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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period from ________to_______

COMMISSION FILE NUMBER 001-33164

 

DOMTAR CORPORATION

(Exact name of registrant as specified in its charter)

 

delaware

 

20-5901152

(State of Incorporation)

 

(I.R.S. Employer

Identification No.)

234 Kingsley Park Drive, Fort Mill, SC 29715

(Address of principal executive offices)

(zip code)

(803) 802-7500

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common stock traded on the New York Stock Exchange; trading symbol UFS.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

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

 

 

 


 

 

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2021

INDEX

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

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

3

 

 

 

 

CONSOLIDATED BALANCE SHEETS

4

 

 

 

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

5

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

6

 

 

 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

 

 

 

ITEM 2.

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

38

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

47

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

47

 

 

 

PART II

OTHER INFORMATION

47

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

47

 

 

 

ITEM 1A.

RISK FACTORS

47

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

48

 

 

 

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

48

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

48

 

 

 

ITEM 5.

OTHER INFORMATION

48

 

 

 

ITEM 6.

EXHIBITS

49

 

 

 

 

 


 

 

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

 

DOMTAR CORPORATION

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

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

For the three months ended

 

 

March 31,

 

 

March 31,

 

 

2021

 

 

2020

 

 

(Unaudited)

 

 

$

 

 

$

 

Sales

 

944

 

 

 

1,031

 

Operating expenses

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

809

 

 

 

906

 

Depreciation and amortization

 

54

 

 

 

58

 

Selling, general and administrative

 

64

 

 

 

66

 

Impairment of long-lived assets (NOTE 11)

 

6

 

 

 

 

Closure and restructuring costs (NOTE 11)

 

3

 

 

 

 

Asset conversion costs (NOTE 11)

 

8

 

 

 

 

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

 

(2

)

 

 

2

 

 

 

942

 

 

 

1,032

 

Operating income (loss)

 

2

 

 

 

(1

)

Interest expense, net

 

15

 

 

 

14

 

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

 

(6

)

 

 

(4

)

Loss before income taxes and equity loss

 

(7

)

 

 

(11

)

Income tax expense (NOTE 8)

 

 

 

 

3

 

Equity method investment loss, net of taxes

 

 

 

 

1

 

Loss from continuing operations

 

(7

)

 

 

(15

)

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

 

(22

)

 

 

20

 

Net (loss) earnings

 

(29

)

 

 

5

 

Per common share (in dollars) (NOTE 5)

 

 

 

 

 

 

 

Basic net (loss) earnings

 

 

 

 

 

 

 

Loss from continuing operations

 

(0.13

)

 

 

(0.27

)

(Loss) earnings from discontinued operations

 

(0.41

)

 

 

0.36

 

Basic net (loss) earnings

 

(0.54

)

 

 

0.09

 

Diluted net (loss) earnings

 

 

 

 

 

 

 

Loss from continuing operations

 

(0.13

)

 

 

(0.27

)

(Loss) earnings from discontinued operations

 

(0.41

)

 

 

0.36

 

Diluted net (loss) earnings

 

(0.54

)

 

 

0.09

 

Weighted average number of common shares outstanding (millions)

 

 

 

 

 

 

 

Basic

 

53.5

 

 

 

56.1

 

Diluted

 

53.5

 

 

 

56.2

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

 

 

 

0.46

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

(29

)

 

 

5

 

Other comprehensive income (loss) (NOTE 12):

 

 

 

 

 

 

 

Net derivative gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

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

 

9

 

 

 

(49

)

Less: Reclassification adjustment for (gains) losses included in

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

 

(2

)

 

 

7

 

Foreign currency translation adjustments

 

72

 

 

 

(74

)

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

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

 

5

 

 

 

1

 

Other comprehensive income (loss)

 

84

 

 

 

(115

)

Comprehensive income (loss)

 

55

 

 

 

(110

)

 

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

 

3

 


 

 

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

At

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

671

 

 

 

309

 

Receivables, less allowances of $5 and $6

 

 

450

 

 

 

380

 

Inventories (NOTE 9)

 

 

600

 

 

 

630

 

Prepaid expenses

 

 

53

 

 

 

50

 

Income and other taxes receivable

 

 

49

 

 

 

54

 

Current assets held for sale (NOTE 3)

 

 

 

 

 

1,133

 

Total current assets

 

 

1,823

 

 

 

2,556

 

Property, plant and equipment, net

 

 

2,022

 

 

 

2,023

 

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

 

 

55

 

 

 

59

 

Intangible assets, net

 

 

29

 

 

 

29

 

Other assets

 

 

192

 

 

 

189

 

Total assets

 

 

4,121

 

 

 

4,856

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

4

 

 

 

 

Trade and other payables

 

 

504

 

 

 

484

 

Income and other taxes payable

 

 

16

 

 

 

15

 

Operating lease liabilities due within one year (NOTE 10)

 

 

19

 

 

 

20

 

Long-term debt due within one year

 

 

301

 

 

 

13

 

Current liabilities held for sale (NOTE 3)

 

 

 

 

 

295

 

Total current liabilities

 

 

844

 

 

 

827

 

Long-term debt

 

 

503

 

 

 

1,084

 

Operating lease liabilities (NOTE 10)

 

 

47

 

 

 

50

 

Deferred income taxes and other

 

 

324

 

 

 

321

 

Other liabilities and deferred credits

 

 

312

 

 

 

314

 

Commitments and contingencies (NOTE 14)

 

 

 

 

 

 

 

 

Shareholders' equity (NOTE 13)

 

 

 

 

 

 

 

 

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

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

 

 

1

 

 

 

1

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

1,493

 

 

 

1,717

 

Retained earnings

 

 

817

 

 

 

846

 

Accumulated other comprehensive loss

 

 

(220

)

 

 

(304

)

Total shareholders' equity

 

 

2,091

 

 

 

2,260

 

Total liabilities and shareholders' equity

 

 

4,121

 

 

 

4,856

 

 

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

 

 

 

4

 


 

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

 

Issued and outstanding common shares

(millions of shares)

 

 

Common stock, at par

 

 

Additional paid-in capital

 

 

Retained

earnings

 

 

Accumulated other comprehensive loss

 

 

Total shareholders' equity

 

 

 

(Unaudited)

 

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at December 31, 2020

 

 

55.2

 

 

 

1

 

 

 

1,717

 

 

 

846

 

 

 

(304

)

 

 

2,260

 

Stock-based compensation, net of tax

 

 

0.1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(29

)

 

 

 

 

 

(29

)

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

Less: Reclassification adjustment for gains

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72

 

 

 

72

 

Change in unrecognized gains and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

5

 

Stock repurchase

 

 

(5.1

)

 

 

 

 

 

(223

)

 

 

 

 

 

 

 

 

(223

)

Balance at March 31, 2021

 

 

50.2

 

 

 

1

 

 

 

1,493

 

 

 

817

 

 

 

(220

)

 

 

2,091

 

 

 

 

 

For the three months ended

 

 

 

March 31, 2020

 

 

 

Issued and outstanding common shares

(millions of shares)

 

 

Common stock, at par

 

 

Additional paid-in capital

 

 

Retained

earnings

 

 

Accumulated other comprehensive loss

 

 

Total shareholders' equity

 

 

 

(Unaudited)

 

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at December 31, 2019

 

 

56.9

 

 

 

1

 

 

 

1,770

 

 

 

998

 

 

 

(393

)

 

 

2,376

 

Stock-based compensation, net of tax

 

 

0.1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Net earnings

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Net derivative losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses arising during the period,

   net of tax of $16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(49

)

 

 

(49

)

Less: Reclassification adjustment for losses

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

7

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Change in unrecognized gains and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Stock repurchase

 

 

(1.8

)

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

 

(59

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Balance at March 31, 2020

 

 

55.2

 

 

 

1

 

 

 

1,710

 

 

 

978

 

 

 

(508

)

 

 

2,181

 

 

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

 

 

 

5

 


 

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

 

 

For the three months ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

Net (loss) earnings

 

 

(29

)

 

 

5

 

Adjustments to reconcile net (loss) earnings to cash flows

   from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

64

 

 

 

72

 

Deferred income taxes and tax uncertainties (NOTE 8)

 

 

(4

)

 

 

1

 

Impairment of long-lived assets (NOTE 11)

 

 

6

 

 

 

 

Net loss on disposition of discontinued operations (NOTE 3)

 

 

32

 

 

 

 

Stock-based compensation expense

 

 

2

 

 

 

1

 

Equity method investment loss, net

 

 

 

 

 

1

 

Other

 

 

2

 

 

 

 

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

 

 

 

 

 

 

 

 

Receivables

 

 

(68

)

 

 

(28

)

Inventories

 

 

32

 

 

 

28

 

Prepaid expenses

 

 

3

 

 

 

(5

)

Trade and other payables

 

 

(6

)

 

 

(16

)

Income and other taxes

 

 

4

 

 

 

39

 

Difference between employer pension and

   other post-retirement contributions and

   pension and other post-retirement expense

 

 

(3

)

 

 

(1

)

Other assets and other liabilities

 

 

(2

)

 

 

(9

)

Cash flows from operating activities

 

 

33

 

 

 

88

 

Investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(51

)

 

 

(62

)

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

 

 

897

 

 

 

 

Cash flows provided from (used for) investing activities

 

 

846

 

 

 

(62

)

Financing activities

 

 

 

 

 

 

 

 

Dividend payments

 

 

 

 

 

(26

)

Stock repurchase

 

 

(223

)

 

 

(59

)

Net change in bank indebtedness

 

 

4

 

 

 

(10

)

Change in revolving credit facility

 

 

 

 

 

140

 

Proceeds from receivables securitization facility

 

 

 

 

 

25

 

Repayments of long-term debt

 

 

(294

)

 

 

 

Other

 

 

(3

)

 

 

(3

)

Cash flows (used for) provided from financing activities

 

 

(516

)

 

 

67

 

Net increase in cash and cash equivalents

 

 

363

 

 

 

93

 

Impact of foreign exchange on cash

 

 

(1

)

 

 

(2

)

Cash and cash equivalents at beginning of period

 

 

309

 

 

 

61

 

Cash and cash equivalents at end of period

 

 

671

 

 

 

152

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Net cash payments (refund) for:

 

 

 

 

 

 

 

 

Interest

 

 

18

 

 

 

17

 

Income taxes

 

 

(7

)

 

 

(25

)

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

 

 

6

 


 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1

BASIS OF PRESENTATION

8

 

 

 

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

9

 

 

 

NOTE 3

DISCONTINUED OPERATIONS

10

 

 

 

NOTE 4

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

13

 

 

 

NOTE 5

(LOSS) EARNINGS PER COMMON SHARE

17

 

 

 

NOTE 6

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

18

 

 

 

NOTE 7

OTHER OPERATING (INCOME) LOSS, NET

19

 

 

 

NOTE 8

INCOME TAXES

20

 

 

 

NOTE 9

INVENTORIES

21

 

 

 

NOTE 10

LEASES

22

 

 

 

NOTE 11

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

24

 

 

 

NOTE 12

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

25

 

 

 

NOTE 13

SHAREHOLDERS’ EQUITY

27

 

 

 

NOTE 14

COMMITMENTS AND CONTINGENCIES

28

 

 

 

NOTE 15

SEGMENT DISCLOSURES

31

 

 

 

NOTE 16

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

32

 

 

 

 

 

 

 

 

 

 

 

 

7

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 1.

_________________

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first three months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission. The December 31, 2020 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

 

 

8

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

 

FUTURE ACCOUNTING CHANGES

 

TRANSITION AWAY FROM INTERBANK OFFERED RATES

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

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

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

 

 

9

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 3.

 

DISCONTINUED OPERATIONS

Sale of Personal Care business

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

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

 

Major components of (loss) earnings from discontinued operations:

 

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

$

 

 

$

 

Sales

 

 

154

 

 

 

266

 

Operating expenses

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

111

 

 

 

196

 

Depreciation and amortization

 

 

10

 

 

 

14

 

Selling, general and administrative

 

 

24

 

 

 

36

 

Closure and restructuring costs

 

 

1

 

 

 

 

Other operating loss, net

 

 

1

 

 

 

 

 

 

 

147

 

 

 

246

 

Operating income

 

 

7

 

 

 

20

 

Net loss on disposition of discontinued operations

 

 

(32

)

 

 

 

(Loss) earnings from discontinued operations before income taxes

 

 

(25

)

 

 

20

 

Income tax benefit

 

 

(3

)

 

 

 

Net (loss) earnings from discontinued operations

 

 

(22

)

 

 

20

 

 

 


10

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

 

 

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

 

 

 

At

 

 

 

December 31,

 

 

 

2020

 

 

 

$

 

Assets

 

 

 

 

Receivables

 

 

110

 

Inventories

 

 

138

 

Prepaid expenses

 

 

3

 

Income and other taxes receivable

 

 

3

 

Property, plant and equipment, net

 

 

351

 

Operating lease right-of-use assets

 

 

15

 

Intangible assets, net (2)(3)

 

 

554

 

Other assets

 

 

2

 

Total assets

 

 

1,176

 

Loss on classification as held for sale

 

 

(43

)

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

Consolidated Balance Sheets (1)

 

 

1,133

 

 

 

 

 

 

Liabilities

 

 

 

 

Trade and other payables

 

 

128

 

Income and other taxes payable

 

 

12

 

Operating lease liabilities due within one year

 

 

8

 

Long-term debt

 

 

1

 

Operating lease liabilities

 

 

8

 

Deferred income taxes and other

 

 

130

 

Other liabilities and deferred credits

 

 

8

 

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

Consolidated Balance Sheets (1)

 

 

295

 

 

 

(1)

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

 

(2)

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

 

(3)

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

 

Cash Flows from Discontinued Operations:

 

 

 

For the three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

$

 

 

$

 

Cash flows from operating activities

 

 

16

 

 

 

6

 

Cash flows used for investing activities

 

 

(3

)

 

 

(8

)

 

 

 

 

 

 

 

 

 

 


11

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)

 

 

Use of proceeds

 

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

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

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

 

 

 

12

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 4.

_________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, interest rates and prices of the Company’s common stock with regard to the Company’s stock-based compensation program. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of March 31, 2021, two customers located in the U.S. represented 13% or $59 million, and 11% or $51 million, respectively, of the Company’s receivables (December 31, 2020 – two customers located in the U.S. represented 15% or $58 million, and 12% or $46 million, respectively).

The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.

INTEREST RATE RISK

The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, bank indebtedness, revolving credit facility and securitization, term loan and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.

EQUITY RISK

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

COST RISK

Cash flow hedges:

The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next 33 months.

 

13

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

 

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of March 31, 2021 to hedge forecasted purchases:

 

Commodity

 

Notional contractual quantity

under derivative contracts

MMBtu(2)

 

 

Notional contractual value

under derivative contracts

(in millions of dollars)

 

Percentage of forecasted

purchases under

derivative contracts

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021 (1)

 

 

6,575,000

 

 

 

$

19

 

 

 

37%

 

2022

 

 

9,270,000

 

 

 

$

25

 

 

 

35%

 

2023

 

 

4,210,000

 

 

 

$

12

 

 

 

15%

 

 

(1)

Represents the remaining nine months of 2021

(2)

MMBtu: Millions of British thermal units

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

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States and Canada. As a result, it is exposed to movements in foreign currency exchange rates in Canada. Moreover, certain assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates.

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

The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of March 31, 2021 to hedge forecasted purchases and sales:

 

Currency exposure hedged

 

Year of

maturity

 

Notional

contractual value

 

Percentage of

forecasted net

exposures under

contracts

 

 

Average

Protection rate

 

Average

Obligation rate