The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(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, 2021, as filed with the Securities and Exchange Commission. The December 31, 2021 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
On November 30, 2021, Paper Excellence completed the acquisition of all the outstanding common shares of Domtar Corporation by means of a merger of Pearl Merger Sub (a wholly-owned subsidiary) with and into the Company with the Company continuing as the surviving corporation and as a subsidiary of Paper Excellence (the “Merger”). See Note 4 “Acquisition of business” for additional information on the Merger.
For purposes of the Company’s financial statement presentation, Pearl Merger Sub was determined to be the accounting acquirer in the Merger which was accounted for using the acquisition method of accounting. The application of the acquisition method of accounting resulted in a new basis of accounting basis of the Company’s assets and liabilities which are measured at fair value as of the date of the Merger.
The Company’s consolidated financial statements for the period following the closing of the Merger are labeled “Successor” and reflect the Company’s assets and liabilities at their fair values. All periods prior to the closing of the Merger reflect the historical accounting basis of the Company’s assets and liabilities and are labeled “Predecessor.”
As a condition to obtain the approval of the Merger from the Canadian Competition Bureau, the Company was required to commit to the divestiture of its Kamloops, British Columbia production facility within a short period of time following the Merger.
Certain reclassifications have been made to the prior years’ presentation to conform to the current year presentation.
8
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(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, “Reference Rate Reform (Topic 848): 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.
As of March 31, 2022, the Company has not yet elected any optional expedients provided in the standard. The Company will apply the accounting relief, if necessary, as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. 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, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3.
DISCONTINUED OPERATIONS
Mandated sale of Kamloops, British Columbia mill
On November 30, 2021, Paper Excellence completed the acquisition of all the outstanding shares of Domtar Corporation. The acquisition was subject to the review by the Canadian Competition Bureau, which outlined certain stipulations in a consent agreement before providing their final approval.
The consent agreement filed by the Canadian Commissioner of Competition (“Commissioner”) with the Competition Tribunal fulfilled the final condition to the closing of the business combination. According to the consent agreement, following the closing of the business combination, Domtar’s pulp mill in Kamloops, British Columbia must be sold in order to resolve the Commissioner’s concerns about the business combination’s implications on the purchase of wood fiber from the Thompson/Okanagan region in British Columbia.
The mill will be sold to an independent purchaser to be approved by the Commissioner.
The results of operations of Domtar’s pulp mill in Kamloops, British Columbia were reclassified to discontinued operations. 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 for each period presented. The Consolidated Statements of Cash Flows were not reclassified to reflect discontinued operations.
10
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DISCONTINUED OPERATIONS (CONTINUED)
Sale of Personal Care business
On March 1, 2021, Domtar completed the 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 of $130 million. Domtar received a net amount of $897 million, which represents the selling price minus the 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 Earnings (loss) from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings (Loss) and Comprehensive Income 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:
|
Successor |
|
|
Predecessor |
|
|
For the three months ended |
|
|
March 31, |
|
|
March 31, |
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
$ |
|
Sales |
|
88 |
|
|
|
227 |
|
Operating expenses |
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
67 |
|
|
|
169 |
|
Depreciation and amortization |
|
— |
|
|
|
14 |
|
Selling, general and administrative |
|
— |
|
|
|
24 |
|
Closure and restructuring costs |
|
— |
|
|
|
1 |
|
Transaction costs |
|
3 |
|
|
|
— |
|
Other operating loss, net |
|
— |
|
|
|
1 |
|
|
|
70 |
|
|
|
209 |
|
Operating income |
|
18 |
|
|
|
18 |
|
Net loss on disposition of discontinued operations |
|
— |
|
|
|
32 |
|
Earnings (loss) from discontinued operations before
income taxes |
|
18 |
|
|
|
(14 |
) |
Income tax expense |
|
5 |
|
|
|
— |
|
Net earnings (loss) from discontinued operations |
|
13 |
|
|
|
(14 |
) |
11
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(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 |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
$ |
|
|
$ |
|
Assets |
|
|
|
|
|
|
|
|
Receivables |
|
|
56 |
|
|
|
50 |
|
Inventories |
|
|
73 |
|
|
|
82 |
|
Long-term assets |
|
|
201 |
|
|
|
155 |
|
Total assets of the disposal group classified as held for sale on the
Consolidated Balance Sheets (1) |
|
|
330 |
|
|
|
287 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Trade and other payables |
|
|
32 |
|
|
|
26 |
|
Income and other taxes payable |
|
|
1 |
|
|
|
— |
|
Long-term debt due within one year |
|
|
1 |
|
|
|
1 |
|
Long-term debt |
|
|
4 |
|
|
|
4 |
|
Deferred income taxes and other |
|
|
— |
|
|
|
27 |
|
Other liabilities and deferred credits |
|
|
5 |
|
|
|
5 |
|
Total liabilities of the disposal group classified as held for sale on the
Consolidated Balance Sheets (1) |
|
|
43 |
|
|
|
63 |
|
|
(1) |
Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company’s Consolidated Balance Sheets. |
Cash Flows from Discontinued Operations:
|
Successor |
|
|
Predecessor |
|
|
For the three months ended |
|
|
March 31, |
|
|
March 31, |
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
$ |
|
Cash flows from operating activities |
|
30 |
|
|
|
15 |
|
Cash flows used for investing activities |
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
12
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 4.
ACQUISITION OF BUSINESS
Acquisition of Domtar Corporation by Paper Excellence
On November 30, 2021, Paper Excellence completed the acquisition of all the outstanding common shares of Domtar Corporation (the “Company”) by means of a merger of Pearl Merger Sub (a wholly-owned subsidiary) with and into the Company with the Company continuing as the surviving corporation and as a subsidiary of Paper Excellence (the “Merger”). On the terms and subject to the conditions set forth in the Merger Agreement, each share of outstanding common stock of the Company was converted into the right to receive $55.50 in cash. The acquisition-date fair value of the consideration transferred totaled $2.796 billion, less cash acquired of $332 million.
Pearl Merger Sub was determined to be the accounting acquirer in the Merger which was accounted for using the acquisition method of accounting. The application of the acquisition method of accounting resulted in a new basis of accounting basis of the Company’s assets and liabilities which are measured at fair value at the acquisition date.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The Company is in the process of obtaining third-party valuations of certain tangible and intangible assets; thus, the provisional measurements of tangible and intangible assets, off-market contracts and deferred income tax assets are subject to change. Purchase adjustments were made related to events or circumstances existing at the acquisition date.
Fair value of net assets acquired at the date of acquisition |
|
|
|
|
|
|
|
|
Receivables |
|
|
|
|
|
$ |
513 |
|
Inventories |
|
|
|
|
|
|
646 |
|
Prepaid expenses |
|
|
|
|
|
|
50 |
|
Income and other taxes receivable |
|
|
|
|
|
|
54 |
|
Property, plant and equipment |
|
|
|
|
|
|
2,404 |
|
Intangible assets |
|
|
|
|
|
|
221 |
|
Customer relationships |
|
|
170 |
|
|
|
|
|
Trade names |
|
|
30 |
|
|
|
|
|
Water rights |
|
|
21 |
|
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
|
|
53 |
|
Other assets |
|
|
|
|
|
|
266 |
|
Assets held for sale |
|
|
|
|
|
|
331 |
|
Total assets |
|
|
|
|
|
|
4,538 |
|
|
|
|
|
|
|
|
|
|
Less: Assumed Liabilities |
|
|
|
|
|
|
|
|
Trade and other payables |
|
|
|
|
|
|
693 |
|
Income and other taxes payable |
|
|
|
|
|
|
16 |
|
Operating lease liabilities (including short-term portion) |
|
|
|
|
|
|
57 |
|
Long-term debt (including short-term portion) |
|
|
|
|
|
|
529 |
|
Deferred income tax liabilities |
|
|
|
|
|
|
519 |
|
Other liabilities and deferred credits |
|
|
|
|
|
|
223 |
|
Liabilities held for sale |
|
|
|
|
|
|
37 |
|
Total liabilities |
|
|
|
|
|
|
2,074 |
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired at the date of acquisition |
|
|
|
|
|
|
2,464 |
|
13
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 4. ACQUISITION OF BUSINESS (CONTINUED)
The preliminary estimated fair value assigned to identifiable intangible assets acquired are determined primarily by using an income approach using a discounted cash flow methodology, which is based on assumptions and estimates made by management. The preliminary estimated fair value of the customer relationship intangible assets was estimated using the multi-period excess earnings method. Management applied significant judgement related to this fair value method, which included the selection of an expected EBITDA margin assumption for the forecast period, contributory asset charges, customer attrition rate and market-participant discount rate assumptions. These significant assumptions are based on company specific information and projections, which are not observable in the market (except for the discount rate assumption) and, therefore, are considered Level 2 and Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.
The preliminary estimated fair value of property, plant and equipment was primarily determined based on management’s preliminary estimate of depreciated replacement cost as further adjusted based on estimated cash flow forecasts. The significant assumptions underlying the fair value are based on company specific information and projections, which are not observable in the market and, therefore, are considered Level 2 and Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.
The preliminary estimated fair value of finished goods was calculated as the estimated selling price, adjusted for costs of the selling effort and a reasonable profit allowance relating to the selling effort. The preliminary estimated fair value of work in process inventory was primarily calculated as the estimated selling price, adjusted for estimated costs to complete the manufacturing, estimated costs of the selling effort, as well as a reasonable profit margin on the remaining manufacturing and selling effort. The preliminary estimated fair value of raw materials and operating and maintenance supplies was determined to approximate the historical carrying value. These significant assumptions are based on company specific information and projections, which are not observable in the market and, therefore, are considered Level 2 and Level 3 measurements. These significant assumptions are forward-looking and could be affected by future changes in economic and market conditions.
For the three months ended March 31, 2022, the Company recognized $3 million of acquisition related costs. These costs are included in the Consolidated Statements of Earnings (Loss) and Comprehensive Income in the line item entitled Transaction costs.
The Predecessor period includes the historical financial information of Pearl Merger Sub prior to the business combination. The businesses, and thus the financial results of the Successor and Predecessor entities, are virtually the same, excluding the impact on certain financial statement line items that were impacted by the Merger mainly:
|
• |
Depreciation and amortization on fair value increments relating to Property, plant and equipment and fair values ascribed to identified intangible assets; |
|
• |
Interest expense and amortization of debt issuance costs relating to additional long-term debt raised by Pearl Merger Sub to effect the Merger; |
|
• |
Merger-related transaction costs; and, |
|
• |
Current and deferred income tax impacts of the above. |
14
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 5.
_________________
DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
HEDGING PROGRAMS
The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices and interest rates. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.
Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The Company does not hold derivative financial instruments for trading purposes.
CREDIT RISK
The Company is exposed to credit risk on accounts receivables 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, 2022, two customers located in the U.S. represented 28% or $138 million, of the Company’s receivables (December 31, 2021 – two customers located in the U.S. represented 28% or $130 million).
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, term loan and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.
COST RISK
Cash flow hedges:
The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive income 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 21 months.
15
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
As of March 31, 2022, the Company hedged 25% and 10% of its forecasted purchases under derivative contracts for 2022 and 2023, respectively. The natural gas derivative contracts were effective as of March 31, 2022.
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 income to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.
As of March 31, 2022, the Company hedged 57%, 25% and 1% of its forecasted net cash exposures under contracts for 2022, 2023 and 2024, respectively. The foreign exchange derivative contracts were effective as of March 31, 2022.
FAIR VALUE MEASUREMENT
The accounting standards for fair value measurements and disclosures establish a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.
|
Level 1 |
Quoted prices in active markets for identical assets or liabilities. |
|
Level 2 |
Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
Level 3 |
Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. |
16
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (b) and (c) below) at March 31, 2022 and December 31, 2021, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
Fair Value of financial instruments at: |
|
March 31, 2022 |
|
|
Quoted prices in
active markets for
identical assets
(Level 1) |
|
|
Significant
observable
inputs
(Level 2) |
|
|
Significant
unobservable
inputs
(Level 3) |
|
|
Balance sheet classification |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Derivatives designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
17 |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
(a) |
Prepaid expenses |
Natural gas swap contracts |
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
(a) |
Prepaid expenses |
Natural gas swap contracts |
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
(a) |
Other assets |
Total Assets |
|
|
36 |
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
(a) |
Trade and other payables |
Total Liabilities |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due
within one year |
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
(b) |
Long-term debt due within
one year |
Long-term debt |
|
|
1,643 |
|
|
|
— |
|
|
|
1,643 |
|
|
|
— |
|
(c) |
Long-term debt |
17
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
Fair Value of financial instruments at: |
|
December 31, 2021 |
|
|
Quoted prices in
active markets for
identical assets
(Level 1) |
|
|
Significant
observable
inputs
(Level 2) |
|
|
Significant
unobservable
inputs
(Level 3) |
|
|
Balance sheet classification |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Derivatives designated as
hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
18 |
|
|
|
— |
|
|
|
18 |
|
|
|
— |
|
(a) |
Prepaid expenses |
Natural gas swap contracts |
|
|
6 |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
(a) |
Prepaid expenses |
Natural gas swap contracts |
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
(a) |
Other assets |
Total Assets |
|
|
26 |
|
|
|
— |
|
|
|
26 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
(a) |
Trade and other payables |
Currency derivatives |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
(a) |
Other liabilities and deferred credits |
Total Liabilities |
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due within
one year |
|
|
259 |
|
|
|
— |
|
|
|
259 |
|
|
|
— |
|
(b) |
Long-term debt due within one year |
Long-term debt |
|
|
1,682 |
|
|
|
— |
|
|
|
1,682 |
|
|
|
— |
|
(c) |
Long-term debt |
(a) |
Fair value of the Company’s derivatives are classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows: |
|
- |
For currency derivatives: Foreign currency forward and option contracts are valued using standard valuation models. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques. |
|
- |
For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates. |
(b) |
Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at March 31, 2022 and December 31, 2021. The carrying value of the Company’s long-term debt due within one year is $7 million and $259 million at March 31, 2022 and December 31, 2021, respectively. |
(c) |
The carrying value of the Company’s long-term debt is $1,682 million and $1,643 million at March 31, 2022 and December 31, 2021, respectively. |
Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.
18
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 6.
_________________
PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company has several defined contribution plans. The pension expense under these plans is equal to the Company’s contribution. For the three months ended March 31, 2022, the pension expense was $12 million (2021 – $9 million).
DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. that are not grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension plans to certain senior management employees.
Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:
|
|
Successor |
|
|
|
For the three months ended |
|
|
|
March 31, 2022 |
|
|
|
Pension plans |
|
|
Other post-retirement benefit plans |
|
|
|
$ |
|
|
$ |
|
Service cost |
|
|
6 |
|
|
|
— |
|
Interest expense |
|
|
9 |
|
|
|
1 |
|
Expected return on plan assets |
|
|
(19 |
) |
|
|
— |
|
Net periodic benefit cost |
|
|
(4 |
) |
|
|
1 |
|
|
|
Predecessor |
|
|
|
For the three months ended |
|
|
|
March 31, 2021 |
|
|
|
Pension plans |
|
|
Other post-retirement benefit plans |
|
|
|
$ |
|
|
$ |
|
Service cost |
|
|
7 |
|
|
|
— |
|
Interest expense |
|
|
8 |
|
|
|
— |
|
Expected return on plan assets |
|
|
(16 |
) |
|
|
— |
|
Amortization of net actuarial loss |
|
|
2 |
|
|
|
— |
|
Net periodic benefit cost |
|
|
1 |
|
|
|
— |
|
The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than the service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statements of Earnings (Loss) and Comprehensive Income.
For the three months ended March 31, 2022, the Company contributed $2 million (2021 – $3 million) to the pension plans and $1 million (2021 – $1 million) to the other post-retirement benefit plans.
19
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 7.
_________________
INCOME TAXES
For the first quarter of 2022, the Company had income tax expense of $3 million, consisting of $1 million of current income tax expense and deferred income tax expense of $2 million. This compares to an income tax benefit of $3 million in the first quarter of 2021, consisting of $8 million of current income tax benefit and a deferred income tax expense of $5 million. The Company made payments, net of income tax refunds, of $2 million during the first quarter of 2022. The effective tax rate was 23% compared with an effective tax rate of 17% in the first quarter of 2021. The effective tax rate for 2021 was impacted by additional tax expense on stock-based compensation which vested during the quarter. Also, a weaker US dollar resulted in an increase in the Company’s deferred tax liability on unremitted foreign earnings.
20
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 8.
_________________
INVENTORIES
The following table presents the components of inventories:
|
|
March 31, |
|
|
December 31, |
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
$ |
Work in process and finished goods |
|
|
375 |
|
|
359 |
Raw materials |
|
|
108 |
|
|
110 |
Operating and maintenance supplies |
|
|
197 |
|
|
194 |
|
|
|
680 |
|
|
663 |
21
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 9.
_________________
LEASES
In the normal course of business, the Company enters into operating and finance leases mainly for manufacturing and warehousing facilities, corporate offices, motor vehicles, mobile equipment and manufacturing equipment.
While the Company’s lease payments are generally fixed over the lease term, some leases may include price escalation terms that are fixed at the lease commencement date.
The Company has remaining lease terms ranging from 1 year to 11 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.
The components of lease expense were as follows:
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
Operating lease expense |
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
Cash paid for amounts included in the measurement of lease
liabilities: |
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities: |
|
|
|
|
|
|
|
|
|
Operating leases |
|
4 |
|
|
|
1 |
|
|
22
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 9. LEASES (CONTINUED)
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
Operating leases |
|
|
|
|
|
|
|
|
|
Operating leases right-of-use assets |
|
51 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities due within one year |
|
19 |
|
|
|
19 |
|
|
|
Long-term operating lease liabilities |
|
35 |
|
|
|
36 |
|
|
|
|
|
54 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
|
Finance leases |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
4 |
|
|
|
5 |
|
|
|
Accumulated depreciation |
|
(1 |
) |
|
|
(2 |
) |
|
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due within one year |
|
1 |
|
|
|
1 |
|
|
|
Long-term debt |
|
3 |
|
|
|
3 |
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term |
|
|
|
|
|
|
|
|
|
|
Operating leases |
4.2 years |
|
|
4.3 years |
|
|
|
|
Finance leases |
6.5 years |
|
|
6.8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
3.2 |
% |
|
|
3.2 |
% |
|
|
|
Finance leases |
|
4.8 |
% |
|
|
4.8 |
% |
|
Maturities of lease liabilities at March 31, 2022 were as follows:
|
|
|
|
Operating leases |
|
|
Finance leases |
|
|
|
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
|
|
2022 |
|
|
2022 |
|
|
|
|
|
|
$ |
|
|
$ |
|
|
2022 (1) |
|
|
|
|
18 |
|
|
|
1 |
|
|
2023 |
|
|
|
|
16 |
|
|
|
1 |
|
|
2024 |
|
|
|
|
13 |
|
|
|
1 |
|
|
2025 |
|
|
|
|
6 |
|
|
|
1 |
|
|
2026 |
|
|
|
|
3 |
|
|
|
1 |
|
|
Thereafter |
|
|
|
|
5 |
|
|
|
1 |
|
|
Total lease payments |
|
|
|
|
61 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Imputed interest |
|
|
|
|
7 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities |
|
|
|
|
54 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the remaining nine months of 2022. |
23
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 10.
_________________
CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
Cost reduction program
The Company implemented a cost savings program. As part of this program, in August 2020, the Company announced the permanent closure of the uncoated freesheet manufacturing at the Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at the Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. Additionally, in May 2021, the Company announced the closure of the converting center in Dallas, Texas. These actions reduced the Company’s annual uncoated freesheet paper capacity by approximately 721,000 short tons and resulted in a workforce reduction of approximately 750 employees. For the three months ended March 31, 2022, the Company recorded nil of accelerated depreciation under Impairment of long-lived assets (2021 – $6 million) and nil of closure costs, under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (2021 – $3 million).
Conversion of Kingsport, Tennessee mill
The Company plans to enter the linerboard market with the conversion of the 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 the Company with a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the end of 2022. For the three months ended March 31, 2022, the Company recorded $13 million under Asset conversion costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (2021 – $8 million).
24
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 11.
_________________
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following table presents the changes in Accumulated other comprehensive income by component(1) for the three months ended March 31, 2022 and the year predecessor period ended November 30, 2021 and successor period ended December 31, 2021:
|
|
Net derivative
gains (losses) on
cash flow hedges |
|
|
Pension items(2) |
|
|
Post-retirement
benefit items(2) |
|
|
Foreign currency
items |
|
|
Total |
|
Predecessor |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance at December 31, 2020 |
|
|
34 |
|
|
|
(207 |
) |
|
|
8 |
|
|
|
(139 |
) |
|
|
(304 |
) |
Natural gas swap contracts |
|
|
22 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
22 |
|
Foreign exchange forward contracts |
|
|
2 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
2 |
|
Net gain |
|
N/A |
|
|
|
85 |
|
|
|
5 |
|
|
N/A |
|
|
|
90 |
|
Foreign currency items |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
57 |
|
|
|
57 |
|
Other comprehensive income
before reclassifications |
|
|
24 |
|
|
|
85 |
|
|
|
5 |
|
|
|
57 |
|
|
|
171 |
|
Amounts reclassified from Accumulated
other comprehensive loss |
|
|
(31 |
) |
|
|
10 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(22 |
) |
Net current period other comprehensive
(loss) income |
|
|
(7 |
) |
|
|
95 |
|
|
|
4 |
|
|
|
57 |
|
|
|
149 |
|
Balance at November 30, 2021 |
|
|
27 |
|
|
|
(112 |
) |
|
|
12 |
|
|
|
(82 |
) |
|
|
(155 |
) |
Elimination of Predecessor's Accumulated other
comprehensive loss |
|
|
(27 |
) |
|
|
112 |
|
|
|
(12 |
) |
|
|
82 |
|
|
|
155 |
|
Balance at November 30, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
25
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 11. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (CONTINUED)
|
|
Net derivative
gains (losses) on
cash flow hedges |
|
|
Pension items(2) |
|
|
Post-retirement
benefit items(2) |
|
|
Foreign currency
items |
|
|
Total |
|
Successor |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance at November 30, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Natural gas swap contracts |
|
|
(3 |
) |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
(3 |
) |
Foreign exchange forward contracts |
|
|
3 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
3 |
|
Net gain (loss) |
|
N/A |
|
|
|
17 |
|
|
|
(1 |
) |
|
N/A |
|
|
|
16 |
|
Foreign currency items |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
8 |
|
|
|
8 |
|
Other comprehensive income (loss)
before reclassifications |
|
|
— |
|
|
|
17 |
|
|
|
(1 |
) |
|
|
8 |
|
|
|
24 |
|
Amounts reclassified from Accumulated
other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net current period other comprehensive
income (loss) |
|
|
— |
|
|
|
17 |
|
|
|
(1 |
) |
|
|
8 |
|
|
|
24 |
|
Balance at December 31, 2021 |
|
|
— |
|
|
|
17 |
|
|
|
(1 |
) |
|
|
8 |
|
|
|
24 |
|
Natural gas swap contracts |
|
|
11 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
11 |
|
Currency options |
|
|
1 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
1 |
|
Foreign exchange forward contracts |
|
|
5 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
5 |
|
Foreign currency items |
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
13 |
|
|
|
13 |
|
Other comprehensive income
before reclassifications |
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
30 |
|
Amounts reclassified from Accumulated
other comprehensive income |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
Net current period other comprehensive
income |
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
28 |
|
Balance at March 31, 2022 |
|
|
15 |
|
|
|
17 |
|
|
|
(1 |
) |
|
|
21 |
|
|
|
52 |
|
(1) |
All amounts are after tax. Amounts in parentheses indicate losses. |
(2) |
The projected benefit obligation is actuarially determined on an annual basis as of December 31. |
26
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 11. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (CONTINUED)
The following table presents reclassifications out of Accumulated other comprehensive income:
Details about Accumulated other comprehensive income components |
|
Amounts reclassified from
Accumulated other
comprehensive income |
|
|
|
Successor |
|
|
Predecessor |
|
|
|
For the three months ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
$ |
|
|
$ |
|
Net derivative gains (losses) on cash flow hedge |
|
|
|
|
|
|
|
|
Natural gas swap contracts (1) |
|
|
1 |
|
|
|
— |
|
Currency options and forwards (1) |
|
|
1 |
|
|
|
10 |
|
Net investment hedge (2) |
|
|
— |
|
|
|
(9 |
) |
Total before tax |
|
|
2 |
|
|
|
1 |
|
Tax benefit |
|
|
— |
|
|
|
1 |
|
Net of tax |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items |
|
|
|
|
|
|
|
|
Amortization of net actuarial loss (3) |
|
|
— |
|
|
|
(2 |
) |
Discontinued operations |
|
|
— |
|
|
|
(4 |
) |
Total before tax |
|
|
— |
|
|
|
(6 |
) |
Tax benefit |
|
|
— |
|
|
|
1 |
|
Net of tax |
|
|
— |
|
|
|
(5 |
) |
(1) |
These amounts are included in Cost of sales in the Consolidated Statements of Earnings (Loss) and Comprehensive Income. |
(2) |
These amounts are included in Earnings (loss) from discontinued operations, net of taxes in the Consolidated Statements of Earnings (Loss) and Comprehensive Income. |
(3) |
These amounts are included in the computation of net periodic benefit cost (see Note 6 “Pension Plans and Other Post-Retirement Benefit Plans” for more details). |
27
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 12.
LONG-TERM DEBT
FIRST LIEN TERM LOAN FACILITY
On January 7, 2022, the Company utilized $127 million under the delayed draw term facility to fund a portion of the redemptions of the Existing Domtar Notes pursuant to the Domtar Notes Change of Control Offers that terminated on January 3, 2022. The remainder of the Delayed Draw Term Loan facility was cancelled and a $2 million repayment was made during the first quarter of 2022, leaving total drawings under the Term Loan Facility of $650 million as of March 31, 2022.
SENIOR SECURED NOTES
On January 7, 2022, $133 million of the 6.75% Senior Secured Notes due 2028 were redeemed, and accrued interest of $2 million were paid, as a result of the Domtar Existing Notes Change of Control Offers that terminated on January 3, 2022, leaving $642 million of Notes outstanding as of March 31, 2022.
EXISTING DOMTAR NOTES CHANGE OF CONTROL OFFERS
On January 3, 2022, $134 million of the 6.25% Notes due 2042 and $100 million of the 6.75% Notes due 2044 were tendered pursuant to the offer. As a result, $116 million of the 6.25% Notes due 2042 and $150 million of the 6.75% Notes due 2044, remain outstanding post January 7, 2022, the payment date. In addition, $3 million of premium and $6 million of accrued interest were paid.
ABL REVOLVING CREDIT FACILITY
On November 30, 2021, the Company entered into an ABL Revolving Credit Facility that matures on November 30, 2026. The ABL Revolving Credit Facility is available to Domtar Corporation and certain other domestic and Canadian subsidiaries and provides for revolving loans and letters of credit in an aggregate amount of up to $400 million, subject to borrowing base capacity. At March 31, 2022, the Company had $150 million in borrowings and $63 million of letters of credit outstanding.
28
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 13.
_________________
COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities. The Company may also incur substantial costs in relation to enforcement actions (including orders requiring corrective measures, installation of pollution control equipment or other remedial actions) as a result of violations of, or liabilities under, environmental laws and regulations applicable to its past and present properties. The Company’s ongoing efforts to identify potential environmental concerns that may be associated with such properties may result in additional environmental costs and liabilities which cannot be reasonably estimated at this time.
A former owner of the Company’s Dryden, Ontario manufacturing site (the "Dryden Property") operated a chlor-alkali plant during the 1960s and 1970s, during which time, mercury and other pollutants were used and discharged into the environment. In conjunction with the sale and redevelopment of the Dryden Property, the Province of Ontario (the “Province”) provided a broad indemnity (the "Indemnity") in 1985 to the then purchaser of the Dryden Property and its successors and assigns with respect to the discharge of any pollutant, including mercury, by the historical operators of the Dryden Property. This Indemnity subsequently was assigned to the Company in connection with its 2007 purchase of the Dryden Property.
As the current owner of the Dryden Property, the Company is actively engaged with the Province with respect to the management of the historical contamination.
The Province issued a Director's order under environmental laws to certain prior owners of the Dryden Property in connection with a nearby waste disposal site that has never been owned by the Company. The Director's order required certain work to be conducted by those prior owners. The prior owners asserted that the Indemnity covered the work required by the Director’s order. Following extensive litigation, the Supreme Court of Canada found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such as the Director's order.
In the future, the Province may challenge whether the Company has the benefit of the Indemnity. In addition to the Indemnity, Domtar has other recourses relating to the historical contamination.
The situation involving the historical contamination is continuing to develop, and the Company cannot predict its outcome. While the Company currently does not believe that it will be required to incur costs that would have a material impact on its results of operations or financial condition, there is no certainty that this is in fact the case.
The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:
|
|
March 31, |
|
|
|
2022 |
|
|
|
$ |
|
Balance at beginning of year |
|
|
41 |
|
Additions and other changes |
|
|
1 |
|
Environmental spending |
|
|
(1 |
) |
Balance at end of period |
|
|
41 |
|
29
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The U.S. Environmental Protection Agency (the “EPA”) and/or various state agencies have notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund”, and similar state laws with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a number of operating sites, due to possible soil, sediment or groundwater contamination.
CONTINGENCIES
In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at March 31, 2022, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
INDEMNIFICATIONS
In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, compliance with laws, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At March 31, 2022, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded a significant expense in the past.
Pension Plans
The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At March 31, 2022 the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.
CLIMATE CHANGE AND AIR QUALITY REGULATIONS
Various national and local laws and regulations relating to climate change have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments.
The EPA repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”) rule. The ACE rule was legally challenged in the U.S. Court of Appeals for the D.C. Circuit. The Court ruled the EPA wrongly understood the Clean Air Act, vacated the ACE rule, sending it back to the EPA for further consideration. The court also rejected the embedded repeal of the Clean Power Plan, but the court stayed its mandate as to that part of its decision to avoid reinstating that now outdated Clean Power Plan. Four petitions of certiorari were filed with the United States Supreme Court seeking review of the D.C. Circuit’s decision, and the Supreme Court decided to hear the appeal. Oral argument was held on February 28, 2022, and a decision is expected in the Summer of 2022. Regardless of the outcome of the petitions for certiorari and EPA’s further consideration, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.
The province of Quebec has a greenhouse gas (“GHG”) cap-and-trade system with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company does not expect its facilities to be disproportionately affected by these measures compared to the other pulp and paper producers located in these provinces.
30
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Government of Canada has established a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. The Government of Canada has imposed its carbon pricing program for regulating GHG emissions in Ontario, which took effect on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario finalized its own GHG Emission Performance Standards regulation. The Canadian Government has accepted Ontario’s program as an alternative to the federal program and the transition for Ontario facilities from the federal program to the Ontario program occurred on January 1, 2022. The Company does not expect to be disproportionately affected compared with other pulp and paper producers located in Ontario.
The EPA proposed to revise its Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”), or Boiler MACT, in a notice published on August 24, 2020. The proposed rule is a response to two court decisions that remanded certain issues for further review by the EPA, and it includes revisions to 34 different emission limitations that could apply to some of the Company’s facilities. The EPA had planned to issue the final rule in September 2021, but the final rule has been delayed. Although the EPA has indicated that a small number of facilities may need to reduce emissions further compared to the current limits, the Company does not expect its facilities to be disproportionately affected compared to other U.S. pulp and paper producers.
31
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 14.
_________________
SEGMENT DISCLOSURES
Following the sale of the Company’s Personal Care business on March 1, 2021, the Company operates as a single reportable segment as described below, which also represents its only operating segment:
• |
Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, hardwood and fluff pulp and high quality airlaid and ultrathin laminated cores. |
An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:
|
|
Successor |
|
|
Predecessor |
|
|
|
For the three months ended |
|
|
|
March 31, |
|
|
March 31, |
|
SEGMENT DATA |
|
2022 |
|
|
2021 |
|
|
|
$ |
|
|
$ |
|
Sales by product group |
|
|
|
|
|
|
|
|
Communication papers |
|
|
579 |
|
|
|
488 |
|
Specialty and packaging papers |
|
|
175 |
|
|
|
137 |
|
Market pulp |
|
|
256 |
|
|
|
246 |
|
Consolidated sales |
|
|
1,010 |
|
|
|
871 |
|
Operating income (loss) from continuing operations (1) |
|
|
|
|
|
|
|
|
Pulp and Paper |
|
|
39 |
|
|
|
1 |
|
Corporate |
|
|
(14 |
) |
|
|
(10 |
) |
Consolidated operating income (loss) from continuing
operations |
|
|
25 |
|
|
|
(9 |
) |
Interest expense, net |
|
|
21 |
|
|
|
15 |
|
Non-service components of net periodic benefit cost |
|
|
(9 |
) |
|
|
(6 |
) |
Earnings (loss) before income taxes |
|
|
13 |
|
|
|
(18 |
) |
Income tax expense (benefit) |
|
|
3 |
|
|
|
(3 |
) |
Earnings (loss) from continuing operations |
|
|
10 |
|
|
|
(15 |
) |
Earnings (loss) from discontinued operations, net of taxes |
|
|
13 |
|
|
|
(14 |
) |
Net earnings (loss) |
|
|
23 |
|
|
|
(29 |
) |
|
(1) |
The Government of Canada created the Canada Emergency Wage Subsidy ("CEWS") to provide financial support for businesses during the COVID-19 pandemic and prevent large layoffs. For the three months ended March 31, 2021, the Company recognized $4 million as a reduction of costs related to this program (CDN $5 million) ($3 million in Cost of sales (CDN $4 million) and $1 million in Selling, general and administrative (CDN $1 million)). |
32