,971

 

 

 

(515

)

 

 

-19

%

 

 

(226

)

 

 

-8

%

Communication Papers

 

 

1,825

 

 

 

2,299

 

 

 

2,446

 

 

 

(474

)

 

 

-21

%

 

 

(147

)

 

 

-6

%

Specialty and Packaging papers

 

 

405

 

 

 

446

 

 

 

525

 

 

 

(41

)

 

 

-9

%

 

 

(79

)

 

 

-15

%

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

 

 

69

 

 

 

93

 

 

 

109

 

 

 

(24

)

 

 

-26

%

 

 

(16

)

 

 

-15

%

Paper - total (in thousands of ST)

 

 

2,299

 

 

 

2,838

 

 

 

3,080

 

 

 

(539

)

 

 

-19

%

 

 

(242

)

 

 

-8

%

Pulp (in thousands of ADMT)

 

 

1,787

 

 

 

1,664

 

 

 

1,647

 

 

 

123

 

 

 

7

%

 

 

17

 

 

 

1

%

 


32


 

ANALYSIS OF CHANGES IN SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020 vs. 2019

 

 

2019 vs. 2018

 

 

 

% Change in Sales due to

 

 

% Change in Sales due to

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

 

Net Price

 

 

Mix

 

 

Currency

 

 

Total

 

 

Net Price

 

 

Mix

 

 

Currency

 

 

Total

 

Sales

 

 

-5

%

 

 

-11

%

 

 

-

%

 

 

-16

%

 

 

1

%

 

 

-5

%

 

 

-

%

 

 

-4

%

 

Sales in 2020 decreased by $717 million, or 16% when compared to sales in 2019. This decrease in sales is mostly due to a decrease in our paper sales volumes and a decrease in net average selling prices for pulp and paper. This decrease was partially offset by an increase in pulp sales volumes.

Sales in 2019 decreased by $196 million, or 4% when compared to sales in 2018. This decrease in sales is mostly due to a decrease in our paper sales volumes and a decrease in net average selling price for pulp. This decrease was partially offset by an increase in net average selling price for paper as well as an increase in our pulp sales volumes.

 

ANALYSIS of CHANGE IN OPERATING INCOME (LOSS)

 

2020 VS. 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ Change in Operating Income (Loss) due to

 

 

 

Volume/

 

 

 

 

 

 

 

 

 

 

Operating (b)

 

 

 

 

 

 

Depreciation/

 

 

 

 

 

 

Other Income/

 

 

 

 

 

 

 

Mix

 

 

Net Price

 

 

Input Costs (a)

 

 

Expenses

 

 

Currency

 

 

Impairment (c)

 

 

Restructuring (d)

 

 

Expense (e)

 

 

Total

 

Pulp and Paper

 

 

(125

)

 

 

(208

)

 

 

77

 

 

 

37

 

 

 

10

 

 

 

(97

)

 

 

(74

)

 

 

11

 

 

 

(369

)

Corporate

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

13

 

Operating income (loss)

 

 

(125

)

 

 

(208

)

 

 

77

 

 

 

53

 

 

 

10

 

 

 

(97

)

 

 

(77

)

 

 

11

 

 

 

(356

)

 

(a)

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

(b)

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

(c)

Depreciation charges were lower by $7 million in 2020, excluding foreign currency impact. In 2020, we recorded $136 million of accelerated depreciation under Impairment of long-lived assets related to our cost reduction program. In 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets related to our decision to permanently close two paper machines.

(d)

2020 restructuring charges relate to:2019 restructuring charges relate to:

-Severance and termination costs ($34 million)

-Inventory write-down ($31 million)

-Environmental costs ($12 million)

-Pension curtailment and settlement charges ($4 million)

-License fees, write-offs and other costs ($18 million)

-Severance and termination costs ($16 million)

-Inventory write-down ($4 million)

-Other costs ($2 million)

(e)

2020 other operating expenses/income includes:2019 other operating expenses/income includes:

- Income from waiving a non-compete clause ($7 million)

- Net gain on sale of property, plant & equipment ($1 million)

- Bad debt expense ($4 million)

- Environmental provision ($2 million)

- Other income ($5 million)

 

2020 vs. 2019

-Environmental provision ($4 million)

-Foreign exchange loss ($3 million)

-Bad debt expense ($1 million)

-Other income ($4 million)

 

Operating loss in our Pulp and Paper business amounted to ($143) million in 2020, a decrease in income of $369 million, when compared to operating income of $226 million in 2019. Our results were negatively impacted by:

 

Lower net average selling prices for pulp and paper ($208 million)

 

Lower volume/ mix ($125 million) mostly related to lower volume of paper, partially offset by higher volume of pulp

 

Higher depreciation/impairment charges ($97 million). We recorded $136 million of accelerated depreciation under Impairment of long-lived assets, related to our cost reduction program in 2020 compared to $32 million of accelerated depreciation under Impairment of long-lived assets, related to our decision to permanently close two paper machines in 2019. Depreciation charges were lower by $7 million when compared to 2019

33


 

 

Higher restructuring charges ($74 million) in 2020 as a result of the cost reduction program ($96 million) compared to the decision to permanently close two paper machines in 2019 ($22 million)

 

These decreases were partially offset by:

 

 

Lower input costs ($77 million) mostly related to lower cost of fiber, due in part to better weather and favorable market conditions compared to 2019

 

Lower operating expenses ($37 million) mostly due to lower maintenance and other costs due to our cash conservation initiatives (including our cost reduction program) in light of the COVID-19 pandemic and amounts recognized from the CEWS when compared to 2019, partially offset by lower production

 

Higher other income ($11 million)

 

Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($10 million)

OTHER FACTORS

Corporate

We incurred $34 million of corporate charges in 2020, a decrease of $13 million compared to corporate charges of $47 million in 2019. This decrease was mostly due to lower SG&A expenses and partially offset by an increase in restructuring expenses, both as a result of the cost reduction program.

Interest Expense, net

We incurred $58 million of net interest expense in 2020, an increase of $6 million compared to net interest expense of $52 million in 2019. The net interest expense was impacted by the $300 million Term Loan entered into on May 5, 2020 as well as an increase in borrowing under the revolving credit facility.

Income Taxes

We recorded an income tax benefit of $76 million in 2020 compared to an income tax expense of $17 million in 2019, which yielded an effective tax rate of 35% and 16% for 2020 and 2019, respectively.

On January 7, 2021, we agreed to sell our Personal Care business to American Industrial Partners (AIP) for $920 million. As such, for the December 31, 2020 reporting period, we are no longer indefinitely reinvested in that business and have classified our investment in that business as held for sale. Accordingly, we have recorded a deferred tax asset of $51 million for the difference between the net book value of the business and the tax basis of that business which impacted the effective tax rate in 2020.

We have assessed the value of the deferred tax asset related to the book/tax basis difference, which is expected to be a capital loss for tax purposes upon the completion of the sale and determined that we are not likely to realize a full benefit from the asset. As such, we have recorded a valuation allowance of $44 million associated with this deferred tax asset. During the year, we also analyzed our existing Arkansas research and development credits and determined an additional valuation allowance of $3 million should be recorded since it is expected these credits will expire un-utilized. These amounts unfavorably impacted the effective tax rate in 2020.

During 2020, we generated a U.S. tax net operating loss which, in accordance with the Coronavirus Aid, Relief, and Economic Security (CARES) Act will be carried back to 2015. In 2015, the US federal tax rate was 35%, versus the current rate of 21%. Therefore, we recorded an additional tax benefit of $5 million related to the tax rate benefit of the loss which favorably impacted the effective tax rate in 2020. We also recorded $17 million of tax credits, mainly research and experimentation credits, which favorably impacted the effective tax rate in 2020. Since we have a tax loss in 2020, the tax credits will be carried forward and are expected to be utilized in future years.  

As a result of the deemed mandatory repatriation tax requirement of the U.S. Tax Reform, we have taxed our undistributed foreign earnings as of December 31, 2017, at reduced tax rates. After completing our evaluation of the U.S. Tax Reform’s impact on our business operations, we had determined that we are no longer indefinitely reinvested in these undistributed foreign earnings as well as foreign earnings after December 31, 2017. As such, as of December 31, 2020, we have recorded a deferred tax liability of $11 million ($12 million as of December 31, 2019) for foreign withholding tax and various state income taxes associated with future repatriation of these earnings. This additional $1 million tax benefit impacted the effective tax rate for 2020 ($2 million tax expense for 2019).

We recorded $18 million of tax credits in 2019, mainly research and experimentation credits, which significantly impacted the effective tax rate. Arkansas legislation changes were passed in 2019 which reduced the state tax rate and changed how the apportionment factor is calculated. This resulted in a deferred state tax benefit of $4 million. Additionally, a valuation allowance of $5 million was recorded in 2019 on state attributes we do not expect to utilize before they expire. 

34


 

Economic conditions and uncertainties

The markets in which our pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. Most of our products are commodities that are widely available from other producers as well. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. We also compete on the basis of product quality, breadth of offering and service solutions. Further, we compete against electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products. In addition, current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions in certain countries due to economic slowdowns and government restrictions on movement.

The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and competitively priced pulp products.

The high degree of uncertainty and volatility day-to-day and the longer-term potential impacts of the economic slowdown remain unclear. In 2021, paper demand remains uncertain and dependent upon the COVID-19 recovery, in particular quarantine measures impacting the return to office and school. We expect near-term pulp markets to gradually improve driven by better demand, maintenance outages and restocking in China. Overall raw material costs are expected to moderately increase and freight costs are also expected to be higher.  

 

2019 VS. 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ Change in Operating Income (Loss) due to

 

 

 

Volume/

 

 

 

 

 

 

 

 

 

 

Operating (b)

 

 

 

 

 

 

 

Depreciation/

 

 

 

 

 

 

Other Income/

 

 

 

 

 

 

 

Mix

 

 

Net Price

 

 

Input Costs (a)

 

 

Expenses

 

 

Currency

 

 

 

Impairment (c)

 

 

Restructuring (d)

 

 

Expense (e)

 

 

Total

 

Pulp and Paper

 

 

(46

)

 

 

52

 

 

 

(46

)

 

 

(128

)

 

 

8

 

 

 

 

(23

)

 

 

(22

)

 

 

(11

)

 

 

(216

)

Corporate

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

Operating income (loss)

 

 

(46

)

 

 

52

 

 

 

(46

)

 

 

(134

)

 

 

8

 

 

 

 

(23

)

 

 

(22

)

 

 

(5

)

 

 

(216

)

(a)

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

(b)

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

(c)

Depreciation charges were lower by $9 million in 2019, excluding foreign currency impact. We recorded $32 million of accelerated depreciation under Impairment of long-lived assets related to our decision to permanently close two paper machines (2018 – nil).

(d)

2019 restructuring charges relates to:2018 restructuring charges relates to:

-Severance and termination costs ($16 million)

-Inventory write-down ($4 million)

-Other costs ($2 million)

-Nil

 

(e)

2019 other operating expenses/income includes:2018 other operating expenses/income includes:

-Environmental provision ($4 million)

-Foreign exchange loss ($3 million)

-Bad debt expense ($1 million)

-Other income ($4 million)

-Net gain on sale of property, plant and equipment ($4 million)

-Foreign exchange gain ($3 million)

-Environmental provision ($5 million)

-Bad debt expense ($2 million)

-Other income ($1 million)

Operating income in our Pulp and Paper business amounted to $226 million in 2019, a decrease of $216 million, when compared to operating income of $442 million in 2018. Our results were negatively impacted by:

 

Higher operating expenses ($128 million) mostly due to lower production as well as higher maintenance and fixed costs due to timing of major maintenance

 

Higher input costs ($46 million) mostly related to higher costs of fiber due mostly to severe weather conditions as well as unfavorable market conditions, partially offset by lower costs of chemicals and energy

 

Lower volume and mix ($46 million) mostly related to lower volume of paper, partially offset by higher volume of pulp

 

Higher depreciation/impairment charges ($23 million) mostly due to our decision to permanently close two paper machines in 2019

 

Higher restructuring charges ($22 million) due to our decision to permanently close two paper machines in 2019

 

Higher other income/expense ($11 million)


35


 

These decreases were partially offset by:

 

Higher average selling prices for paper partially offset by lower average selling prices for pulp ($52 million)

 

Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program ($8 million)

Our Espanola pulp and specialty paper mill underwent an extensive audit and inspection of major components during its outage in June 2019. Following the inspection and given the cyclically low pulp prices, we made the decision to fast-track some maintenance work that was originally planned for 2020 in order to address some reliability risks. This extended shutdown impacted mostly our second half of 2019 by adding approximately $36 million of maintenance costs and lowering our total production by approximately 60,000 tonnes.

OTHER FACTORS

Corporate

We incurred $47 million of corporate charges in both 2019 and 2018. Corporates charges decreased mostly due to a decrease in environmental provision and was offset by an increase in SG&A expenses.  

Interest expense, net

We incurred $52 million of net interest expense in 2019, a decrease of $10 million compared to net interest expense of $62 million in 2018. The net interest expense was impacted by the repayment of the $300 million Term Loan in the fourth quarter of 2018.

Income Taxes

We recorded an income tax expense of $17 million in 2019 compared to an income tax expense of $68 million in 2018, which yielded an effective tax rate of 16% and 19% for 2019 and 2018, respectively.

We recorded $18 million of tax credits in 2019, mainly research and experimentation credits, which significantly impacted the effective tax rate. Arkansas legislation changes were passed in 2019 which reduced the state tax rate and changed how the apportionment factor is calculated. This resulted in a deferred state tax benefit of $4 million. Additionally, a valuation allowance of $5 million was recorded on state attributes we do not expect to utilize before they expire.

As a result of the deemed mandatory repatriation tax requirement of the U.S. Tax Reform, we have taxed our undistributed foreign earnings as of December 31, 2017, at reduced tax rates. After completing our evaluation of the U.S. Tax Reform’s impact on business operations, we have determined that we are no longer indefinitely reinvested in these undistributed foreign earnings as well as foreign earnings after December 31, 2017. Therefore, as of December 31, 2019, we have recorded a deferred tax liability of $12 million ($10 million as December 31, 2018) for foreign withholding tax and various state income taxes associated with future repatriation of these earnings. This $2 million tax expense impacted the effective tax rate for 2019 ($10 million expense for 2018).

We recorded $18 million of tax credits in 2018, mainly research and experimentation credits, which significantly impact the effective tax rate.  We also recognized $3 million of tax benefits relating to 2018 law changes in Sweden and various U.S. states which favorably impacted our effective tax rate.

On December 22, 2017, the U.S. Tax Reform was signed into law. The U.S. Tax Reform significantly changed U.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a one-time deemed repatriation tax on accumulated foreign earnings. Additionally, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, we completed our analysis, including currently available legislative updates, and recorded an additional tax benefit of $13 million for the year ended December 31, 2018. Of this benefit, $7 million related to adjustments to the deemed mandatory repatriation tax and $6 million related to the revaluation of our net deferred tax liabilities.


36


 

DISCONTINUED OPERATION

On January 7, 2021, we signed an agreement to sell our Personal Care business. Its results of operations are reported as discontinued operations for all periods presented. For the year ended December 31, 2020, we reported earnings on discontinued operations, net of taxes, of $18 million (2019 - loss from discontinued operations, net of taxes of $1 million; 2018 - earnings from discontinued operations, net of taxes, of $2 million). For more information, refer to Item 8, Financial Statements and Supplemental Data, under Note 3, “Discontinued Operations”.

STOCK-BASED COMPENSATION EXPENSE

Under the Omnibus Plan, we may award to key employees and non-employee directors, at the discretion of the Human Resources Committee of the Board of Directors, non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock units, performance-conditioned restricted stock units, performance share units, deferred share units (“DSUs”) and other stock-based awards. The non-employee directors only receive DSUs. We generally grant awards annually and use, when available, treasury stock to fulfill awards settled in common stock and options exercised.

For the year ended December 31, 2020, stock-based compensation expense recognized in our results from continuing and discontinued operations was $7 million (2019 – $22 million) for all of the outstanding awards. Compensation costs not yet recognized amounted to $15 million (2019 – $16 million) and will be recognized over the remaining service period of approximately 14 months. The aggregate value of liability awards settled in 2020 was $6 million (2019 – $12 million). The total fair value of equity awards settled in 2020 was $6 million (2019 – $11 million), representing the fair value at the time of settlement. The fair value at the grant date for these settled equity awards was $7 million (2019 – $6 million). Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

LIQUIDITY AND CAPITAL RESOURCES

Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our $700 million credit facility, of which $646 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $111 million is currently undrawn and available. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.

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

A portion of our cash is held outside the U.S. by foreign subsidiaries. The earnings of the foreign subsidiaries reflect full provision for local income taxes. The U.S. Tax Reform includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries for which we recorded a provisional repatriation tax amount of $46 million in 2017 and adjusted by $7 million in 2018. After completing our evaluation of the U.S. Tax Reform’s impact on the business operations, we have determined that we are no longer indefinitely reinvested in these undistributed foreign earnings as well as foreign earnings after December 31, 2017. We remain indefinitely reinvested in the outside basis differences of our foreign subsidiaries, except for our Personal Care business which we are selling.  We do not anticipate any additional cash tax liability associated with repatriating the proceeds of the sale other than what is already provided.

Operating Activities

Our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials, including fiber and energy, and other expenses such as income tax and property taxes.

Cash flows from operating activities, including discontinued operations, totaled $411 million in 2020, a $31 million decrease compared to cash flows from operating activities of $442 million in 2019. This decrease in cash flows from operating activities is primarily due to a decrease in profitability partially offset by an improvement in cash flow from working capital requirements. We received income tax refunds, net of payments, of $22 million in 2020 compared to income tax payments, net of refunds of $59 million in 2019. We paid $4 million of employer pension and other post-retirement contributions in excess of pension and other post-retirement expense in 2020 compared to 2019 when we paid $1 million of employer pension and other post-retirement contributions in excess of pension and other post-retirement expense when excluding our non-cash pension settlement loss of $30 million.


37


 

Investing Activities

Cash flows used for investing activities, including discontinued operations, in 2020 amounted to $202 million, a $52 million decrease compared to cash flows used for investing activities of $254 million in 2019.

The use of cash in 2020 was attributable to additions to property, plant and equipment of $175 million and the acquisition of the Appvion Point of Sale Business in the second quarter of 2020 ($30 million).

The use of cash in 2019 was attributable to additions to property, plant and equipment of $255 million.

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

Financing Activities

Cash flows provided from financing activities, including discontinued operations, totaled $35 million in 2020 compared to cash flows used for financing activities of $237 million in 2019.

The primary source of cash flows provided from financing activities was from proceeds of the term loan in 2020 ($300 million). This was partially offset by the decrease in borrowings under our credit facilities (revolver and receivables securitization) ($135 million), the repurchase of our common stock ($59 million), dividend payments ($51 million) and a decrease in bank indebtedness ($10 million).

The use of cash in 2019 was primarily the result of the repurchase of our common stock ($219 million) and dividend payments ($110 million). This was partially offset by the net increase of borrowings under our credit facilities (revolver and receivables securitization) ($85 million).

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $788 million as of December 31, 2020 compared to $886 million as of December 31, 2019.

Term Loan

On May 5, 2020, we entered into a $300 million Term Loan Agreement that matures on May 5, 2025. We used borrowings under the Term Loan Agreement to repay other debt, to pay related fees and expenses. A mandatory repayment of $6 million was made in 2020. For more information, refer to Item 8, Financial Statements and Supplemental Data, under Note 19 “Long-Term Debt”.

Revolving Credit Facility

We have an unsecured $700 million revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks that matures on August 22, 2023.

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

Borrowings under the Credit Agreement bear interest at LIBOR, EURIBOR, Canadian bankers' acceptance or prime rate, as applicable, plus a margin linked to our credit rating. In addition, we pay facility fees quarterly at rates dependent on our credit ratings. The Financial Conduct Authority in the United Kingdom plans to phase out LIBOR by the end of 2021. We do not anticipate a significant impact to our financial position from the planned phase out of LIBOR.

The Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying material acquisitions). At December 31, 2020, we were in compliance with these financial covenants, and had no borrowings under the Credit Agreement (December 31, 2019– $80 million). At December 31, 2020, our interest coverage ratio was 8.2 and our leverage ratio was 1.9. At December 31, 2020, we had $54 million of outstanding letters of credit (December 31, 2019 – nil), leaving $646 million unused and available under this facility (December 31, 2019 – $620 million).


38


 

Receivables Securitization

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

At December 31, 2020, we had no borrowings under the receivables securitization facility, and had no outstanding letters of credit under the program (December 31, 2019 – $55 million and $53 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 December 31, 2020, we had $111 million unused and available under this facility.

Common Stock

On May 5, 2020, we suspended the distribution of our regular quarterly dividend and stock repurchase program in light of current uncertainty in the global markets. Our stock repurchase program resumed on February 11, 2021. Our Board of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

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

During 2019, we declared one quarterly dividend of $0.435 and three quarterly dividends of $0.455 per share, to holders of our common stock. Dividends aggregating $28 million, $28 million, $27 million and $26 million were paid on April 15, 2019, July 16, 2019, October 15, 2019 and January 15, 2020, respectively, to shareholders of record as of April 2, 2019, July 2, 2019, October 2, 2019 and January 2, 2020, respectively.  

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 December 31, 2020, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.

Pension Plans

We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At December 31, 2020, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

In the normal course of business, we enter into certain contractual obligations and commercial commitments. The following tables provide our obligations and commitments at December 31, 2020:

 

CONTRACT TYPE

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

THEREAFTER

 

 

TOTAL

 

(in millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (excluding interest)

 

 

12

 

 

 

312

 

 

 

12

 

 

 

12

 

 

 

246

 

 

$

500

 

 

$

1,094

 

Finance leases and other (including interest)

 

 

1

 

 

 

2

 

 

 

2

 

 

 

2

 

 

 

1

 

 

 

5

 

 

 

13

 

Operating leases

 

 

20

 

 

 

18

 

 

 

15

 

 

 

10

 

 

 

6

 

 

 

9

 

 

 

78

 

Long-term income taxes payable (1)

 

 

3

 

 

 

3

 

 

 

6

 

 

 

8

 

 

 

10

 

 

 

 

 

 

30

 

Total obligations

 

$

36

 

 

$

335

 

 

$

35

 

 

$

32

 

 

$

263

 

 

$

514

 

 

 

1,215

 

39


 

 

COMMITMENT TYPE

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

 

THEREAFTER

 

 

TOTAL

 

(in millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other commercial commitments (2)

 

$

155

 

 

$

10

 

 

$

6

 

 

 

6

 

 

 

 

 

 

2

 

 

$

179

 

 

(1)

In connection with the U.S. Tax Reform, we have remaining liabilities of $30 million in repatriation tax to pay through 2025. See Note 10 “Income Taxes” for additional information on the U.S. Tax Reform.

(2)

Includes commitments to purchase property, plant and equipment, roundwood, wood chips, gas and certain chemicals. Purchase orders in the normal course of business are excluded.

In addition, we expect to contribute a minimum total amount of $13 million to the pension plans in 2021 and a minimum total amount of $4 million in 2021 to the other post-retirement benefits plans.

For 2021 and the foreseeable future, we expect cash flows from operations and from our various sources of financing to be sufficient to meet our contractual obligations and commercial commitments.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Item 8, Financial Statements and Supplementary Data under Note 2 “Recent Accounting Pronouncements”.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Our principal accounting policies are described in Item 8, Financial Statements and Supplementary Data, under Note 1 “Summary of Significant Accounting Policies”. Notes referenced in this section are included in Item 8, Financial Statements and Supplementary Data.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes 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 as set forth in Note 1 “Summary of Significant Accounting Policies”, 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.

Environmental Matters and Asset Retirement Obligations

We maintain provisions for estimated environmental costs when remedial efforts are probable and can be reasonably estimated. Environmental provisions relate mainly to air emissions, effluent treatment, silvicultural activities and site remediation (together referred to as “environmental matters”). The environmental cost estimates reflect assumptions and judgments as to probable nature, magnitude and timing of required investigation, remediation and monitoring activities, as well as contribution by other responsible parties. Additional information regarding environmental matters is available in Note 22 “Commitments and Contingencies”.

While we believe that we have determined the costs for environmental matters likely to be incurred, based on known information, our ongoing efforts to identify potential environmental concerns that may be associated with the properties may lead to future environmental investigations. These efforts may result in the determination of additional environmental costs and liabilities, which cannot be reasonably estimated at this time. In addition, environmental laws and regulations and interpretation by regulatory authorities could change which could result in significant changes to our estimates. For further details on “Climate change regulation” and other environmental matters refer to Note 22 “Commitments and Contingencies”.

Asset retirement obligations are mainly associated with landfill operation and closure, dredging of settling ponds and bark pile management. We recognize asset retirement obligations, at fair value, in the period in which we incur a legal obligation associated with the retirement of an asset. The fair value is based on the expected cash flow approach, in which multiple cash flow scenarios that reflect a range of possible outcomes are considered. Probabilities are applied to each of the cash flow scenarios to arrive at an expected cash flow. The estimated cash flows are then discounted using a credit adjusted risk-free interest rate in combination with business-specific and other relevant risks to discount the cash flow. The rates used vary between 4.7% and 12.0%.

40


 

Cash flow estimates incorporate assumptions that marketplace participants would use in their estimates of fair value, whenever that information is available without undue cost and effort. If unavailable, assumptions are based on internal experts, third-party engineers’ studies and historical experience in remediation work. As at December 31, 2020, we had an asset retirement obligation provision of $14 million for 12 locations (2019 – $13 million).

As at December 31, 2020, we had a total provision of $47 million for environmental matters and asset retirement obligations (2019 – $35 million). Certain of these amounts have been discounted due to more certainty of the timing of expenditures using the credit adjusted risk-free interest rate for the corresponding period until the settlement date. The rates used vary, based on the prevailing rate at the moment of recognition of the liability and on its settlement period. Additional costs, not known or identified, could be incurred for remediation efforts. Based on policies and procedures in place to monitor environmental exposure, management believes that such additional remediation costs would not have a material adverse effect on our financial position, result of operations or cash flows.

Impairment of Property Plant and Equipment, Operating lease right-of-use assets and Definite-Lived Intangible Assets

Property, plant and equipment, operating lease right-of-use assets and definite-lived intangible assets are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that, at the lowest level of determinable cash flows, the carrying value of the assets may not be recoverable. Step I of the impairment test assesses if the carrying value of the assets exceeds their estimated undiscounted future cash flows in order to assess if the property, plant and equipment, operating lease right-of-use assets and definite-lived intangible assets are impaired. In the event the estimated undiscounted future cash flows are lower than the net book value of the assets, a Step II impairment test must be carried out to determine the impairment charge. In Step II, the assets are written down to their estimated fair values. Given that there is generally no readily available quoted value for our property, plant and equipment, operating lease right-of-use assets and definite-lived intangible assets, we determine fair value of our assets based on the present value of estimated future cash flows expected from their use and eventual disposition, and by using the liquidation or salvage value in the case of idled assets. The fair value estimate in Step II is based on the undiscounted cash flows used in Step I.

Estimates of undiscounted future cash flows used to test the recoverability of the property, plant and equipment, operating lease right-of use assets and definite-lived intangible assets includes key assumptions related to selling prices, inflation-adjusted cost projections, forecasted exchange rates (when applicable) and estimated useful life. Changes in our assumptions and estimates may affect our forecasts and may lead to an outcome where impairment charges would be required. In addition, actual results may vary from our forecasts, and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where our conclusions may differ in reflection of prevailing market conditions.

Useful Lives

On a regular basis, we review the estimated useful lives of our property, plant and equipment and our definite-lived intangible assets. Assessing the reasonableness of the estimated useful lives of property, plant and equipment and definite-lived intangible assets requires judgment and is based on currently available information. Changes in circumstances such as technological advances, changes to our business strategy, changes to our capital strategy or changes in regulation can result in useful lives differing from our estimates. Revisions to the estimated useful lives of property, plant and equipment and definite-lived intangible assets constitute a change in accounting estimate and are dealt with prospectively by amending depreciation and amortization rates.

A change in the remaining estimated useful life of a group of assets, or their estimated net salvage value, will affect the depreciation or amortization rate used to depreciate or amortize the group of assets and thus affect depreciation or amortization expense as reported in our results of operations. In 2020, we recorded depreciation and amortization expense of $223 million compared to $231 million in 2019. At December 31, 2020, we had property, plant and equipment with a net book value of $2,023 million (2019 – $2,223 million) and definite-lived intangible assets, net of amortization, of $19 million (2019 – $20 million).

 

In 2020, we recognized $136 million of accelerated depreciation, mostly related to our announced permanent closure of our uncoated freesheet manufacturing at Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at the Ashdown, Arkansas mill and the converting center in Ridgefield, Tennessee.  

In the third quarter of 2019, we announced the permanent closure of two paper machines. These closures took place at our Ashdown, Arkansas pulp and paper mill and our Port Huron, Michigan paper mill. As a result, we recognized $32 million of accelerated depreciation in 2019.

Closure and Restructuring Costs

Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are measured at their fair value. For such recognition to occur, management, with the appropriate level of authority, must have approved and committed to a firm plan

41


 

and appropriate communication to those affected must have occurred. These provisions may require an estimation of costs such as severance and termination benefits, pension and related curtailments, environmental remediation and may also include expenses related to demolition and outplacement. Actions taken may also require an evaluation of any remaining assets to determine required impairments, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation expense.

Estimates of cash flows and fair value relating to closures and restructuring require judgment. Closure and restructuring liabilities are based on management’s best estimates of future events. Although we do not anticipate significant changes, actual costs may differ from these estimates due to subsequent business developments. As such, additional costs and further impairment charges may be required in future periods.

During 2020, we recorded $136 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, we recorded $34 million of severance and termination costs, $31 million of inventory obsolescence and $34 million of other costs, under Closure and restructuring costs.

During 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets and $1 million of accelerated depreciation under Depreciation and amortization, on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, we recorded $3 million of severance and termination costs, $4 million of inventory obsolescence and $2 million of other costs, under Closure and restructuring costs in relation to the paper machine closures. Concurrently, with the Ashdown paper machine closure and related workforce reduction, management negotiated a voluntary early retirement program to reduce costs and put the mill in a stronger cost position in the long-term. We additionally recorded $13 million of severance and termination costs under Closure and restructuring costs.

Additional information can be found under Note 16 “Closure and Restructuring Costs and Impairment of Long-Lived Assets”.

Indefinite-lived intangible assets impairment assessment

Indefinite-lived intangible assets consist of license rights ($6 million) and water rights ($4 million). We test indefinite-lived intangible assets at the asset level. Indefinite-lived intangible assets are not amortized and are evaluated at the beginning of the fourth quarter of every year or more frequently whenever indicators of potential impairment exist. In connection with the Company's annual impairment testing in the fourth quarter of 2020, we performed a qualitative assessment for each indefinite-lived intangible asset (license rights and water rights). The qualitative assessments performed in the fourth quarter of 2020 indicated that the indefinite-lived intangible assets had fair values that exceeded their carrying amounts.

Pension Plans and Other Post-Retirement Benefit Plans

We have several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to our contribution. Defined contribution pension expense was $39 million for the year ended December 31, 2020 (2019 – $39 million).

We sponsor both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. We also sponsor 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. In addition, we provide supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension plans to certain senior management employees.

We account for pensions and other post-retirement benefits in accordance with Compensation-Retirement Benefits Topic of the Financial Accounting Standards Board-Accounting Standards Committee which requires employers to recognize the overfunded or underfunded status of defined benefit pension plans as an asset or liability in its Consolidated Balance Sheets. Pension and other post-retirement benefit charges require assumptions in order to estimate the projected and accumulated benefit obligations. These assumptions require considerable management judgment and include:

-

Expected long-term rate of return on plan assets – used to estimate the growth and expected return on assets

-

Discount rate – used to determine interest costs and the net present value of our obligations

-

Rate of compensation increase – used to calculate the impact of future increases on our obligations

-

Health care cost trends – used to calculate the impact of future health care costs on our obligations

-

Employee related factors, such as mortality rates, turnover, retirement age and disabilities – used to determine the extent of our obligations

Changes in these assumptions result in actuarial gains or losses, which are amortized over the expected average remaining service life of the active employee group covered by the plans, only to the extent that the unrecognized net actuarial gains and losses are in excess

42


 

of 10% of the greater of the projected benefit obligation and the market value of assets, over the average remaining service period of approximately ten years of the active employee group covered by the pension plans, and 12 years of the active employee group covered by the other post-retirement benefits plans.

An expected rate of return on plan assets of 4.6% was considered appropriate by management for the determination of pension expense for 2020. Effective January 1, 2021, we will use 4.4% as the expected return on plan assets, which reflects the current view of long-term investment returns. The overall expected long-term rate of return on plan assets is based on management’s best estimate of the long-term returns of the major asset classes (cash and cash equivalents, equities and bonds) weighted by the target allocation of assets at the measurement date, net of expenses. This rate includes an equity risk premium over government bond returns for equity investments and a value-added premium for the contribution to returns from active management. The sources used to determine management's best estimate of long-term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country-specific inflation and investment market expectations derived from market data and analysts' or governments' expectations, as applicable.

We set our discount rate assumption annually to reflect the rates available on high-quality, fixed income debt instruments, with a duration that is expected to match the timing and amount of expected benefit payments. High-quality debt instruments are corporate bonds with a rating of AA or better. The discount rates at December 31, 2020 for pension plans were estimated at 2.5% for the projected benefit obligation and 3.0% for the net periodic benefit cost for 2020 and for post-retirement benefit plans were estimated at 2.5% for the projected benefit obligation and 3.0% for the net periodic benefit cost for 2020.

We used a full yield curve approach to estimate the current service and interest cost components of net periodic benefit cost for Canadian pension plans and U.S. funded pension plans. The estimate of these components is made by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We used this approach to provide a more precise measurement of current service and interest cost components by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. 

The rate of compensation increase is another significant assumption in the actuarial model for pension (set at 2.7% for the projected benefit obligation and 2.8% for the net periodic benefit cost) and for post-retirement benefit plans (set at 2.8% for the projected benefit obligation and 2.7% for the net periodic benefit cost) and is determined based upon our long-term plans for such increases.

For employee related factors, mortality rate tables tailored to our industry were used and the other factors reflect our historical experience and management’s best estimate regarding future expectations.

For measurement purposes, a 3.9% weighted average annual rate of increase in the per capita cost of covered health care benefits was assumed for 2020.

The following table provides a sensitivity analysis of the key weighted average economic assumptions used in measuring the projected pension benefit obligation, the accrued other post-retirement benefit obligation and related net periodic benefit cost for 2020. The sensitivity analysis should be used with caution as it is hypothetical and changes in each key assumption may not be linear. The sensitivities in each key variable have been calculated independently of each other.

 

 

Pension

 

 

Other Post-Retirement Benefit

 

PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

 

Projected Benefit Obligation

 

 

Net Periodic Benefit Cost

 

 

Projected Benefit Obligation

 

 

Net Periodic Benefit Cost

 

(In millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected rate of return on assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1% increase

 

N/A

 

 

 

(14

)

 

N/A

 

 

N/A

 

1% decrease

 

N/A

 

 

 

14

 

 

N/A

 

 

N/A

 

Discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1% increase

 

 

(189

)

 

 

(7

)

 

 

(8

)

 

 

-

 

1% decrease

 

 

235

 

 

 

16

 

 

 

10

 

 

 

-

 

43


 

Our pension plan funding policy is to contribute annually the amount required to provide for benefits earned in the year and to fund solvency deficiencies, funding shortfalls and past service obligations over periods not exceeding those permitted by the applicable regulatory authorities. Past service obligations primarily arise from improvements to plan benefits. The other post-retirement benefit plans are not funded and contributions are made annually to cover benefit payments.

We expect to contribute a minimum total amount of $13 million in 2021 compared to $15 million in 2020 (2019 – $17 million) to the pension plans. We expect to contribute a minimum total amount of $4 million in 2021 compared to $4 million in 2020 to the other post-retirement benefit plans (2019 – $4 million).

Benefit obligations and fair values of plan assets as of December 31, 2020 for our pension and post-retirement plans were are follows:

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Other

 

 

 

Pension

 

 

post-retirement

 

 

Pension

 

 

post-retirement

 

 

 

plans

 

 

benefit plans

 

 

plans

 

 

benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Projected benefit obligation at end of year

 

 

(1,566

)

 

 

(67

)

 

 

(1,425

)

 

 

(63

)

Fair value of assets at end of year

 

 

1,594

 

 

 

 

 

 

1,465

 

 

 

 

Funded status

 

 

28

 

 

 

(67

)

 

 

40

 

 

 

(63

)

 

For additional details on our pension plans and other post-retirement benefit plans, refer to Note 7 “Pension Plans and Other Post-Retirement Benefit Plans”.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined according to differences between the carrying amounts and tax bases of the assets and liabilities. The change in the net deferred tax asset or liability is included in earnings. Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to apply in the years in which assets and liabilities are expected to be recovered or settled. Deferred tax assets and liabilities are classified as non-current items on the Consolidated Balance Sheets. For these years, a projection of taxable income and an assumption of the ultimate recovery or settlement period for temporary differences are required. The projection of future taxable income is based on management’s best estimate and may vary from actual taxable income.

We assess the need to establish a valuation allowance for deferred tax assets and, if it is deemed more likely than not that our deferred tax assets will not be realized based on these taxable income projections, a valuation allowance is recorded. In general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax assets. Evaluating the need for an amount of a valuation allowance for deferred tax assets often requires significant judgment. All available evidence, both positive and negative, should be considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. In our evaluation process, we give the most weight to historical income or losses. After evaluating all available positive and negative evidence, although realization is not assured, we determined that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, with the exception of certain state credits and losses for which a valuation allowance of $13 million exists at December 31, 2020, the tax basis difference in our assets held of sale (U.S. and foreign) for which a valuation allowance of $44 million exists at December 31, 2020, and certain foreign loss carryforwards for which a valuation allowance of $7 million exists at December 31, 2020. Of this amount, $47 million unfavorably impacted tax expense and the effective tax rate for 2020 (2019 –$5 million).

Our deferred tax assets are mainly composed of temporary differences related to various accruals, accounting provisions, pension and post-retirement benefit liabilities, net operating loss carryforwards, and available tax credits. Our deferred tax liabilities are mainly composed of temporary differences pertaining to property, plant and equipment, intangible assets, leases and other items. Estimating the ultimate settlement period requires judgment. The reversal of timing differences is expected at enacted tax rates, which could change due to changes in income tax laws or the introduction of tax changes through the presentation of annual budgets by different governments. As a result, a change in the timing and the income tax rate at which the components will reverse could materially affect deferred tax expense in our future results of operations.

In addition, U.S. and foreign tax rules and regulations are subject to interpretation and require judgment that may be challenged by taxation authorities. To the best of our knowledge, we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law. In accordance with Income Taxes Topic of FASB ASC 740, we evaluate new tax positions that result in a tax benefit to us and determine the amount of tax benefits that can be recognized. The remaining unrecognized tax benefits are evaluated on a quarterly basis to determine if changes in recognition or classification are necessary. Significant changes in the amount of unrecognized tax benefits expected within the next 12 months are disclosed quarterly. Future

44


 

recognition of unrecognized tax benefits would impact the effective tax rate in the period the benefits are recognized. At December 31, 2020, we had gross unrecognized tax benefits of approximately $23 million (2019 – $28 million). These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any additional benefits expected to be realized if such positions were sustained, such as federal deduction that could be realized if an unrecognized state deduction was not sustained. As of December 31, 2020, we believe it is reasonably possible that up to $4 million of our unrecognized tax benefits may be recognized in 2021, which could impact the effective tax rate. However, the amount and timing of the recognition of these benefits is subject to some uncertainty. In addition, a number of countries are actively pursuing changes to their tax laws applicable to corporation multinationals, such as the U.S. Tax Reform, enacted in 2017. Finally, foreign governments may enact tax laws in response to the U.S. Tax Reform that could result in further changes to global taxation and materially impact our financial results.

We operate in multiple jurisdictions with complex tax policy and regulatory environments. U.S. and foreign tax rules and regulations are subject to interpretation and require judgment that may be challenged by taxation authorities.

Tax audits by their nature are often complex and can require several years to resolve. We have a number of audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on currently available information, we believe that we have adequately provided for our future tax consequences based upon current facts and circumstances and current tax law, and we believe that the ultimate outcomes will not have a material adverse effect on our financial position, results of operations or cash flows. For further details refer to Note 10 “Income Taxes”.

Contingencies related to legal claims

As discussed in Item 1A Risk Factors, under the risk “Failure to comply with applicable laws and regulations could have a material adverse effect on our business, financial results or condition” and in Note 22 “Commitments and Contingencies”, we are subject to various legal proceedings and claims that arise in the ordinary course of business. We record a liability when it is probable that a loss has been incurred, and the amount is reasonably estimable. The most likely cost to be incurred is accrued based on an evaluation of the then available facts with respect to each matter. When no amount within a range of estimates is more likely, the minimum is accrued. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. For further details on “Contingencies” and legal claims refer to Note 22 “Commitments and Contingencies”.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our operating income can be impacted by the following sensitivities:

 

SENSITIVITY ANALYSIS

 

 

 

 

(In millions of dollars, unless otherwise noted)

 

 

 

 

Each $10/unit change in the selling price of the following

   products1:

 

 

 

 

Papers

 

 

 

 

Business Papers

 

$

10

 

Commercial Print & Publishing Papers

 

 

8

 

Specialty & Packaging Papers

 

 

4

 

Pulp - net position

 

 

 

 

Softwood

 

$

13

 

Fluff

 

 

8

 

Hardwood

 

 

-

 

Foreign exchange

 

 

 

 

(US $0.01 change in relative value to the Canadian dollar before hedging)

 

 

11

 

Energy 2

 

 

 

 

Natural gas: $0.25/MMBtu change in price before hedging

 

 

6

 

 

1

Based on estimated 2021 capacity (ST or ADMT).

2

Based on estimated 2021 consumption levels. The allocation between energy sources may vary during the year in order to take advantage of market conditions.

Note that we may, from time to time, hedge part of our foreign exchange, and energy positions, which may therefore impact the above sensitivities.

45


 

In the normal course of business, we are exposed to certain financial risks. We do not use derivative instruments for speculative purposes; although all derivative instruments purchased to minimize risk may not qualify for hedge accounting.

CREDIT RISK

We are exposed to credit risk on accounts receivables from our customers. In order to reduce this risk, we review new customers’ credit history before granting credit and conduct regular reviews of existing customers’ credit performance. As of December 31, 2020, two of our customers located in the U.S. represented 15% or $58 million, and 12% or $46 million, respectively, of our receivables (December 31, 2019– two customers located in the U.S. represented 14% or $66 million and 13% or $65 million, respectively).

We are exposed to credit risk in the event of non-performance by counterparties to our financial instruments. We attempt 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

We are exposed to interest rate risk arising from fluctuations in interest rates on our cash and cash equivalents, bank indebtedness, revolving credit facility, securitization, term loan and long-term debt. Our 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 our overall borrowing costs. We may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby we agree to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.  

The Financial Conduct Authority in the United Kingdom plans to phase out LIBOR by the end of 2021. We do not anticipate a significant impact to our financial position from the planned phase out of LIBOR.

COST RISK

Cash flow hedges

We are exposed to price volatility for raw materials and energy used in our manufacturing process. We manage our exposure to cost risk primarily through the use of supplier contracts. We purchase 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, we 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 36 months.

FOREIGN CURRENCY RISK

Cash flow hedges

We have manufacturing operations in the U.S. and Canada. As a result, we are exposed to movements in foreign currency exchange rates in Canada. Moreover, certain assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. Accordingly, our earnings are affected by increases or decreases in the value of the Canadian dollar. Our risk management policy allows us to hedge a significant portion of the exposure to fluctuations in foreign currency exchange rates for periods up to three years.  We may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate our exposure to fluctuations in foreign currency exchange rates.

Derivatives are used to hedge forecasted purchases in Canadian dollars by our Canadian subsidiary over the next 24 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.

46


 

PART II

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management’s Reports to Shareholders of Domtar Corporation

Management’s Report on Financial Statements and Practices

The accompanying Consolidated Financial Statements of Domtar Corporation and its subsidiaries (the “Company”) were prepared by management. The statements were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best judgments and estimates. Management is responsible for the completeness, accuracy and objectivity of the financial statements. The other financial information included in the annual report is consistent with that in the financial statements.

Management has established and maintains a system of internal accounting and other controls for the Company and its subsidiaries. This system and its established accounting procedures and related controls are designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect all transactions, that policies and procedures are implemented by qualified personnel, and that published financial statements are properly prepared and fairly presented. The Company’s system of internal control is supported by written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit function. Appropriate actions are taken by management to correct deficiencies as they are identified.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has evaluated the effectiveness of internal control over financial reporting, using the criteria established in 2013 Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on the assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2020, based on criteria in Internal Control – Integrated Framework issued in 2013 by the COSO.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.


47


 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Domtar Corporation:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Domtar Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of earnings (loss) and comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2020 appearing after the list of exhibits under Item 15(a)(3) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

48


 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Indefinite Lived Intangible Assets Impairment Assessment - Personal Care Segment

As described in Notes 1 and 3 to the consolidated financial statements, the Company classified the Personal Care business as a disposal group held for sale in the fourth quarter of 2020. As of December 31, 2020, net indefinite lived intangible assets in the disposal group held for sale totaled approximately $290 million. Management measured the indefinite lived intangible assets included in the disposal group held for sale at the lower of the carrying value or the fair value less any costs to sell. Management performed quantitative impairment tests for each Personal Care indefinite-lived intangible asset, which included comparing the fair value of the indefinite-lived intangible asset to its carrying amount. Fair value of the indefinite lived intangible assets is derived using an income approach that is a relief from royalty model. Key estimates supporting the cash flow projections used in the estimation of fair value include, but are not limited to, management's assessment of industry and market conditions, as well as its estimates of revenue growth rates, royalty rates, tax rates and discount rates.

The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible assets impairment assessment, specifically for  the Personal Care segment, is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the indefinite lived intangible assets included in the disposal group held for sale; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates and royalty rates; and (iii) the audit effort involved the use of  professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s impairment assessment of the Personal Care indefinite-lived intangible assets included in the disposal group held for sale, including controls over the development of assumptions relating to cash flow projections, revenue growth rates, royalty rates, tax rates, and discount rates utilized in the valuation of the intangible assets. These procedures also included, among others (i) testing management’s process for determining the fair value measurements of the Personal Care segment indefinite-lived intangible assets included in the disposal group; (ii) evaluating the appropriateness of the income approach based on a relief from royalty model; (iii) testing the completeness and accuracy of the underlying data used in the model; and (iv) evaluating the reasonableness of significant assumptions used by management related to revenue growth rates and royalty rates.  Evaluating management’s assumptions related to revenue growth rates and royalty rates involved evaluating whether the assumptions used were reasonable considering (i) the current and past performance of the segment; and (ii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s income approach based on the relief from royalty model, and evaluating the appropriateness of the royalty rates assumption.

 

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina

March 1, 2021

We have served as the Company’s auditor since 2007.

 

49


 

DOMTAR CORPORATION

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

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

Sales

 

 

3,652

 

 

 

4,369

 

 

 

4,565

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

3,125

 

 

 

3,610

 

 

 

3,638

 

Depreciation and amortization

 

 

223

 

 

 

231

 

 

 

241

 

Selling, general and administrative

 

 

253

 

 

 

291

 

 

 

292

 

Impairment of long-lived assets (NOTE 16)

 

 

136

 

 

 

32

 

 

 

0

 

Closure and restructuring costs (NOTE 16)

 

 

99

 

 

 

22

 

 

 

0

 

Other operating (income) loss, net (NOTE 8)

 

 

(7

)

 

 

4

 

 

 

(1

)

 

 

 

3,829

 

 

 

4,190

 

 

 

4,170

 

Operating (loss) income

 

 

(177

)

 

 

179

 

 

 

395

 

Interest expense, net (NOTE 9)

 

 

58

 

 

 

52

 

 

 

62

 

Non-service components of net periodic benefit cost (NOTE 7)

 

 

(17

)

 

 

23

 

 

 

(18

)

(Loss) earnings before income taxes and equity loss

 

 

(218

)

 

 

104

 

 

 

351

 

Income tax (benefit) expense (NOTE 10)

 

 

(76

)

 

 

17

 

 

 

68

 

Equity loss, net of taxes

 

 

3

 

 

 

2

 

 

 

2

 

(Loss) earnings from continuing operations

 

 

(145

)

 

 

85

 

 

 

281

 

Earnings (loss) from discontinued operations, net of taxes (NOTE 3)

 

 

18

 

 

 

(1

)

 

 

2

 

Net (loss) earnings

 

 

(127

)

 

 

84

 

 

 

283

 

Per common share (in dollars) (NOTE 6)

 

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations

 

 

(2.62

)

 

 

1.39

 

 

 

4.47

 

Earnings (loss) from discontinued operations

 

 

0.33

 

 

 

(0.02

)

 

 

0.03

 

Basic net (loss) earnings

 

 

(2.29

)

 

 

1.37

 

 

 

4.50

 

Diluted net (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations

 

 

(2.62

)

 

 

1.39

 

 

 

4.45

 

Earnings (loss) from discontinued operations

 

 

0.33

 

 

 

(0.02

)

 

 

0.03

 

Diluted net (loss) earnings

 

 

(2.29

)

 

 

1.37

 

 

 

4.48

 

Weighted average number of common shares outstanding (millions)

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

55.4

 

 

 

61.2

 

 

 

62.9

 

Diluted

 

 

55.4

 

 

 

61.4

 

 

 

63.1

 

Cash dividends per common share

 

 

0.91

 

 

 

1.78

 

 

 

1.72

 

Net (loss) earnings

 

 

(127

)

 

 

84

 

 

 

283

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Net gains (losses) arising during the period, net

   of tax $(9) (2019 – $(3); 2018 – $10)

 

 

27

 

 

 

11

 

 

 

(30

)

Less: Reclassification adjustment for losses (gains) included in net

   (loss) earnings, net of tax of $(4) (2019 – $(3); 2018 – $1)

 

 

12

 

 

 

8

 

 

 

(2

)

Foreign currency translation adjustments

 

 

63

 

 

 

21

 

 

 

(91

)

Change in unrecognized (losses) gains and prior service cost

   related to pension and post-retirement benefit plans, net of tax of $4

   (2019 – $(13); 2018 – $3)

 

 

(13

)

 

 

34

 

 

 

(8

)

Other comprehensive income (loss)

 

 

89

 

 

 

74

 

 

 

(131

)

Comprehensive (loss) income

 

 

(38

)

 

 

158

 

 

 

152

 

 

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

 

 

50


 

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

At

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

309

 

 

 

61

 

Receivables, less allowances of $6 and $4

 

 

380

 

 

 

482

 

Inventories (NOTE 11)

 

 

630

 

 

 

663

 

Prepaid expenses

 

 

50

 

 

 

29

 

Income and other taxes receivable

 

 

54

 

 

 

56

 

Assets held for sale (NOTE 3)

 

 

1,133

 

 

 

227

 

Total current assets

 

 

2,556

 

 

 

1,518

 

Property, plant and equipment, net (NOTE 12)

 

 

2,023

 

 

 

2,223

 

Operating lease right-of-use assets (NOTE 13)

 

 

59

 

 

 

58

 

Intangible assets, net (NOTE 14)

 

 

29

 

 

 

30

 

Other assets (NOTE 15)

 

 

189

 

 

 

163

 

Non-current assets held for sale (NOTE 3)

 

 

 

 

 

911

 

Total assets

 

 

4,856

 

 

 

4,903

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

 

 

 

9

 

Trade and other payables (NOTE 17)

 

 

484

 

 

 

580

 

Income and other taxes payable

 

 

15

 

 

 

15

 

Operating lease liabilities due within one year (NOTE 13)

 

 

20

 

 

 

18

 

Long-term debt due within one year (NOTE 19)

 

 

13

 

 

 

1

 

Liabilities held for sale (NOTE 3)

 

 

295

 

 

 

143

 

Total current liabilities

 

 

827

 

 

 

766

 

Long-term debt (NOTE 19)

 

 

1,084

 

 

 

937

 

Operating lease liabilities (NOTE 13)

 

 

50

 

 

 

40

 

Deferred income taxes and other (NOTE 10)

 

 

321

 

 

 

360

 

Other liabilities and deferred credits (NOTE 20)

 

 

314

 

 

 

269

 

Long-term liabilities held for sale (NOTE 3)

 

 

 

 

 

155

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (NOTE 22)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity (NOTE 21)

 

 

 

 

 

 

 

 

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

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

 

 

1

 

 

 

1

 

Treasury stock $0.01 par value; 9,806,566 and 8,120,194 shares

 

 

 

 

 

 

Additional paid-in capital

 

 

1,717

 

 

 

1,770

 

Retained earnings

 

 

846

 

 

 

998

 

Accumulated other comprehensive loss

 

 

(304

)

 

 

(393

)

Total shareholders' equity

 

 

2,260

 

 

 

2,376

 

Total liabilities and shareholders' equity

 

 

4,856

 

 

 

4,903

 

 

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

 

 

51


 

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

Issued and

outstanding

common

shares

(millions of

shares)

 

 

Common

stock, at par

 

 

Additional

paid-in

capital

 

 

Retained

earnings

 

 

Accumulated

other

comprehensive

loss

 

 

Total

shareholders’

equity

 

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at December 31, 2017

 

 

62.7

 

 

 

1

 

 

 

1,969

 

 

 

849

 

 

 

(336

)

 

 

2,483

 

Stock-based compensation, net of tax

 

 

0.2

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

283

 

 

 

 

 

 

283

 

Net derivative losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses arising during the period,

   net of tax of $10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30

)

 

 

(30

)

Less: Reclassification adjustment

   for gains included in net earnings,

   net of tax of $1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91

)

 

 

(91

)

Change in unrecognized losses and

   prior service cost related to pension

   and post-retirement benefit plans,

   net of tax of $3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

(8

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(109

)

 

 

 

 

 

(109

)

Balance at December 31, 2018

 

 

62.9

 

 

 

1

 

 

 

1,981

 

 

 

1,023

 

 

 

(467

)

 

 

2,538

 

Stock-based compensation, net of tax

 

 

0.2

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

84

 

 

 

 

 

 

84

 

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

Less: Reclassification adjustment for

   losses included in net earnings,

   net of tax of $(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

 

 

21

 

Change in unrecognized gains and prior

   service cost related to pension

   and post-retirement benefit plans,

   net of tax of $(13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

34

 

Stock repurchase

 

 

(6.2

)

 

 

 

 

 

(219

)

 

 

 

 

 

 

 

 

(219

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(109

)

 

 

 

 

 

(109

)

Balance at December 31, 2019

 

 

56.9

 

 

 

1

 

 

 

1,770

 

 

 

998

 

 

 

(393

)

 

 

2,376

 

Stock-based compensation, net of tax

 

 

0.1

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(127

)

 

 

 

 

 

(127

)

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

27

 

Less: Reclassification adjustment for

   losses included in net loss,

   net of tax of $(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

12

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63

 

 

 

63

 

Change in unrecognized losses and prior

   service cost related to pension

   and post-retirement benefit plans,

   net of tax of $4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

(13

)

Stock repurchase

 

 

(1.8

)

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

 

(59

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Balance at December 31, 2020

 

 

55.2

 

 

 

1

 

 

 

1,717

 

 

 

846

 

 

 

(304

)

 

 

2,260

 

 

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

52


 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

 

 

Year ended

December 31,

2020

 

 

Year ended

December 31,

2019

 

 

Year ended

December 31,

2018

 

 

 

$

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

(127

)

 

 

84

 

 

 

283

 

Adjustments to reconcile net (loss) earnings to cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

283

 

 

 

293

 

 

 

308

 

Deferred income taxes and tax uncertainties (NOTE 10)

 

 

(45

)

 

 

(16

)

 

 

13

 

Impairment of long-lived assets (NOTE 16)

 

 

137

 

 

 

58

 

 

 

7

 

Impairment of inventory (NOTE 16)

 

 

31

 

 

 

6

 

 

 

4

 

Net gains on disposals of property, plant and equipment

 

 

(1

)

 

 

 

 

 

(4

)

Loss on classification as held for sale (NOTE 3)

 

 

45

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

8

 

 

 

9

 

 

 

8

 

Equity loss, net

 

 

3

 

 

 

2

 

 

 

2

 

Other

 

 

4

 

 

 

 

 

 

(1

)

Changes in assets and liabilities, excluding the effect of acquisition

   of business

 

 

 

 

 

 

 

 

 

 

 

 

Receivables

 

 

99

 

 

 

96

 

 

 

18

 

Inventories

 

 

7

 

 

 

(22

)

 

 

(28

)

Prepaid expenses

 

 

11

 

 

 

2

 

 

 

2

 

Trade and other payables

 

 

(57

)

 

 

(67

)

 

 

24

 

Income and other taxes

 

 

13

 

 

 

(43

)

 

 

(32

)

Difference between employer pension and other post-retirement

   contributions and pension and other post-retirement expense

 

 

(4

)

 

 

29

 

 

 

(46

)

Other assets and other liabilities

 

 

4

 

 

 

11

 

 

 

(4

)

Cash flows from operating activities

 

 

411

 

 

 

442

 

 

 

554

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(175

)

 

 

(255

)

 

 

(195

)

Proceeds from disposals of property, plant and equipment

 

 

3

 

 

 

1

 

 

 

5

 

Acquisition of business, net of cash acquired (NOTE 4)

 

 

(30

)

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

(6

)

Cash flows used for investing activities

 

 

(202

)

 

 

(254

)

 

 

(196

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Dividend payments

 

 

(51

)

 

 

(110

)

 

 

(108

)

Stock repurchase

 

 

(59

)

 

 

(219

)

 

 

 

Net change in bank indebtedness

 

 

(10

)

 

 

9

 

 

 

 

Change in revolving credit facility

 

 

(80

)

 

 

80

 

 

 

 

Proceeds from receivables securitization facility

 

 

25

 

 

 

205

 

 

 

85

 

Repayments of receivables securitization facility

 

 

(80

)

 

 

(200

)

 

 

(60

)

Issuance of long-term debt

 

 

300

 

 

 

 

 

 

 

Repayments of long-term debt

 

 

(7

)

 

 

(1

)

 

 

(301

)

Other

 

 

(3

)

 

 

(1

)

 

 

2

 

Cash flows provided from (used for) financing activities

 

 

35

 

 

 

(237

)

 

 

(382

)

Net increase (decrease) in cash and cash equivalents

 

 

244

 

 

 

(49

)

 

 

(24

)

Impact of foreign exchange on cash

 

 

4

 

 

 

(1

)

 

 

(4

)

Cash and cash equivalents at beginning of year

 

 

61

 

 

 

111

 

 

 

139

 

Cash and cash equivalents at end of year

 

 

309

 

 

 

61

 

 

 

111

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

Net cash payments (refund) for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

52

 

 

 

46

 

 

 

57

 

Income taxes

 

 

(22

)

 

 

59

 

 

 

71

 

 

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

 

 

53


 

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

55

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

62

NOTE 3

DISCONTINUED OPERATIONS

63

NOTE 4

ACQUISITION OF BUSINESS

66

NOTE 5

STOCK-BASED COMPENSATION

67

NOTE 6

EARNINGS (LOSS) PER COMMON SHARE

71

NOTE 7

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

72

NOTE 8

OTHER OPERATING (INCOME) LOSS, NET

81

NOTE 9

INTEREST EXPENSE, NET

82

NOTE 10

INCOME TAXES

83

NOTE 11

INVENTORIES

88

NOTE 12

PROPERTY, PLANT AND EQUIPMENT

89

NOTE 13

LEASES

90

NOTE 14

INTANGIBLE ASSETS

92

NOTE 15

OTHER ASSETS

93

NOTE 16

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

94

NOTE 17

TRADE AND OTHER PAYABLES

96

NOTE 18

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

97

NOTE 19

LONG-TERM DEBT

99

NOTE 20

OTHER LIABILITIES AND DEFERRED CREDITS

101

NOTE 21

SHAREHOLDERS’ EQUITY

102

NOTE 22

COMMITMENTS AND CONTINGENCIES

104

NOTE 23

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

107

NOTE 24

SEGMENT DISCLOSURES

112

NOTE 25

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

115

 

54


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 1.

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Domtar designs, manufactures, markets and distributes a wide variety of fiber-based products including communication papers, specialty and packaging papers and components of absorbent hygiene products. The foundation of its business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. The majority of this pulp production is consumed internally to manufacture paper with the balance sold as market pulp. Domtar is 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.

BASIS OF PRESENTATION

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the year, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. On an ongoing basis, management reviews the estimates and assumptions, including but not limited to those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, pension and other post-retirement benefit plans, income taxes, business combinations and contingencies, based on currently available information. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Domtar and its controlled subsidiaries. Intercompany transactions have been eliminated on consolidation. The equity method of accounting is used for investments in affiliates over which the Company has significant influence but does not have effective control.

DISCONTINUED OPERATIONS

The results of operations for the Personal Care business unit (disposal group) have been classified as discontinued operations for all periods presented in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) as the disposal group met the criteria to be classified as held for sale in the fourth quarter and the disposal of the business unit represents a strategic shift that will have a major effect on the Company's operations and financial results. The after-tax results of operations of the discontinued operations (including the loss recognized on classification as held for sale are reported as a separate component in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for current and all prior periods presented. In addition, the related assets and liabilities of the disposal group have been classified as held for sale in the Consolidated Balance Sheets at December 31, 2020 and 2019.

TRANSLATION OF FOREIGN CURRENCIES

The Company determines its international subsidiaries’ functional currency by reviewing the currencies in which their respective operating activities occur. The Company translates assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using the rate in effect at the balance sheet date and revenues and expenses are translated at the average exchange rates during the year. Foreign currency translation gains and losses are included in Shareholders’ equity as a component of Accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets.

Monetary assets and liabilities denominated in a currency that is different from a reporting entity’s functional currency must first be remeasured from the applicable currency to the legal entity’s functional currency. The effect of this remeasurement process is recognized in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) and is partially offset by the Company’s hedging program (refer to Note 23 ���Derivatives and hedging activities and fair value measurement”).

 

55


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

REVENUE RECOGNITION

The Company’s revenue is generated from the sale of finished goods to customers. Revenue is recognized at a single point in time when the performance obligation is satisfied which occurs when the control over the goods is transferred to customers. For shipping and handling activities performed after customers obtain control of the goods, the Company elected to account for these activities as fulfillment activities rather than assessing such activities as separate performance obligations. Accordingly, the sale of goods to customers represents a single performance obligation to which the entire transaction price is allocated.

The point in time when the control of goods is transferred to customers is largely dependent on delivery terms. Revenue is recorded at the time of shipment for delivery terms designated free on board (“f.o.b.”) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for goods transferred to customers. Revenue is recognized net of variable consideration in the form of rebates, discounts and other commercial incentives extended to customers. Variable consideration is recognized using the most likely amounts which are based on an analysis of historical experience and current period expectations. The Company includes estimated amounts of variable consideration in revenue to the extent that it is probable that there will not be a significant reversal of recognized revenue when the uncertainty related to that variable consideration is resolved.

For all the Company’s contracts, customer payments are due in less than one year. Accordingly, the Company does not adjust the amount of revenue recognized for the effects of a significant financing component.

Sales taxes, and other similar taxes, collected from customers are excluded from revenue.

SHIPPING AND HANDLING COSTS

The Company classifies shipping and handling costs as a component of Cost of sales in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).

CLOSURE AND RESTRUCTURING COSTS

Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are measured at their fair value. For such recognition to occur, management, with the appropriate level of authority, must have approved and committed to a firm plan and appropriate communication to those affected must have occurred. These provisions may require an estimation of costs such as severance and termination benefits, pension and related curtailments, environmental remediation and may also include expenses related to demolition and outplacement. Actions taken may also require an evaluation of any remaining assets to determine required impairments, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation expense.

Estimates of cash flows and fair value relating to closures and restructurings require judgment. Closure and restructuring liabilities are based on management’s best estimates of future events. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates due to subsequent developments such as the results of environmental studies, the ability to find a buyer for assets set to be dismantled and demolished and other business developments. As such, additional costs and further working capital adjustments may be required in future periods.

 


56


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

INCOME TAXES

Domtar uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined according to differences between the carrying amounts and tax bases of the assets and liabilities. The Company records its worldwide tax provision based on the respective tax rules and regulations for the jurisdictions in which it operates. The change in the net deferred tax asset or liability is included in Income tax expense (benefit) or in Other comprehensive income (loss) in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss). Deferred tax assets and liabilities are measured using enacted tax rates and laws expected to apply in the years in which the assets and liabilities are expected to be recovered or settled. Uncertain tax positions are recorded based upon the Company’s evaluation of whether it is “more likely than not” (a probability level of more than 50%) that, based upon its technical merits, the tax position will be sustained upon examination by the taxing authorities. The Company establishes a valuation allowance for deferred tax assets when it is more likely than not that they will not be realized. In general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax assets. Deferred tax assets and liabilities are classified as non-current items on the Consolidated Balance Sheets.

The Company recognizes interest and penalties related to income tax matters as a component of Income tax expense (benefit) in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).

If and when incurred, the Company accounts for any taxes associated with Global Intangible Low-Taxed Income (“GILTI”) as a period cost.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and short-term investments with original maturities of less than three months and are presented at cost which approximates fair value.

RECEIVABLES AND ALLOWANCES FOR CREDIT LOSSES

We establish allowances for credit losses on receivables. The adequacy of these allowances is assessed quarterly through consideration of factors including, but not limited to, customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of the receivable, expected loss rates and collateral exposures. We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon publicly available information and information obtained directly from our customers. Our rating categories are comparable to those used by major credit rating agencies. The securitization of receivables is accounted for as secured borrowings. Accordingly, financing expenses related to the securitization of receivables are recognized in earnings as a component of Interest expense, net in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).

INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost includes labor, materials and production overhead. The last-in, first-out (“LIFO”) method is used to account for certain domestic raw materials, in process and finished goods inventories. LIFO inventories were $220 million and $242 million at December 31, 2020 and 2019, respectively. The balance of domestic raw material inventories, all materials and supplies inventories and all foreign inventories are recorded at either the first-in, first-out (“FIFO”) or average cost methods. Had the inventories for which the LIFO method is used been valued under the FIFO method, the amounts at which product inventories are stated would have been $52 million and $69 million greater at December 31, 2020 and 2019, respectively.

 


57


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated depreciation including asset impairments. Costs for repair and maintenance activities are expensed as incurred under the direct expense method of accounting. Interest costs are capitalized for significant capital projects. For timberlands, the amortization is calculated using the unit of production method. For all other assets, depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over periods of 10 to 40 years and machinery and equipment over periods of 3 to 20 years. NaN depreciation is recorded on assets under construction.

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the assets may not be recoverable, by comparing the net book value of the asset group to their estimated undiscounted future cash flows expected from their use and eventual disposition. Impaired assets are recorded at estimated fair value, determined principally by using the present value of estimated future cash flows expected from their use and eventual disposition.

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 Company’s incremental borrowing rate. The operating lease right-of-use asset also include previously recognized impairments and purchase price adjustments relating to favorable and unfavorable terms of leases acquired as part of business combinations. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Any potential impairment for right-of-use assets will be calculated in the same manner as disclosed under impairment of long-lived assets.

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 (Loss) and Comprehensive Income (Loss) and the classification in the Consolidated Balance Sheets.

Finance lease expense is represented by the interest on the lease liability determined using the effective interest method and the amortization of the finance lease right-of-use asset calculated using the straight-line method over the estimated useful life of the identified asset. Finance lease related balances are included in the Consolidated Balance Sheets in Property, plant and equipment, net,  Long-term debt due within one year and Long-term debt.

Operating lease expense is recorded on a straight-line basis over the lease term by adding interest expense determined using the effective interest method to the amortization of the right-of-use asset. Operating lease related balances are included in the Consolidated Balance Sheets in Operating lease right-of-use assets, Operating lease liabilities due within one year and Operating lease liabilities.

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.


58


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

INTANGIBLE ASSETS

Indefinite-lived intangible assets are not amortized and are evaluated for impairment individually at the beginning of the fourth quarter of every year, or more frequently whenever indicators of potential impairment exist. The Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of indefinite-lived intangible assets is less than their carrying amounts. To carry out the qualitative assessment, the Company considers elements such as the results of recent fair value assessments, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, specific events affecting the Company and the business. The identification and impact assessment of events and circumstances on the fair value involves significant judgment and assumptions. If a qualitative assessment is performed and after assessing the qualitative factors, the Company determines that it is more likely than not that the fair value of the indefinite-lived intangible assets is less than their carrying amounts, then a quantitative impairment test is required. The Company can also elect to proceed directly to the quantitative test. The quantitative impairment test consists of comparing the fair value of the indefinite-lived intangible assets determined using a variety of methodologies to their carrying amount. If the carrying amounts of the indefinite-lived intangible assets exceed their fair value, an impairment loss is recognized in an amount equal to that excess.  

Indefinite-lived intangible assets include license rights and water rights. The Company reviews its indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support indefinite useful lives.

Definite-lived intangible assets are stated at cost less amortization and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Definite-lived intangible assets include water rights, customer relationships, technology as well as non-compete agreements, which are being amortized using the straight-line method over their respective estimated useful lives. Any potential impairment for definite-lived intangible assets will be calculated in the same manner as disclosed under impairment of long-lived assets.

Amortization is based on the following useful lives:

 

 

 

Useful life

Water rights

 

40 years

Customer relationships

 

20 to 30 years

Technology

 

7 to 20 years

Non-Compete agreements

 

9 years

 

 

 

DEBT ISSUANCE COSTS

Debt issuance costs are presented in the Consolidated Balance Sheets as a deduction from the carrying value of long-term debt. Debt issuance costs associated with revolving credit arrangements are presented in Other assets in the Consolidated Balance Sheets. Debt issuance costs are amortized using the effective rate method over the term of the related debt and included in Interest expense, net in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).


59


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

ENVIRONMENTAL COSTS AND ASSET RETIREMENT OBLIGATIONS

Environmental expenditures for effluent treatment, air emission, silvicultural activities and site remediation (together referred to as environmental matters) are expensed or capitalized depending on their future economic benefit. In the normal course of business, Domtar incurs certain operating costs for environmental matters that are expensed as incurred. Expenditures for property, plant and equipment that prevent future environmental impacts are capitalized and amortized on a straight-line basis over 10 to 40 years. Provisions for environmental matters are recorded when remediation efforts are probable and can be reasonably estimated. Provisions for environmental matters are generally not discounted, due to uncertainty with respect to timing of expenditures.

Asset retirement obligations are mainly associated with landfill operation and closure, dredging of settling ponds and bark pile management and are recognized, at fair value, in the period in which Domtar incurs a legal obligation associated with the retirement of an asset. Conditional asset retirement obligations are recognized, at fair value, when the fair value of the liability can be reasonably estimated on a probability-weighted discounted cash flow estimate. The associated costs are capitalized as part of the carrying value of the related asset and depreciated over its remaining useful life. The liability is accreted using the credit adjusted risk-free interest rate used to discount the cash flow.

STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS

Domtar recognizes the cost (net of estimated forfeitures) of employee services received in exchange for awards of equity instruments over the requisite service period, based on their grant date fair value for awards accounted for as equity and based on the quoted market value at the end of each reporting period for awards accounted for as liability. The Company awards are accounted for as compensation expense in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) and presented in Additional paid-in capital on the Consolidated Balance Sheets for equity type awards and presented in Other liabilities and deferred credits on the Consolidated Balance Sheets for liability type awards.

The Company’s awards may be subject to market, performance and/or service conditions. Any consideration paid by plan participants on the exercise of stock options or the purchase of shares is credited to Additional paid-in capital in the Consolidated Balance Sheets. The par value included in the Additional paid-in capital component of stock-based compensation is transferred to Common stock upon the issuance of shares of common stock.

Stock options subject to service conditions vest pro rata on the first three anniversaries of the grant and have a seven-year term. Service and performance-based awards vest on the third anniversary of the grant. The performance-based awards have an additional feature where the ultimate number of units that vest will be determined by the Company’s performance results or shareholder return in relation to a predetermined target over the vesting period. Deferred Share Units vest immediately at the grant date and are remeasured at the end of each reporting period, until settlement, using the quoted market value.

Under the amended and restated Domtar Corporation 2007 Omnibus Incentive Plan (“Omnibus Plan”), a maximum of 872,136 shares are reserved for issuance in connection with awards to be granted.

DERIVATIVE INSTRUMENTS

Derivative instruments may be utilized by Domtar as part of the overall strategy to manage exposure to fluctuations in foreign currency, interest rate and commodity price on certain purchases. As a matter of policy, derivatives are not used for trading or speculative purposes. All derivatives are recorded at fair value either as assets or liabilities. When derivative instruments have been designated within a hedge relationship and are highly effective in offsetting the identified risk characteristics of specific financial assets and liabilities or group of financial assets and liabilities, hedge accounting is applied. In a fair value hedge, changes in fair value of derivatives are recognized in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss). The change in fair value of the hedged item attributable to the hedged risk is also recorded in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) by way of a corresponding adjustment of the carrying amount of the hedged item recognized in the Consolidated Balance Sheets. In a cash flow hedge, changes in fair value of derivative instruments are recorded in Other comprehensive income (loss). These amounts are reclassified in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) in the periods in which results are affected by the cash flows of the hedged item within the same line item.

60


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

PENSION PLANS

Domtar’s plans include funded and unfunded defined benefit and defined contribution pension plans. Domtar recognizes the overfunded or underfunded status of defined benefit and underfunded defined contribution pension plans as an asset or liability in the Consolidated Balance Sheets. The net periodic benefit cost includes the following:

 

-

The cost of pension benefits provided in exchange for employees’ services rendered during the period,

 

-

The interest cost of pension obligations,

 

-

The expected long-term return on pension fund assets based on a market value of pension fund assets,

 

-

Gains or losses on settlements and curtailments,

 

-

The straight-line amortization of past service costs and plan amendments over the average remaining service period of approximately ten years of the active employee group covered by the plans, and

 

-

The amortization of cumulative net actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation and the market value of assets over the average remaining service period of approximately ten years of the active employee group covered by the plans.

The defined benefit plan obligations are determined in accordance with the projected unit credit actuarial cost method.

OTHER POST-RETIREMENT BENEFIT PLANS

The Company recognizes the unfunded status of other post-retirement benefit plans (other than multiemployer plans) as a liability in the Consolidated Balance Sheets. These benefits, which are funded by Domtar as they become due, include life insurance programs, medical and dental benefits and short-term and long-term disability programs. The Company amortizes the cumulative net actuarial gains and losses in excess of 10% of the greater of the projected benefit obligation and the market value of assets over the average remaining service period of approximately 12 years of the active employee group covered by the plans.

GUARANTEES

A guarantee is a contract or an indemnification agreement that contingently requires Domtar to make payments to the other party of the contract or agreement, based on changes in an underlying item that is related to an asset, a liability or an equity security of the other party or on a third party’s failure to perform under an obligating agreement. It could also be an indirect guarantee of the indebtedness of another party, even though the payment to the other party may not be based on changes in an underlying item that is related to an asset, a liability or an equity security of the other party. Guarantees, when applicable, are accounted for at fair value.

 

 

61


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 2.

 

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. Under the guidance, implementation costs for cloud computing arrangements should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software and expensed over the term of the hosting arrangement. The ASU also provides guidance on presentation and disclosure.

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

RECEIVABLES

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

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

INCOME TAXES

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

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

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

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

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

 

62


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 3.

 

DISCONTINUED OPERATIONS

Sale of Personal Care business

On January 7, 2021, Domtar Corporation entered into a definitive agreement with American Industrial Partners (AIP) to sell the Company’s Personal Care business for a purchase price of $920 million in cash, including elements of working capital estimated at $130 million, subject to customary adjustments. Subject to the satisfaction or waiver of conditions of the agreement, the transaction is expected to close in the first quarter of 2021.

The result of operations of the Company’s Personal Care business were reclassified to discontinued operations during 2020. These results have been summarized in Earnings (loss) from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for each period presented. The Consolidated Statements of Cash Flows were not reclassified to reflect discontinued operations. Personal Care was previously disclosed as a separate reportable business segment.

 

Major components of earnings (loss) from discontinued operations:

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

Sales

 

 

995

 

 

 

920

 

 

 

959

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

721

 

 

 

684

 

 

 

734

 

Depreciation and amortization

 

 

60

 

 

 

62

 

 

 

67

 

Selling, general and administrative

 

 

141

 

 

 

143

 

 

 

151

 

Impairment of long-lived assets

 

 

1

 

 

 

26

 

 

 

7

 

Closure and restructuring costs

 

 

 

 

 

20

 

 

 

8

 

Other operating loss, net

 

 

2

 

 

 

1

 

 

 

1

 

 

 

 

925

 

 

 

936

 

 

 

968

 

Operating income (loss)

 

 

70

 

 

 

(16

)

 

 

(9

)

Loss on classification as held for sale

 

 

45

 

 

 

 

 

 

 

Earnings (loss) from discontinued operations before income taxes

 

 

25

 

 

 

(16

)

 

 

(9

)

Income tax expense (benefit)

 

 

7

 

 

 

(15

)

 

 

(11

)

Net earnings (loss) from discontinued operations

 

 

18

 

 

 

(1

)

 

 

2

 

 

 

63


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

 

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

 

 

 

At

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Receivables

 

 

110

 

 

 

94

 

Inventories

 

 

138

 

 

 

123

 

Prepaid expenses

 

 

3

 

 

 

4

 

Income and other taxes receivable

 

 

3

 

 

 

6

 

Property, plant and equipment, net

 

 

351

 

 

 

344

 

Operating lease right-of-use assets

 

 

15

 

 

 

22

 

Intangible assets, net (2)(3)

 

 

554

 

 

 

543

 

Other assets

 

 

2

 

 

 

2

 

Total assets

 

 

1,176

 

 

 

1,138

 

Loss on classification as held for sale

 

 

(43

)

 

 

 

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

Consolidated Balance Sheets (1)

 

 

1,133

 

 

 

1,138

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Trade and other payables

 

 

128

 

 

 

125

 

Income and other taxes payable

 

 

12

 

 

 

7

 

Operating lease liabilities due within one year

 

 

8

 

 

 

10

 

Long-term debt

 

 

1

 

 

 

1

 

Operating lease liabilities

 

 

8

 

 

 

29

 

Deferred income taxes and other

 

 

130

 

 

 

119

 

Other liabilities and deferred credits

 

 

8

 

 

 

7

 

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

Consolidated Balance Sheets (1)

 

 

295

 

 

 

298

 

 

 

(1)

Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company’s Consolidated Balance Sheet at December 31, 2020, as the discontinued operations are expected to be disposed in the first quarter of 2021. The assets and liabilities of discontinued operations are classified in their respective current and long-term classifications, in the Company’s Consolidated Balance Sheet at December 31, 2019 in accordance with the nature and underlying classification of such assets and liabilities.

 

(2)

Intangible assets, net at December 31, 2020 are comprised of $290 million of indefinite-lived assets and $264 million of definite-lived assets (2019 $272 million and $271 million, respectively).

 

(3)

Indefinite-lived intangible assets of the disposal group held for sale consists of trade names ($248 million) and catalog rights ($42 million) following the business acquisitions in the Company’s former Personal Care segment. Indefinite-lived intangible assets included in the disposal group held for sales are tested at the asset level. In connection with the Company's annual impairment testing in the fourth quarter of 2020, a quantitative assessment was performed for each indefinite lived intangible asset. If the carrying amounts of the indefinite-lived intangible assets exceed their respective fair value, an impairment loss is recognized in an amount equal to that excess. In performing the quantitative assessment, fair value of the indefinite-lived intangible assets is derived using an income approach. Under this approach, the fair value of indefinite-lived intangible assets is estimated based on the present value of estimated future cash flows (a relief from royalty model). Considerable management judgment is necessary to estimate future cash flows used to measure the fair value. Key estimates supporting the cash flow projections include, but are not limited to, management's assessment of industry and market conditions as well as estimates of revenue growth rates, royalty rate, tax rates and discount rates. Financial forecasts are consistent with the

64


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

 

 

Company’s operating plans and are prepared for each indefinite-lived intangible asset assessment. The discount rate assumptions used are based on the weighted-average cost of capital adjusted for business-specific and other relevant risks. The quantitative assessment performed in the fourth quarter of 2020 indicated that the indefinite-lived intangible assets had fair values that exceeded their carrying amounts. Variations in management’s assumptions and estimates, particularly in the expected growth rates and royalty rates embedded in the cash flow projections, and the discount rate could have a significant impact on fair value. The Company’s former Personal Care business was classified as a disposal group held for sale in the fourth quarter of 2020 and the Company performed an updated impairment assessment of the indefinite-lived intangible assets included in the disposal group held for sale. The updated impairment assessment did not result in an impairment loss.

 

Cash Flows from Discontinued Operations:

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

$

 

 

$

 

 

$

 

Cash flows from operating activities

 

 

111

 

 

 

90

 

 

 

58

 

Cash flows used for investing activities

 

 

(34

)

 

 

(40

)

 

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 4.

 

ACQUISITION OF BUSINESS

 

Purchase of Appvion Point of Sale business

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

The table below illustrates the purchase price allocation:

 

Fair value of net assets acquired at the date of acquisition

 

 

 

 

 

 

Inventories

 

 

 

 

11

 

Property, plant and equipment

 

 

 

 

23

 

Operating lease right-of-use assets

 

 

 

 

2

 

Total assets

 

 

 

 

36

 

 

 

 

 

 

 

 

Less: Assumed Liabilities

 

 

 

 

6

 

 

 

 

 

 

 

 

Fair value of net assets acquired at the date of

   acquisition

 

 

 

 

30

 

 

 

66


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 5.

 

STOCK-BASED COMPENSATION

OMNIBUS PLAN

Under the Omnibus Plan, the Company may award to key employees and non-employee directors, at the discretion of the Human Resources Committee of the Board of Directors, non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock units, performance-conditioned restricted stock units, performance share units, deferred share units (“DSUs”) and other stock-based awards. The non-employee directors only receive DSUs. The Company generally grants awards annually and uses, when available, treasury stock to fulfill awards settled in common stock and option exercises.

PERFORMANCE SHARE UNITS (“PSUs”)

PSUs are granted to Management Committee and non-Management Committee members. These awards will be settled in shares for Management Committee members and in cash for non-Management Committee members, based on market conditions and/or performance and service conditions. These awards have an additional feature where the ultimate number of units that vest will be determined by the Company’s performance results or shareholder return in relation to a predetermined target over the vesting period. No awards vest when the minimum thresholds are not achieved. The performance measurement date will vary depending on the specific award. These awards will cliff vest at various dates up to February 18, 2023.

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

average grant

 

PSUs

 

Number of units

 

 

date fair value

 

 

 

 

 

 

 

$

 

Vested and non-vested at December 31, 2017

 

 

622,468

 

 

 

37.78

 

Granted

 

 

238,537

 

 

 

41.39

 

Forfeited

 

 

(36,932

)

 

 

38.09

 

Issued

 

 

52,563

 

 

 

41.05

 

Vested and settled

 

 

(154,178

)

 

 

44.22

 

Vested and non-vested at December 31, 2018

 

 

722,458

 

 

 

37.82

 

Granted

 

 

192,261

 

 

 

61.46

 

Forfeited

 

 

(24,980

)

 

 

45.54

 

Cancelled

 

 

(41,399

)

 

 

57.09

 

Vested and settled

 

 

(222,019

)

 

 

32.39

 

Vested and non-vested at December 31, 2019

 

 

626,321

 

 

 

45.42

 

Granted

 

 

304,604

 

 

 

36.70

 

Forfeited

 

 

(27,778

)

 

 

45.25

 

Cancelled

 

 

(150,542

)

 

 

45.41

 

Vested and settled

 

 

(216,701

)

 

 

39.04

 

Vested and non-vested at December 31, 2020

 

 

535,904

 

 

 

43.06

 

 

 

67


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)

 

The fair value of PSUs granted in 2020, 2019 and 2018 was estimated at the grant date using the Monte Carlo simulation methodology. The Monte Carlo simulation creates artificial futures by generating numerous sample paths of potential outcomes. The following assumptions were used in calculating the fair value of the units granted:

 

 

 

2020

 

 

2019

 

 

2018

 

Dividend yield

 

 

5.338

%

 

 

3.323

%

 

 

3.800

%

Expected volatility 1 year

 

 

32

%

 

 

31

%

 

 

22

%

Expected volatility 3 years

 

 

29

%

 

 

28

%

 

 

26

%

Risk-free interest rate December 31, 2018

 

 

 

 

 

 

 

 

2.23

%

Risk-free interest rate December 31, 2019

 

 

 

 

 

2.85

%

 

 

2.46

%

Risk-free interest rate December 31, 2020

 

 

1.42

%

 

 

2.65

%

 

 

2.61

%

Risk-free interest rate December 31, 2021

 

 

1.26

%

 

 

2.56

%

 

 

 

Risk-free interest rate December 31, 2022

 

 

1.21

%

 

 

 

 

 

 

 

At December 31, 2020, of the total vested and non-vested PSUs, 277,653 are expected to be settled in shares and 258,251 will be settled in cash.

RESTRICTED STOCK UNITS (“RSUs”)

RSUs are granted to Management Committee and non-Management Committee members. These awards will be settled in shares for Management Committee members and in cash for non-Management Committee members, upon completing service conditions. The awards cliff vest after a service period of approximately three years. Additionally, the RSUs are credited with dividend equivalents in the form of additional RSUs when cash dividends are paid on the Company’s stock. The grant date fair value of RSUs is equal to the market value of the Company’s stock on the date the awards are granted.

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

average grant

 

RSUs

 

Number of units

 

 

date fair value

 

 

 

 

 

 

 

$

 

Non-vested at December 31, 2017

 

 

460,663

 

 

 

38.56

 

Granted/issued

 

 

157,502

 

 

 

44.04

 

Forfeited

 

 

(27,251

)

 

 

39.91

 

Vested and settled

 

 

(135,323

)

 

 

42.54

 

Non-vested at December 31, 2018

 

 

455,591

 

 

 

39.16

 

Granted/issued

 

 

156,417

 

 

 

51.07

 

Forfeited

 

 

(21,203

)

 

 

42.86

 

Vested and settled

 

 

(174,353

)

 

 

34.96

 

Non-vested at December 31, 2019

 

 

416,452

 

 

 

45.20

 

Granted/issued

 

 

231,012

 

 

 

33.26

 

Forfeited

 

 

(19,521

)

 

 

41.05

 

Vested and settled

 

 

(147,753

)

 

 

40.21

 

Non-vested at December 31, 2020

 

 

480,190

 

 

 

41.16

 

 

At December 31, 2020, of the total non-vested RSUs, 229,731 are expected to be settled in shares and 250,459 will be settled in cash.


68


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)

 

DEFERRED SHARE UNITS

DSUs are granted to the Company’s Directors. The DSUs granted to the Directors vest immediately on the grant date. The DSUs are credited with dividend equivalents in the form of additional DSUs when cash dividends are paid on the Company’s stock. For Directors’ DSUs, the Company will deliver at the option of the holder either one share of common stock or the cash equivalent of the fair market value on settlement of each outstanding DSU (including dividend equivalents accumulated) upon termination of service. Directors who attained the share ownership requirements may elect to receive the equity component of their annual retainer in DSUs that may be settled in either cash or stock one year after the grant date. The grant date fair value of DSU awards is equal to the market value of the Company’s stock on the date the awards are granted.

Management Committee members may elect to defer awards earned under another program into DSUs. In 2020, 0 vested awards were deferred to DSUs (2019 – nil; 2018 – nil).

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

average grant

 

DSUs

 

Number of units

 

 

date fair value

 

 

 

 

 

 

 

$

 

Vested at December 31, 2017

 

 

272,234

 

 

 

29.55

 

Granted/issued

 

 

31,691

 

 

 

44.64

 

Settled

 

 

(9,752

)

 

 

40.95

 

Vested at December 31, 2018

 

 

294,173

 

 

 

30.79

 

Granted/issued

 

 

35,596

 

 

 

41.32

 

Settled

 

 

(12,606

)

 

 

43.90

 

Vested at December 31, 2019

 

 

317,163

 

 

 

31.45

 

Granted/issued

 

 

48,943

 

 

 

25.11

 

Settled

 

 

(10,873

)

 

 

40.96

 

Vested at December 31, 2020

 

 

355,233

 

 

 

30.29

 

 

NON-QUALIFIED STOCK OPTIONS

Stock options are granted to Management Committee and non-Management Committee members. The stock options vest at various dates up to February 20, 2021 subject to service conditions. The options expire at various dates no later than seven years from the date of grant. In 2020 and 2019, 0 stock options were granted.

The fair value of the stock options granted in 2018 was estimated at the grant date using a Black-Scholes based option pricing model or an option pricing model that incorporated the market conditions when applicable. The following assumptions were used in calculating the fair value of the options granted:

 

 

 

2018

 

 

Dividend yield

 

 

3.27

%

 

Expected volatility

 

 

29

%

 

Risk-free interest rate

 

 

2.62

%

 

Expected life

 

4.5 years

 

 

Strike price

 

$

43.66

 

 

 

The grant date fair value of the non-qualified options granted in 2018 was $8.65.

69


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)

 

 

 

 

 

 

 

 

Weighted average

 

 

Weighted average

 

 

Aggregate intrinsic

 

 

 

Number

 

 

exercise

 

 

remaining life

 

 

value

 

OPTIONS

 

of options

 

 

price

 

 

(in years)

 

 

(in millions)

 

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

Outstanding at December 31, 2017

 

 

563,065

 

 

 

44.46

 

 

 

4.1

 

 

 

3.6

 

Granted

 

 

104,086

 

 

 

43.66

 

 

 

6.2

 

 

 

 

Exercised

 

 

(147,397

)

 

 

39.42

 

 

 

 

 

 

 

Forfeited/expired

 

 

(6,102

)

 

 

50.05

 

 

 

 

 

 

 

Outstanding at December 31, 2018

 

 

513,652

 

 

 

45.68

 

 

 

3.6

 

 

 

0.1

 

Exercisable at December 31, 2018

 

 

303,055

 

 

 

49.15

 

 

 

2.3

 

 

 

 

Outstanding at December 31, 2018

 

 

513,652

 

 

 

45.68

 

 

 

3.6

 

 

 

0.1

 

Exercised

 

 

(88,682

)

 

 

39.46

 

 

 

 

 

 

 

Forfeited/expired

 

 

(3,616

)

 

 

53.13

 

 

 

 

 

 

 

Outstanding at December 31, 2019

 

 

421,354

 

 

 

46.92

 

 

 

2.5

 

 

 

0.1

 

Exercisable at December 31, 2019

 

 

316,530

 

 

 

48.44

 

 

 

1.8

 

 

 

0.1

 

Outstanding at December 31, 2019

 

 

421,354

 

 

 

46.92

 

 

 

2.5

 

 

 

0.1

 

Forfeited/expired

 

 

(15,030

)

 

 

43.09

 

 

 

 

 

 

 

Outstanding at December 31, 2020

 

 

406,324

 

 

 

47.07

 

 

 

1.6

 

 

 

 

Exercisable at December 31, 2020

 

 

371,622

 

 

 

47.38

 

 

 

1.4

 

 

 

 

The total intrinsic value of options exercised in 2019 and 2018 was $1 million and $1 million, respectively. Based on the Company’s closing year-end stock price of $31.65 (2019 – $38.24; 2018 – $35.13), the aggregate intrinsic value of options outstanding and options exercisable is nil.

For the year ended December 31, 2020, stock-based compensation expense recognized in the Company’s results from continuing and discontinued operations was $7 million (2019 – $22 million; 2018 – $10 million) for all outstanding awards. Compensation costs not yet recognized amounted to $15 million (2019 – $16 million; 2018 – $17 million) and will be recognized over the average remaining service period of approximately 14 months. The aggregate value of liability awards settled in 2020 was $6 million (2019 – $12 million; 2018 –$8 million). The total fair value of equity awards settled in 2020 was $6 million (2019 – $11 million; 2018 – $6 million), representing the fair value at the time of settlement. The fair value at the grant date for these settled equity awards was $7 million (2019 – $6 million; 2018 – $7 million). Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

CLAWBACK FOR FINANCIAL REPORTING MISCONDUCT

If a participant in the Omnibus Plan knowingly or grossly negligently engages in financial reporting misconduct, then all awards and gains from the exercise of options in the 12 months prior to the date the misleading financial statements were issued as well as any awards that vested based on the misleading financial statements will be disgorged to the Company. In addition, the Company may cancel or reduce, or require a participant to forfeit and disgorge to the Company or reimburse the Company for, any awards granted or vested, and bonus granted or paid, and any gains earned or accrued, due to the exercise, vesting or settlement of awards or sale of any common stock, to the extent permitted or required by, or pursuant to any Company policy implemented as required by applicable law, regulation or stock exchange rule as may from time to time be in effect.

 

 

70


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 6.

 

EARNINGS (LOSS) PER COMMON SHARE

The calculation of basic (loss) earnings per common share is based on the weighted average number of Domtar common shares outstanding during the year. The calculation for diluted (loss) earnings per common share recognizes the effect of all potential dilutive common securities.

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

 

 

 

Year ended

 

 

Year ended

 

 

Year ended

 

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

(Loss) earnings from continuing operations

 

$

(145

)

 

$

85

 

 

$

281

 

Earnings (loss) from discontinued operations, net of taxes

 

$

18

 

 

$

(1

)

 

$

2

 

Net (loss) earnings

 

$

(127

)

 

$

84

 

 

$

283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding (millions)

 

 

55.4

 

 

 

61.2

 

 

 

62.9

 

Effect of dilutive securities (millions)

 

 

 

 

 

0.2

 

 

 

0.2

 

Weighted average number of diluted common shares

   outstanding (millions)

 

 

55.4

 

 

 

61.4

 

 

 

63.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

   (Loss) earnings from continuing operations

 

$

(2.62

)

 

$

1.39

 

 

$

4.47

 

   Earnings (loss) from discontinued operations

 

$

0.33

 

 

$

(0.02

)

 

$

0.03

 

   Basic net (loss) earnings per common share

 

$

(2.29

)

 

$

1.37

 

 

$

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

   (Loss) earnings from continuing operations

 

$

(2.62

)

 

$

1.39

 

 

$

4.45

 

   Earnings (loss) from discontinued operations

 

$

0.33

 

 

$

(0.02

)

 

$

0.03

 

   Diluted net (loss) earnings per common share

 

$

(2.29

)

 

$

1.37

 

 

$

4.48

 

 

The following table provides the securities that could potentially dilute basic (loss) earnings per common share in the future, but were not included in the computation of diluted (loss) earnings per common share because to do so would have been anti-dilutive:

 

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

Options to purchase common shares

 

 

406,324

 

 

 

324,413

 

 

 

227,221

 

 

 

71


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 7.

 

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 year ended December 31, 2020, the related pension expense was $39 million (2019 – $39 million; 2018 – $46 million).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. that are not grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension plans to certain senior management employees.

Related pension and other post-retirement plan expenses and the corresponding obligations are actuarially determined using management’s most probable assumptions.

The Company’s pension plan funding policy is to contribute annually the amount required to provide for benefits earned in the year and to fund solvency deficiencies, funding shortfalls and past service obligations over periods not exceeding those permitted by the applicable regulatory authorities. Past service obligations primarily arise from improvements to plan benefits. The other post-retirement benefit plans are not funded, and contributions are made annually to cover benefit payments.

The Company expects to contribute a minimum total amount of $13 million in 2021 compared to $15 million in 2020 (2019 – $17 million; 2018 – $57 million) to the pension plans. The Company expects to contribute a minimum total amount of $4 million in 2021 compared to $4 million in 2020 (2019 – $4 million; 2018 – $4 million) to the other post-retirement benefit plans.

 

72


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

 

CHANGE IN PROJECTED BENEFIT OBLIGATION

The following table represents the change in the projected benefit obligation as of December 31, 2020 and December 31, 2019, the measurement date for each year:

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension

 

 

Other post-retirement

 

 

Pension

 

 

Other post-retirement

 

 

 

plans

 

 

benefit plans

 

 

plans

 

 

benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Projected benefit obligation at beginning of year

 

 

1,425

 

 

 

63

 

 

 

1,557

 

 

 

62

 

Service cost for the year

 

 

29

 

 

 

1

 

 

 

29

 

 

 

1

 

Interest expense

 

 

39

 

 

 

2

 

 

 

57

 

 

 

2

 

Plan participants' contributions

 

 

6

 

 

 

 

 

 

6

 

 

 

 

Actuarial loss (gain)

 

 

127

 

 

 

2

 

 

 

170

 

 

 

(1

)

Plan amendments

 

 

2

 

 

 

 

 

 

 

 

 

 

Benefits paid

 

 

(67

)

 

 

 

 

 

(96

)

 

 

 

Direct benefit payments

 

 

(3

)

 

 

(4

)

 

 

(4

)

 

 

(4

)

Acquisition of business

 

 

 

 

 

1

 

 

 

 

 

 

 

Curtailment (1)

 

 

(1

)

 

 

 

 

 

 

 

 

 

Settlement (2)

 

 

(15

)

 

 

 

 

 

(348

)

 

 

 

Effect of foreign currency exchange rate change

 

 

24

 

 

 

2

 

 

 

54

 

 

 

3

 

Projected benefit obligation at end of year

 

 

1,566

 

 

 

67

 

 

 

1,425

 

 

 

63

 

 

During 2020 and 2019, net actuarial losses increased the projected benefit obligation due to the decrease in discount rates.

 

The accumulated benefit obligation of the pension plans at December 31, 2020 and 2019 was $1,516 million and $1,379 million, respectively.

CHANGE IN FAIR VALUE OF ASSETS

The following table represents the change in the fair value of assets, as of December 31, 2020 and December 31, 2019, reflecting the actual return on plan assets, the contributions and the benefits paid for each year:

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

Pension plans

 

 

Pension plans

 

 

 

$

 

 

$

 

Fair value of assets at beginning of year

 

 

1,465

 

 

 

1,579

 

Actual return on plan assets

 

 

166

 

 

 

253

 

Employer contributions

 

 

15

 

 

 

17

 

Plan participants' contributions

 

 

6

 

 

 

6

 

Benefits paid

 

 

(70

)

 

 

(100

)

Settlement (2)

 

 

(15

)

 

 

(348

)

Effect of foreign currency exchange rate change

 

 

27

 

 

 

58

 

Fair value of assets at end of year

 

 

1,594

 

 

 

1,465

 

 

 

(1)

Curtailment accounting was triggered following the restructuring activities that occurred in 2020. The impact was estimated as of July 31, 2020, based on the information known at that time and was remeasured on December 31, 2020.

 

 

(2)

Settlement accounting was triggered as of December 31, 2020, following the restructuring activities that occurred in 2020, to reflect lump sums paid in 2020 in excess of the sum of service cost and interest cost.

73


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

 

 

(2)

On November 26, 2019, the Company entered into agreements with Sun Life Assurance Company of Canada to purchase group annuity buy-out contracts and transfer approximately $272 million (CDN $360 million) of its Ontario, Canada defined benefit plans’ projected benefit obligations. The transactions closed on December 5, 2019 and were funded with pension plan assets. Additionally, the Company entered into agreements with existing insurers to convert $76 million (CDN $101 million) of existing buy-in annuity contracts to buy-out annuity contracts to complete the full transfer of these obligations. These annuity buy-out transactions transferred responsibility for pension benefits for approximately 1,265 retirees and their beneficiaries. Settlement accounting rules required a remeasurement of the plans as of November 26, 2019 and the Company recognized a non-cash pension settlement charge of $30 million before tax in the fourth quarter of 2019.

 

INVESTMENT POLICIES AND STRATEGIES OF THE PLAN ASSETS

The assets of the pension plans are held by a number of independent trustees and are accounted for separately in the Company’s pension funds. The investment strategy for the assets in the pension plans is to maintain a diversified portfolio of assets, invested in a prudent manner to maintain the security of funds while maximizing returns within the guidelines provided in the investment policy. Diversification of the pension plans’ holdings is maintained in order to reduce the pension plans’ annual return variability, reduce market and credit exposure to any single asset and to any single component of the capital markets, reduce exposure to unexpected inflation, enhance the long-term risk-adjusted return potential of the pension plans and reduce funding risk.

Over the long-term, the performance of the pension plans is primarily determined by the long-term asset mix decisions. To manage the long-term risk of not having sufficient funds to match the obligations of the pension plans, the Company conducts asset/liability studies. These studies lead to the recommendation and adoption of a long-term asset mix target that sets the expected rate of return and reduces the risk of adverse consequences to the plans from increases in liabilities and decreases in assets. In identifying the asset mix target that would best meet the investment objectives, consideration is given to various factors, including (a) each plan’s characteristics, (b) the duration of each plan’s liabilities, (c) the solvency and going concern financial position of each plan and their sensitivity to changes in interest rates and inflation, and (d) the long-term return and risk expectations for key asset classes.

The investments of each plan can be done directly through cash investments in equities or bonds or indirectly through derivatives or pooled funds. The use of derivatives must be in accordance with an approved mandate and cannot be used for speculative purposes.

The Company’s pension funds are not permitted to directly own any of the Company’s shares or debt instruments.

The following table shows the allocation of the plan assets, based on the fair value of the assets held and the target allocation for 2020:

 

 

 

 

 

 

 

Percentage of

 

 

Percentage of

 

 

 

 

 

 

 

plan assets at

 

 

plan assets at

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

 

Target allocation

 

 

2020

 

 

2019

 

Fixed income

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

0% – 10%

 

 

 

2

%

 

 

2

%

Bonds

 

40% – 50%

 

 

 

42

%

 

 

53

%

Insurance contracts

 

11%

 

 

 

11

%

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Canadian Equity

 

3% – 10%

 

 

 

6

%

 

 

6

%

U.S. Equity

 

9% – 19%

 

 

 

15

%

 

 

15

%

International Equity

 

18% – 28%

 

 

 

24

%

 

 

24

%

Total (1)

 

 

 

 

 

 

100

%

 

 

100

%

 

(1)

Approximately 72% of the pension plans' assets relate to Canadian plans, 28% relate to U.S. plans.

74


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

 

RECONCILIATION OF FUNDED STATUS TO AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS

The following table presents the difference between the fair value of assets and the actuarially determined projected benefit obligation. This difference is also referred to as either the deficit or surplus, as the case may be, or the funded status of the plans. The table further reconciles the amount of the surplus or deficit (funded status) to the net amount recognized in the Consolidated Balance Sheets.

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension

 

 

Other post-retirement

 

 

Pension

 

 

Other post-retirement

 

 

 

plans

 

 

benefit plans

 

 

plans

 

 

benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Projected benefit obligation at end of year

 

 

(1,566

)

 

 

(67

)

 

 

(1,425

)

 

 

(63

)

Fair value of assets at end of year

 

 

1,594

 

 

 

 

 

 

1,465

 

 

 

 

Funded status

 

 

28

 

 

 

(67

)

 

 

40

 

 

 

(63

)

 

The funded status includes $61 million of projected benefit obligation ($55 million at December 31, 2019) related to supplemental unfunded defined benefit and defined contribution plans.

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension

 

 

Other post-retirement

 

 

Pension

 

 

Other post-retirement

 

 

 

plans

 

 

benefit plans

 

 

plans

 

 

benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Trade and other payables (Note 17)

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

Other liabilities and deferred credits (Note 20)

 

 

(124

)

 

 

(62

)

 

 

(101

)

 

 

(58

)

Other assets (Note 15)

 

 

152

 

 

 

 

 

 

141

 

 

 

 

Net amount recognized in the Consolidated

   Balance Sheets

 

 

28

 

 

 

(67

)

 

 

40

 

 

 

(63

)

 

The following table presents the pre-tax amounts included in Other comprehensive income (loss):

 

 

 

Year ended

 

 

Year ended

 

 

Year ended

 

 

 

December 31, 2020

 

 

December 31, 2019

 

 

December 31,