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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 June 30, 2022

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: None.

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  ☐ *

*The Registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the Registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the Registrant been subject to such requirements.

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  ☒

There are no longer publicly traded common shares of Domtar Corporation.

 

 

 

 

 

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended June 30, 2022

INDEX

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

3

 

 

 

 

CONSOLIDATED BALANCE SHEETS

4

 

 

 

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

5

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

7

 

 

 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9

 

 

 

ITEM 2.

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

38

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

49

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

49

 

 

 

PART II

OTHER INFORMATION

49

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

49

 

 

 

ITEM 1A.

RISK FACTORS

49

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

49

 

 

 

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

49

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

49

 

 

 

ITEM 5.

OTHER INFORMATION

49

 

 

 

ITEM 6.

EXHIBITS

50

 

 

 

 

 

 

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

Successor

 

 

Predecessor

 

 

Successor

 

 

Predecessor

 

 

For the three months ended

 

 

For the six months ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

(Unaudited)

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

1,087

 

 

 

916

 

 

 

2,097

 

 

 

1,787

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

881

 

 

 

719

 

 

 

1,713

 

 

 

1,470

 

Depreciation and amortization

 

61

 

 

 

50

 

 

 

127

 

 

 

100

 

Selling, general and administrative

 

69

 

 

 

67

 

 

 

138

 

 

 

131

 

Impairment of long-lived assets (NOTE 10)

 

—

 

 

 

1

 

 

 

—

 

 

 

7

 

Closure and restructuring costs (NOTE 10)

 

—

 

 

 

7

 

 

 

—

 

 

 

10

 

Asset conversion costs (NOTE 10)

 

12

 

 

 

5

 

 

 

25

 

 

 

13

 

Transaction costs (NOTE 4)

 

3

 

 

 

18

 

 

 

6

 

 

 

18

 

Other operating (income) loss, net

 

(5

)

 

 

1

 

 

 

(3

)

 

 

(1

)

 

 

1,021

 

 

 

868

 

 

 

2,006

 

 

 

1,748

 

Operating income from continuing operations

 

66

 

 

 

48

 

 

 

91

 

 

 

39

 

Interest expense, net

 

24

 

 

 

20

 

 

 

45

 

 

 

35

 

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

 

(17

)

 

 

(6

)

 

 

(26

)

 

 

(12

)

Earnings before income taxes

 

59

 

 

 

34

 

 

 

72

 

 

 

16

 

Income tax expense (NOTE 7)

 

13

 

 

 

11

 

 

 

16

 

 

 

8

 

Earnings from continuing operations

 

46

 

 

 

23

 

 

 

56

 

 

 

8

 

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

 

5

 

 

 

14

 

 

 

18

 

 

 

—

 

Net earnings

 

51

 

 

 

37

 

 

 

74

 

 

 

8

 

Other comprehensive (loss) income (NOTE 12):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative (losses) gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (losses) gains arising during the period, net of tax of

   $2 and $(3), respectively (2021 – $(5) and $(8),

   respectively)

 

(7

)

 

 

18

 

 

 

10

 

 

 

27

 

Less: Reclassification adjustment for gains included in

   net earnings, net of tax of $2 and $2, respectively

   (2021 – $3 and $2, respectively)

 

(4

)

 

 

(12

)

 

 

(6

)

 

 

(14

)

Foreign currency translation adjustments

 

(20

)

 

 

12

 

 

 

(7

)

 

 

84

 

Change in unrecognized gains and prior service cost related

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

   $(4) and $(4), respectively (2021 – $(7) and $(8), respectively)

 

11

 

 

 

20

 

 

 

11

 

 

 

25

 

Other comprehensive (loss) income

 

(20

)

 

 

38

 

 

 

8

 

 

 

122

 

Comprehensive income

 

31

 

 

 

75

 

 

 

82

 

 

 

130

 

 

 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents, including restricted cash of nil and $250

 

 

189

 

 

 

286

 

Receivables, less allowances of $4 and $4

 

 

527

 

 

 

463

 

Inventories (NOTE 8)

 

 

648

 

 

 

663

 

Prepaid expenses

 

 

51

 

 

 

44

 

Income and other taxes receivable

 

 

51

 

 

 

59

 

Assets held for sale (NOTE 3)

 

 

—

 

 

 

287

 

Total current assets

 

 

1,466

 

 

 

1,802

 

Property, plant and equipment, net

 

 

2,708

 

 

 

2,524

 

Operating lease right-of-use assets (NOTE 9)

 

 

51

 

 

 

48

 

Intangible assets, net

 

 

23

 

 

 

207

 

Other assets

 

 

291

 

 

 

273

 

Total assets

 

 

4,539

 

 

 

4,854

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Trade and other payables

 

 

611

 

 

 

543

 

Income and other taxes payable

 

 

36

 

 

 

11

 

Operating lease liabilities due within one year (NOTE 9)

 

 

18

 

 

 

19

 

Long-term debt due within one year (NOTE 11)

 

 

7

 

 

 

259

 

Liabilities held for sale (NOTE 3)

 

 

—

 

 

 

63

 

Total current liabilities

 

 

672

 

 

 

895

 

Long-term debt (NOTE 11)

 

 

1,531

 

 

 

1,643

 

Operating lease liabilities (NOTE 9)

 

 

33

 

 

 

36

 

Deferred income taxes and other

 

 

498

 

 

 

525

 

Other liabilities and deferred credits

 

 

184

 

 

 

216

 

Commitments and contingencies (NOTE 13)

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

Common stock $0.01 par value; 100 shares issued and outstanding

 

 

—

 

 

 

—

 

Additional paid-in capital

 

 

1,555

 

 

 

1,555

 

Retained earnings (deficit)

 

 

34

 

 

 

(40

)

Accumulated other comprehensive income

 

 

32

 

 

 

24

 

Total shareholders' equity

 

 

1,621

 

 

 

1,539

 

Total liabilities and shareholders' equity

 

 

4,539

 

 

 

4,854

 

 

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

 

 

 

4

 

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

For the three months ended

 

 

 

June 30, 2022

 

Successor

 

Additional paid-in capital

 

 

(Deficit)

retained earnings

 

 

Accumulated other comprehensive income

 

 

Total shareholders' equity

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at March 31, 2022

 

 

1,555

 

 

 

(17

)

 

 

52

 

 

 

1,590

 

Net earnings

 

 

—

 

 

 

51

 

 

 

—

 

 

 

51

 

Net derivative losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses arising during the period,

   net of tax of $2

 

 

—

 

 

 

—

 

 

 

(7

)

 

 

(7

)

Less: Reclassification adjustment for gains

   included in net earnings, net of tax of $2

 

 

—

 

 

 

—

 

 

 

(4

)

 

 

(4

)

Foreign currency translation adjustments

 

 

—

 

 

 

—

 

 

 

(20

)

 

 

(20

)

Change in unrecognized gains and prior service cost related to

   pension and post-retirement benefit plans, net of tax of $(4)

 

 

—

 

 

 

—

 

 

 

11

 

 

 

11

 

Balance at June 30, 2022

 

 

1,555

 

 

 

34

 

 

 

32

 

 

 

1,621

 

 

 

 

For the six months ended

 

 

 

June 30, 2022

 

Successor

 

Additional paid-in capital

 

 

(Deficit)

retained earnings

 

 

Accumulated other comprehensive income

 

 

Total shareholders' equity

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at December 31, 2021

 

 

1,555

 

 

 

(40

)

 

 

24

 

 

 

1,539

 

Net earnings

 

 

—

 

 

 

74

 

 

 

—

 

 

 

74

 

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period, net of tax of $(3)

 

 

—

 

 

 

—

 

 

 

10

 

 

 

10

 

Less: Reclassification adjustment for gains included in

   net earnings, net of tax of $2

 

 

—

 

 

 

—

 

 

 

(6

)

 

 

(6

)

Foreign currency translation adjustments

 

 

—

 

 

 

—

 

 

 

(7

)

 

 

(7

)

Change in unrecognized gains and prior service cost related to

   pension and post-retirement benefit plans, net of tax of $(4)

 

 

—

 

 

 

—

 

 

 

11

 

 

 

11

 

Balance at June 30, 2022

 

 

1,555

 

 

 

34

 

 

 

32

 

 

 

1,621

 

 


5

 

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

For the three months ended

 

 

 

June 30, 2021

 

Predecessor

 

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 March 31, 2021

 

 

50.2

 

 

 

1

 

 

 

1,493

 

 

 

817

 

 

 

(220

)

 

 

2,091

 

Stock-based compensation, net of tax

 

 

0.2

 

 

 

—

 

 

 

7

 

 

 

—

 

 

 

—

 

 

 

7

 

Net earnings

 

 

—

 

 

 

—

 

 

 

—

 

 

 

37

 

 

 

—

 

 

 

37

 

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(5)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

18

 

 

 

18

 

Less: Reclassification adjustment for gains

   included in net earnings, net of tax of $3

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(12

)

 

 

(12

)

Foreign currency translation adjustments

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

12

 

 

 

12

 

Change in unrecognized gains and prior service

   cost related to pension and post-retirement

   benefit plans, net of tax of $(7)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

20

 

 

 

20

 

Balance at June 30, 2021

 

 

50.4

 

 

 

1

 

 

 

1,500

 

 

 

854

 

 

 

(182

)

 

 

2,173

 

 

 

 

 

For the six months ended

 

 

 

June 30, 2021

 

Predecessor

 

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

 

 

0.3

 

 

 

—

 

 

 

6

 

 

 

—

 

 

 

—

 

 

 

6

 

Net earnings

 

 

—

 

 

 

—

 

 

 

—

 

 

 

8

 

 

 

—

 

 

 

8

 

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(8)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

27

 

 

 

27

 

Less: Reclassification adjustment for gains

   included in net earnings, net of tax of $2

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(14

)

 

 

(14

)

Foreign currency translation adjustments

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

84

 

 

 

84

 

Change in unrecognized gains and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $(8)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

25

 

 

 

25

 

Stock repurchase

 

 

(5.1

)

 

 

—

 

 

 

(223

)

 

 

—

 

 

 

—

 

 

 

(223

)

Balance at June 30, 2021

 

 

50.4

 

 

 

1

 

 

 

1,500

 

 

 

854

 

 

 

(182

)

 

 

2,173

 

 

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

 

 

6

 

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

 

Successor

 

 

Predecessor

 

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

Net earnings

 

 

74

 

 

 

8

 

Adjustments to reconcile net earnings to cash flows from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

127

 

 

 

117

 

Deferred income taxes and tax uncertainties (NOTE 7)

 

 

(6

)

 

 

(4

)

Impairment of long-lived assets (NOTE 10)

 

 

—

 

 

 

7

 

Net loss on disposition of discontinued operations (NOTE 3)

 

 

—

 

 

 

33

 

Stock-based compensation expense

 

 

—

 

 

 

4

 

Make-whole premium on repayment of long-term debt

 

 

—

 

 

 

11

 

Other

 

 

(1

)

 

 

6

 

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

 

 

 

 

 

 

 

 

Receivables

 

 

8

 

 

 

(137

)

Inventories

 

 

(23

)

 

 

18

 

Prepaid expenses

 

 

9

 

 

 

1

 

Trade and other payables

 

 

23

 

 

 

32

 

Income and other taxes

 

 

36

 

 

 

12

 

Difference between employer pension and other post-retirement

   contributions and pension and other post-retirement expense

 

 

(23

)

 

 

(8

)

Other assets and other liabilities

 

 

(5

)

 

 

(10

)

Cash flows from operating activities

 

 

219

 

 

 

90

 

Investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(211

)

 

 

(122

)

Proceeds from disposals of property, plant and equipment

 

 

23

 

 

 

1

 

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

 

 

237

 

 

 

897

 

Cash flows provided from investing activities

 

 

49

 

 

 

776

 

Financing activities

 

 

 

 

 

 

 

 

Stock repurchase

 

 

—

 

 

 

(223

)

Net repayments under revolving credit facility

 

 

(115

)

 

 

—

 

Issuance of long-term debt, net of debt issue costs

 

 

127

 

 

 

—

 

Repayments of long-term debt, including make-whole premium

 

 

(374

)

 

 

(606

)

Other

 

 

(2

)

 

 

—

 

Cash flows used for financing activities

 

 

(364

)

 

 

(829

)

Net (decrease) increase in cash and cash equivalents

 

 

(96

)

 

 

37

 

Impact of foreign exchange on cash

 

 

(1

)

 

 

—

 

Cash and cash equivalents at beginning of period

 

 

286

 

 

 

309

 

Cash and cash equivalents at end of period

 

 

189

 

 

 

346

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Net cash payments for:

 

 

 

 

 

 

 

 

Interest

 

 

58

 

 

 

37

 

Income taxes

 

 

6

 

 

 

1

 

 

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

 

7

 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1

BASIS OF PRESENTATION

9

 

 

 

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

10

 

 

 

NOTE 3

DISCONTINUED OPERATIONS

11

 

 

 

NOTE 4

ACQUISITION OF BUSINESS

14

 

 

 

NOTE 5

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

16

 

 

 

NOTE 6

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

20

 

 

 

NOTE 7

INCOME TAXES

22

 

 

 

NOTE 8

INVENTORIES

23

 

 

 

NOTE 9

LEASES

24

 

 

 

NOTE 10

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

27

 

 

 

NOTE 11

LONG-TERM DEBT

28

 

 

 

NOTE 12

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

29

 

 

 

NOTE 13

COMMITMENTS AND CONTINGENCIES

33

 

 

 

NOTE 14

SEGMENT DISCLOSURES

36

 

 

 

NOTE 15

SUBSEQUENT EVENT

37

 

 

 

 

 

 

8

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 six 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. Such divestiture occurred on June 1, 2022 as described in Note 3.

Certain reclassifications have been made to the prior year’s presentation to conform to the current year presentation.

 

 

9

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 June 30, 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.

 

10

 

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 was to 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.

On June 1, 2022, Domtar completed the sale of the mill and related assets to an independent acquiror approved by the Commissioner for a purchase price of $243 million, which represents $237 million in cash and $6 million in receivables, subject to customary adjustments. In connection with the sale, the Company entered into Transition Services Agreements with Kruger 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 Domtar’s pulp mill in Kamloops, British Columbia were reclassified to discontinued operations. These results have been summarized in Earnings from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings and Comprehensive Income for each period presented. The Consolidated Statements of Cash Flows were not reclassified to reflect discontinued operations.

 

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 represented 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. These agreements expired as 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 from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings 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.

 

 


11

 

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3 – DISCONTINUED OPERATIONS (CONTINUED)

 

 

Major components of earnings from discontinued operations:

 

 

Successor

 

 

Predecessor

 

 

Successor

 

 

Predecessor

 

 

For the three months ended

 

 

For the six months ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

66

 

 

 

94

 

 

 

154

 

 

 

321

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

52

 

 

 

70

 

 

 

119

 

 

 

239

 

Depreciation and amortization

 

—

 

 

 

3

 

 

 

—

 

 

 

17

 

Selling, general and administrative

 

—

 

 

 

1

 

 

 

—

 

 

 

25

 

Closure and restructuring costs

 

—

 

 

 

—

 

 

 

—

 

 

 

1

 

Transaction costs

 

6

 

 

 

—

 

 

 

9

 

 

 

—

 

Other operating loss, net

 

—

 

 

 

—

 

 

 

—

 

 

 

1

 

 

 

58

 

 

 

74

 

 

 

128

 

 

 

283

 

Operating income

 

8

 

 

 

20

 

 

 

26

 

 

 

38

 

Net loss on disposition of discontinued operations

 

—

 

 

 

1

 

 

 

—

 

 

 

33

 

Earnings from discontinued operations before

   income taxes

 

8

 

 

 

19

 

 

 

26

 

 

 

5

 

Income tax expense

 

3

 

 

 

5

 

 

 

8

 

 

 

5

 

Net earnings from discontinued operations

 

5

 

 

 

14

 

 

 

18

 

 

 

—

 

 

 

 

12

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Receivables

 

 

—

 

 

 

50

 

Inventories

 

 

—

 

 

 

82

 

Long-term assets

 

 

—

 

 

 

155

 

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

   Consolidated Balance Sheets (1)

 

 

—

 

 

 

287

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Trade and other payables

 

 

—

 

 

 

26

 

Income and other taxes payable

 

 

—

 

 

 

—

 

Long-term debt due within one year

 

 

—

 

 

 

1

 

Long-term debt

 

 

—

 

 

 

4

 

Deferred income taxes and other

 

 

—

 

 

 

27

 

Other liabilities and deferred credits

 

 

—

 

 

 

5

 

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

   Consolidated Balance Sheets (1)

 

 

—

 

 

 

63

 

 

(1)

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

 

Cash Flows from Discontinued Operations:

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

For the six months ended

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

$

 

 

$

 

Cash flows from operating activities

 

 

 

 

 

39

 

 

 

21

 

Cash flows used for investing activities

 

 

 

 

 

(3

)

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 - Preliminary values

 

 

 

 

 

 

Receivables

 

 

 

$

557

 

Inventories

 

 

 

 

597

 

Prepaid expenses

 

 

 

 

50

 

Income and other taxes receivable

 

 

 

 

48

 

Property, plant and equipment

 

 

 

 

2,639

 

Intangible assets

 

 

 

 

20

 

Operating lease right-of-use assets

 

 

 

 

51

 

Other assets

 

 

 

 

268

 

Assets held for sale

 

 

 

 

287

 

Total assets

 

 

 

 

4,517

 

 

 

 

 

 

 

 

Less: Assumed Liabilities

 

 

 

 

 

 

Trade and other payables

 

 

 

 

674

 

Income and other taxes payable

 

 

 

 

16

 

Operating lease liabilities (including short-term portion)

 

 

 

 

58

 

Long-term debt (including short-term portion)

 

 

 

 

529

 

Deferred income tax liabilities

 

 

 

 

511

 

Other liabilities and deferred credits

 

 

 

 

221

 

Liabilities held for sale

 

 

 

 

44

 

Total liabilities

 

 

 

 

2,053

 

 

 

 

 

 

 

 

Fair value of net assets acquired at the date of acquisition

 

 

 

 

2,464

 

 


14

 

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4 – ACQUISITION OF BUSINESS (CONTINUED)

 

 

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 and six months ended June 30, 2022, the Company recognized nil and $3 million, respectively, of acquisition related costs affected to that transaction. These costs are included in the Consolidated Statements of Earnings 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.

 

 

 

 

15

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 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 June 30, 2022, two customers located in the U.S. represented 27% or $144 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 of natural gas over the next 18 months.

 

 

16

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

 

As of June 30, 2022, the Company hedged 22% and 10% of its forecasted purchases of natural gas under derivative contracts for 2022 and 2023, respectively. The natural gas derivative contracts were effective as of June 30, 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 June 30, 2022, the Company hedged 61%, 37% and 5% of its forecasted net Canadian dollars cash exposures under contracts for 2022, 2023 and 2024, respectively. The foreign exchange derivative contracts were effective as of June 30, 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.

 


17

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 June 30, 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:

 

June 30, 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

 

 

4

 

 

 

—

 

 

 

4

 

 

 

—

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

12

 

 

 

—

 

 

 

12

 

 

 

—

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

2

 

 

 

—

 

 

 

2

 

 

 

—

 

(a)

Other assets

Total Assets

 

 

18

 

 

 

—

 

 

 

18

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

4

 

 

 

—

 

 

 

4

 

 

 

—

 

(a)

Trade and other payables

Total Liabilities

 

 

4

 

 

 

—

 

 

 

4

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due

   within one year

 

 

7

 

 

 

—

 

 

 

7

 

 

 

—

 

(b)

Long-term debt due within

   one year

Long-term debt

 

 

1,390

 

 

 

—

 

 

 

1,390

 

 

 

—

 

(c)

Long-term debt

 

 

 

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

 

18

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

 

(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 June 30, 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 June 30, 2022 and December 31, 2021, respectively.

(c)

The carrying value of the Company’s long-term debt is $1,531 million and $1,643 million at June 30, 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.

 

 

 

19

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 and six months ended June 30, 2022, the pension expense was $7 million and $19 million, respectively (2021 – $8 million and $17 million, respectively).

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. who 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

 

 

For the six months ended

 

 

 

June 30, 2022

 

 

June 30, 2022

 

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Service cost

 

 

5

 

 

 

—

 

 

 

11

 

 

 

—

 

Interest expense

 

 

9

 

 

 

—

 

 

 

18

 

 

 

1

 

Expected return on plan assets

 

 

(18

)

 

 

—

 

 

 

(37

)

 

 

—

 

Settlement gain (1)

 

 

(8

)

 

 

—

 

 

 

(8

)

 

 

—

 

Net periodic benefit cost

 

 

(12

)

 

 

—

 

 

 

(16

)

 

 

1

 

 

 

(1)

During the second quarter of 2022, the Company entered into agreements with insurance companies to purchase group annuity buy-out contracts and transfer approximately $105 million (CDN $135 million) of its Quebec, Canada defined benefit plans’ projected benefit obligations and $85 million of its U.S. defined benefit plans’ projected benefit obligations. The transactions closed in April 2022 for Canada and in June 2022 for the U.S. and were funded with pension plan assets. Additionally, the Company entered into agreements with existing insurers to convert $141 million (CDN $180 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 3,253 retirees and their beneficiaries. Settlement accounting rules required a remeasurement of the plans as of April 30, 2022 for Canada and June 30, 2022 for the U.S. and the Company recognized a non-cash pension settlement gain of $8 million before tax in the second quarter of 2022.

 

 

20

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

 

 

 

 

 

Predecessor

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30, 2021

 

 

June 30, 2021

 

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

Pension plans

 

 

Other post-retirement benefit plans

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Service cost

 

 

7

 

 

 

—

 

 

 

14

 

 

 

—

 

Interest expense

 

 

8

 

 

 

1

 

 

 

16

 

 

 

1

 

Expected return on plan assets

 

 

(17

)

 

 

—

 

 

 

(33

)

 

 

—

 

Amortization of net actuarial loss (gain)

 

 

2

 

 

 

(1

)

 

 

4

 

 

 

(1

)

Settlement loss

 

 

1

 

 

 

—

 

 

 

1

 

 

 

—

 

Amortization of prior year service costs

 

 

1

 

 

 

—

 

 

 

1

 

 

 

—

 

Net periodic benefit cost

 

 

2

 

 

 

—

 

 

 

3

 

 

 

—

 

 

The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statement of Earnings and Comprehensive Income.

 

For the three and six months ended June 30, 2022, the Company contributed $2 million and $4 million, respectively (2021 – $5 million and $8 million, respectively) to the pension plans and $1 million and $2 million, respectively (2021 – $1 million and $2 million, respectively) to the other post-retirement benefit plans.

 

 

 

 

21

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 7.

_________________

INCOME TAXES

 

For the second quarter of 2022, the Company’s income tax expense was $13 million, consisting of a current income tax expense of $21 million and a deferred income tax benefit of $8 million. This compares to an income tax expense of $11 million in the second quarter of 2021, consisting of a current income tax expense of $16 million and a deferred income tax benefit of $5 million. The Company made payments, net of income tax refunds, of $4 million during the second quarter of 2022. The effective tax rate was 22% compared with an effective tax rate of 32% in the second quarter of 2021. The effective tax rate for the second quarter of 2021 was impacted by certain transaction costs incurred during the quarter related to the potential acquisition of the Company by Paper Excellence which provided no tax benefit.

 

For the first six months of 2022, the Company’s income tax expense was $16 million, consisting of a current income tax expense of $22 million and a deferred income tax benefit of $6 million. This compares to an income tax expense of $8 million in the first six months of 2021, consisting of a current income tax expense of $8 million and no deferred income tax expense. The Company made payments, net of income tax refunds, of $6 million during the first six months of 2022. The effective tax rate was 22% compared to an effective tax rate of 50% in the first six months of 2021. The effective tax rate for the first six months of 2021 was significantly impacted by certain transaction costs incurred during the period related to the potential acquisition of the Company by Paper Excellence which provided no tax benefit.

 

 

 

 

22

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

 

NOTE 8.

_________________

INVENTORIES

The following table presents the components of inventories:

 

 

 

June 30,

 

 

December 31,

 

 

2022

 

 

2021

 

 

$

 

 

$

Work in process and finished goods

 

 

389

 

 

359

Raw materials

 

 

109

 

 

110

Operating and maintenance supplies

 

 

150

 

 

194

 

 

 

648

 

 

663

 

 

 

23

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

Operating lease expense

 

5

 

 

 

5

 

 

 

10

 

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

 

 

 

 

 

 

 

 

Successor

 

 

Predecessor

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Cash paid for amounts included in the measurement of lease

   liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

 

 

 

12

 

 

 

12

 

 

 

Operating cash flows from finance leases

 

 

 

 

 

—

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

 

6

 

 

 

2

 

 

 

 

 

24

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 9. LEASES (CONTINUED)

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

Operating leases

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases right-of-use assets

 

 

 

 

 

51

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease liabilities due within one year

 

 

 

 

 

18

 

 

 

19

 

 

 

Long-term operating lease liabilities

 

 

 

 

 

33

 

 

 

36

 

 

 

 

 

 

 

 

 

51

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance leases

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

 

 

 

4

 

 

 

5

 

 

 

Accumulated depreciation

 

 

 

 

 

(1

)

 

 

(2

)

 

 

 

 

 

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt due within one year

 

 

 

 

 

—

 

 

 

1

 

 

 

Long-term debt

 

 

 

 

 

4

 

 

 

3

 

 

 

 

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average remaining lease term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

4.1 years

 

 

4.3 years

 

 

 

 

Finance leases

 

 

 

 

6.5 years

 

 

6.8 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

 

3.3

%

 

 

3.2

%

 

 

 

Finance leases

 

 

 

 

 

4.8

%

 

 

4.8

%

 

 

 


25

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 9. LEASES (CONTINUED)

 

 

Maturities of lease liabilities at June 30, 2022 were as follows:

 

 

 

 

 

 

 

 

 

Operating leases

 

 

Finance leases

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

2022

 

 

2022

 

 

 

 

 

 

 

 

 

 

$

 

 

$

 

 

2022 (1)

 

 

 

 

 

 

 

 

10

 

 

 

—

 

 

2023

 

 

 

 

 

 

 

 

17

 

 

 

1

 

 

2024

 

 

 

 

 

 

 

 

13

 

 

 

1

 

 

2025

 

 

 

 

 

 

 

 

6

 

 

 

1

 

 

2026

 

 

 

 

 

 

 

 

3

 

 

 

1

 

 

Thereafter

 

 

 

 

 

 

 

 

6

 

 

 

2

 

 

Total lease payments

 

 

 

 

 

 

 

 

55

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Imputed interest

 

 

 

 

 

 

 

 

4

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total lease liabilities

 

 

 

 

 

 

 

 

51

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Represents the remaining six months of 2022.

 

 

 

26

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 and six months ended June 30, 2022, the Company recorded nil of accelerated depreciation under Impairment of long-lived asset (2021 – $1 million and $7 million, respectively) and nil of closure costs under Closure and restructuring costs on the Consolidated Statement of Earnings and Comprehensive Income (2021 – $7 million and $10 million, respectively).

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 and six months ended June 30, 2022, the Company recorded $12 million and $25 million, respectively, under Asset conversion costs on the Consolidated Statement of Earnings and Comprehensive Income (2021 – $5 million and $13 million, respectively). These costs will be ongoing until the completion of the conversion.

 

 

 

27

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 11.

_________________

LONG-TERM DEBT

 

 

 

 

 

 

Par

 

 

 

 

June 30,

 

 

December 31,

 

 

 

Maturity

 

Amount

 

 

Currency

 

2022

 

 

2021

 

 

 

 

 

$

 

 

 

 

$

 

 

$

 

Unsecured notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.25% Notes

 

2042

 

 

116

 

 

US

 

 

122

 

 

 

264

 

6.75% Notes

 

2044

 

 

150

 

 

US

 

 

157

 

 

 

262

 

Senior secured notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.75% Notes

 

2028

 

 

642

 

 

US

 

 

642

 

 

 

775

 

ABL Revolving Credit Facility

 

2026

 

 

—

 

 

US

 

 

—

 

 

 

115

 

First Lien Term Loan

 

2028

 

 

648

 

 

US

 

 

642

 

 

 

520

 

Finance lease obligations

 

2022 - 2028

 

 

 

 

 

 

 

 

4

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

1,567

 

 

 

1,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Unamortized debt issuance costs

 

 

 

 

 

 

 

 

 

 

29

 

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Due within one year

 

 

 

 

 

 

 

 

 

 

7

 

 

 

259

 

 

 

 

 

 

 

 

 

 

 

 

1,531

 

 

 

1,643

 

.

 

 

 

 

28

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 12.

_________________

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

The following table presents the changes in Accumulated other comprehensive income by component(1) for the six months ended June 30, 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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

29

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12. 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

 

 

13

 

 

N/A

 

 

N/A

 

 

N/A

 

 

 

13

 

Foreign exchange forward contracts

 

 

(3

)

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(3

)

Net gain

 

N/A

 

 

 

12

 

 

 

6

 

 

N/A

 

 

 

18

 

Foreign currency items

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(7

)

 

 

(7

)

Other comprehensive income (loss)

   before reclassifications

 

 

10

 

 

 

12

 

 

 

6

 

 

 

(7

)

 

 

21

 

Amounts reclassified from Accumulated

   other comprehensive income

 

 

(6

)

 

 

(6

)

 

 

(1

)

 

 

—

 

 

 

(13

)

Net current period other comprehensive

   income (loss)

 

 

4

 

 

 

6

 

 

 

5

 

 

 

(7

)

 

 

8

 

Balance at June 30, 2022

 

 

4

 

 

 

23

 

 

 

4

 

 

 

1

 

 

 

32

 

 

(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.

 

 

30

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

 

The following tables present 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

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

 

$

 

 

$

 

Net derivative gains (losses) on cash flow hedge

 

 

 

 

 

 

 

 

Natural gas swap contracts (1)

 

 

5

 

 

 

(1

)

Currency options and forwards (1)

 

 

1

 

 

 

16

 

Total before tax

 

 

6

 

 

 

15

 

Tax expense

 

 

(2

)

 

 

(3

)

Net of tax

 

 

4

 

 

 

12

 

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension items

 

 

 

 

 

 

 

 

Amortization of net actuarial gain (loss) (3) (4)

 

 

8

 

 

 

(3

)

Amortization of prior year service costs (3)

 

 

—

 

 

 

(1

)

Total before tax

 

 

8

 

 

 

(4

)

Tax (expense) benefit

 

 

(2

)

 

 

1

 

Net of tax

 

 

6

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Amortization of other post-retirement benefit items

 

 

 

 

 

 

 

 

Amortization of net actuarial gain (3)

 

 

—

 

 

 

1

 

Discontinued operations

 

 

1

 

 

 

—

 

Total before tax

 

 

1

 

 

 

1

 

Tax expense

 

 

—

 

 

 

—

 

Net of tax

 

 

1

 

 

 

1

 

31

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

 

 

 

 

 

Amounts reclassified from

Accumulated other

comprehensive income

 

 

 

Successor

 

 

Predecessor

 

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

 

$

 

 

$

 

Net derivatives gains (losses) on cash flow hedge

 

 

 

 

 

 

 

 

Natural gas swap contracts (1)

 

 

6

 

 

 

(1

)

Currency options and forwards (1)

 

 

2

 

 

 

26

 

Net investment hedge (2)

 

 

—

 

 

 

(9

)

Total before tax

 

 

8

 

 

 

16

 

Tax expense

 

 

(2

)

 

 

(2

)

Net of tax

 

 

6

 

 

 

14

 

 

 

 

 

 

 

 

 

 

Amortization of defined benefit pension items

 

 

 

 

 

 

 

 

Amortization of net actuarial gain (loss) (3) (4)

 

 

8

 

 

 

(5

)

Amortization of prior year service costs (3)

 

 

—

 

 

 

(1

)

Discontinued operations

 

 

—

 

 

 

(4

)

Total before tax

 

 

8

 

 

 

(10

)

Tax (expense) benefit

 

 

(2

)

 

 

2

 

Net of tax

 

 

6

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

Amortization of other post-retirement benefit items

 

 

 

 

 

 

 

 

Amortization of net actuarial gain (3)

 

 

—

 

 

 

1

 

Discontinued operations

 

 

1

 

 

 

—

 

Total before tax

 

 

1

 

 

 

1

 

Tax expense

 

 

—

 

 

 

—

 

Net of tax

 

 

1

 

 

 

1

 

 

 

 

(1)

These amounts are included in Cost of Sales in the Consolidated Statements of Earnings and Comprehensive Income.

 

(2)

This amount is included in Earnings from discontinued operations, net of taxes in the Consolidated Statements of Earnings 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).

 

(4)

Includes the non-cash pension settlement gain of $8 million recognized in the second quarter of 2022.

 

 

 

 

 

 

32

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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:

 

 

 

June 30,

 

 

 

2022

 

 

 

$

 

Balance at beginning of year

 

 

41

 

Additions and other changes

 

 

1

 

Environmental spending

 

 

(1

)

Balance at end of period

 

 

41

 

 

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.

 

 

33

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

 

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 June 30, 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 June 30, 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 June 30, 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. However, on June 30, 2022, the Supreme Court reversed the D.C. Circuit’s decision, holding that the Clean Power Plan was an “extraordinary” case of an agency claiming transformative power without a clear statement from Congress. The decision does not completely bar EPA from regulating greenhouse gas emissions from the power sector but prohibits the EPA from imposing standards based on “generation shifting” away from coal-fired power plants to natural gas plants and renewable resources. The EPA plans to propose a new climate change rule for existing power plants in March 2023. 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.

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.

34

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

The EPA proposed to revise its Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”), or Boiler MACT, in a notice published on August 24, 2020. The proposed rule is a response to two court decisions that remanded certain issues for further review by the EPA, and it includes revisions to 34 different emission limitations that could apply to some of the Company’s facilities. 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.

 

 

 

35

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 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 now operates as a single reportable segment as described below, which also represents its only operating segment:

•

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

An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:

 

 

 

Successor

 

 

Predecessor

 

 

Successor

 

 

Predecessor

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

SEGMENT DATA

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales by product group

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Communication papers

 

 

635

 

 

 

498

 

 

 

1,214

 

 

 

986

 

Specialty and packaging papers

 

 

189

 

 

 

145

 

 

 

364

 

 

 

282

 

Market pulp

 

 

263

 

 

 

273

 

 

 

519

 

 

 

519

 

Consolidated sales

 

 

1,087

 

 

 

916

 

 

 

2,097

 

 

 

1,787

 

Operating income (loss) from continuing operations (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

75

 

 

 

77

 

 

 

114

 

 

 

78

 

Corporate

 

 

(9

)

 

 

(29

)

 

 

(23

)

 

 

(39

)

Consolidated operating income from continuing

   operations

 

 

66

 

 

 

48

 

 

 

91

 

 

 

39

 

Interest expense, net

 

 

24

 

 

 

20

 

 

 

45

 

 

 

35

 

Non-service components of net periodic benefit cost

 

 

(17

)

 

 

(6

)

 

 

(26

)

 

 

(12

)

Earnings before income taxes

 

 

59

 

 

 

34

 

 

 

72

 

 

 

16

 

Income tax expense

 

 

13

 

 

 

11

 

 

 

16

 

 

 

8

 

Earnings from continuing operations

 

 

46

 

 

 

23

 

 

 

56

 

 

 

8

 

Earnings from discontinued operations, net of taxes

 

 

5

 

 

 

14

 

 

 

18

 

 

 

—

 

Net earnings

 

 

51

 

 

 

37

 

 

 

74

 

 

 

8

 

 

(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 six months ended June 30, 2021, the Company recognized $6 million as a reduction of costs related to this program (CDN $8 million) ($5 million in Cost of sales (CDN $6 million) and $1 million in Selling, general and administrative (CDN $2 million)).

 

 

36

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

JUNE 30, 2022

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

 

NOTE 15.

_________________

SUBSEQUENT EVENT

Paper Excellence enters agreement to acquire Resolute Forest Products through Domtar Corporation

On July 6, 2022, the Paper Excellence Group announced that it has entered into a definitive agreement to acquire Resolute Forest Products Inc. ("Resolute") through Domtar. Under the agreement, Domtar will acquire all outstanding shares of Resolute common stock for $20.50 per share and one contingent value right tied to potential duty deposit refunds of up to $500 million. Any proceeds attributable to the contingent value right will be distributed proportionally to contingent value right holders, and the value will ultimately be determined by the terms and timing of the resolution of the softwood lumber dispute between Canada and the United States. 

The cash consideration will be approximately $1.6 billion, excluding the contingent value right on softwood lumber duty deposit refunds. 

Domtar has secured committed financing consisting of (i) up to $500 million in equity, and (ii) debt financing consisting of (A) a $400 million senior secured bridge loan and an increased $1 billion ABL facility with commitments provided by Barclays Bank PLC and Bank of Montreal and (B) a $500 million farm credit system term loan with a commitment provided by CoBank, ACB. Such commitments are subject to the terms and conditions set forth in the applicable debt commitment letters. Additionally, Domtar may fund the acquisition with available liquidity from Domtar and Resolute, which may include cash on hand as well as drawings under the ABL facility. The term loan and senior secured bridge are expected to rank pari passu with Domtar’s existing term loan and secured notes and the financing is expected to refinance all of Resolute’s existing debt in conjunction with the acquisition. Domtar expects to replace the secured bridge loan with longer term secured notes. The final structure and terms of the debt financing are subject to change depending on markets and other conditions.

The transaction, subject to Resolute shareholder approval, as well as applicable regulatory approvals and satisfaction of other customary closing conditions, is expected to close in the first half of 2023.

 

 

 

37

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q. This MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 10, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed below under “outlook”, “Forward-looking statements”, as well as in Item 1A, Risk Factors, in Part II, of this report. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers to Domtar Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is determined on the basis of accounting principles generally accepted in the United States.

The information contained on our website, www.domtar.com, is not incorporated by reference into this Form 10-Q and should in no way be construed as a part of this or any other report that we file with or furnish to the SEC.

In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT” refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net earnings (loss), and shipment volumes are based on the three and six months ended June 30, 2022 and June 30, 2021. The three month and six month periods are also referred to as the second quarter and first half of 2022 and 2021. Reference to notes refers to footnotes to the consolidated financial statements and notes thereto included in Item 1 in this Form 10-Q.

Paper Excellence Acquired Domtar Corporation

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”).

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 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.”

We have prepared our discussion of the results of operations by comparing the results of the Successor period from January 1, 2022 to June 30, 2022 and the Predecessor period from January 1, 2021 through June 30, 2021. We believe this approach provides the most meaningful basis of comparison and is more useful in identifying current business trends for the periods presented.

As a condition to obtain the approval of the Merger from the Canadian Competition Bureau, we were required to commit to the divestiture of our Kamloops, British Columbia pulp mill, within a short period of time following the Merger. On June 1, 2022, the mill and related assets, were sold to an independent acquirer approved by the Commissioner. The assets and liabilities related to the pulp mill for periods prior to the sales, were presented as held for sale in the Consolidated Balance Sheet. At the time of the Merger, the sale of the pulp mill meets the criteria for discontinued operations and as such, earnings are included within Earnings (loss) from discontinued operations, net of taxes in the Consolidated Statement of Earnings (Loss) and Comprehensive income (loss) for all periods presented. Refer to Item 1, Financial Statements and Supplementary Data, under Note 3 “Discontinued Operations” for additional information on the Discontinued Operations.

SUBSEQUENT EVENT

Paper Excellence enters agreement to acquire Resolute Forest Products through Domtar Corporation

On July 6, 2022, the Paper Excellence Group announced that it has entered into a definitive agreement to acquire Resolute Forest Products Inc. ("Resolute") through Domtar. Under the agreement, we will acquire all outstanding shares of Resolute common stock for $20.50 per share and one contingent value right tied to potential duty deposit refunds of up to $500 million. Any proceeds attributable to the contingent value right will be distributed proportionally to contingent value right holders, and the value will ultimately be determined by the terms and timing of the resolution of the softwood lumber dispute between Canada and the United States.

38

 

The cash consideration will be approximately $1.6 billion, excluding the contingent value right on softwood lumber duty deposit refunds.

We have secured committed financing consisting of (i) up to $500 million in equity, and (ii) debt financing consisting of (A) a $400 million senior secured bridge loan and an increased $1 billion ABL facility with commitments provided by Barclays Bank PLC and Bank of Montreal and (B) a $500 million farm credit system term loan with a commitment provided by CoBank, ACB. Such commitments are subject to the terms and conditions set forth in the applicable debt commitment letters. Additionally, Domtar may fund the acquisition with available liquidity from Domtar and Resolute, which may include cash on hand as well as drawings under the ABL facility. The term loan and senior secured bridge are expected to rank pari passu with Domtar’s existing term loan and secured notes and the financing is expected to refinance all of Resolute’s existing debt in conjunction with the acquisition. Domtar expects to replace the secured bridge loan with longer term secured notes. The final structure and terms of the debt financing are subject to change depending on markets and other conditions.

The transaction, subject to Resolute shareholder approval, as well as applicable regulatory approvals and satisfaction of other customary closing conditions, is expected to close in the first half of 2023.

OVERVIEW

We design, manufacture, market and distribute a wide variety of fiber-based products including communication papers, specialty and packaging papers. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. 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.

 

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

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

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

Conversion of 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. Once fully operational, the mill is expected to be a low-cost, first quartile recycled linerboard facility in North America. The converted mill is expected to directly employ approximately 160 employees. For the first half of 2022, we recorded $25 million under Asset conversion costs, and we are expecting costs to be ongoing until the completion of the conversion.

HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2022

 

•

We reported operating income from continuing operations of $66 million, compared to operating income from continuing operations of $48 million in the second quarter of 2021

 

•

We reported earnings from continuing operations of $46 million compared to earnings from continuing operations of $23 million in the second quarter of 2021

 

•

Earnings from discontinued operations, net of taxes amounted to $5 million in the second quarter of 2022

 

•

Sales increased by 19% from the second quarter of 2021. Our net average selling prices for pulp and paper as well as our paper volumes were up when compared to the second quarter of 2021

 

•

Recognition of asset conversion costs of $12 million related to our previously announced decision to repurpose assets at our Kingsport mill

 

•

Recognition of $3 million of transaction costs related to our announced agreement to acquire Resolute


39

 

 

HIGHLIGHTS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2022  

 

•

We reported operating income from continuing operations of $91 million, compared to operating income from continuing operations of $39 million in the first half of 2021

 

•

We reported earnings from continuing operations of $56 million compared to earnings from continuing operations of $8 million in the first half of 2021

 

•

Earnings from discontinued operations, net of taxes amounted to $18 million in the first half of 2022

 

•

Sales increased by 17% from the first half of 2021. Our net average selling prices for pulp and paper as well as our paper volumes were up when compared to the first half of 2021

 

•

Recognition of asset conversion costs of $25 million related to our previously announced decision to repurpose assets at our Kingsport mill

 

•

Recognition of $6 million of transaction costs related to our Merger as well as the announced agreement to acquire Resolute

 

 

 

Three months ended

 

 

Six months ended

 

 

 

Successor

 

 

 

Predecessor

 

 

Variance

 

 

Successor

 

 

 

Predecessor

 

 

Variance

 

FINANCIAL HIGHLIGHTS

 

June 30, 2022

 

 

 

June 30, 2021

 

 

$

 

 

%

 

 

June 30, 2022

 

 

 

June 30, 2021

 

 

$

 

 

%

 

(In millions of dollars, unless otherwise noted)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

1,087

 

 

 

$

916

 

 

$

171

 

 

 

19

%

 

$

2,097

 

 

 

$

1,787

 

 

$

310

 

 

 

17

%

Operating income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp and Paper

 

 

75

 

 

 

 

77

 

 

 

(2

)

 

 

(3

%)

 

 

114

 

 

 

 

78

 

 

 

36

 

 

 

46

%

Corporate

 

 

(9

)

 

 

 

(29

)

 

 

20

 

 

 

69

%

 

 

(23

)

 

 

 

(39

)

 

 

16

 

 

 

41

%

Operating income from continuing operations

 

 

66

 

 

 

 

48

 

 

 

18

 

 

 

38

%

 

 

91

 

 

 

 

39

 

 

 

52

 

 

 

133

%

Earnings from continuing operations

 

 

46

 

 

 

 

23

 

 

 

23

 

 

 

100

%

 

 

16

 

 

 

 

8

 

 

 

8

 

 

 

100

%

Earnings from discontinued operations, net of taxes

 

 

5

 

 

 

 

14

 

 

 

(9

)

 

 

(64

%)

 

 

18

 

 

 

 

-

 

 

 

18

 

 

-

 

Net earnings

 

 

51

 

 

 

 

37

 

 

 

14

 

 

 

38

%

 

 

74

 

 

 

 

8

 

 

 

66

 

 

 

825

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2022

 

 

At December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

 

 

 

$

4,539

 

 

$

4,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term debt, including current portion

 

 

 

 

 

 

 

 

 

 

$

1,538

 

 

$

1,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ONGOING IMPACT OF THE COVID-19 PANDEMIC

As reflected in the discussion below, ongoing impacts of the COVID-19 pandemic and actions taken in response to them had varying effects on our results of operations, although some effects, including customer demand, are mitigating or becoming more difficult to isolate or quantify. Moreover, it is difficult to determine the duration and scope of the pandemic, the scale and rate of economic recovery from the pandemic, any ongoing effects on consumer demand and spending patterns, supply chain disruptions, and labor availability and costs, or the impact of other indirect factors that may be attributable to the pandemic, and the extent to which these or other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations. In addition, these factors can make it difficult to isolate and quantify the portion of our costs that are a direct result of the pandemic and costs arising from factors that may have been influenced by the pandemic, including increased wage rates and incentives, increased carrier rates, and fulfillment network inefficiencies resulting from constrained labor markets and global supply chain constraints. We expect these factors and their effects on our operations to continue during the second half of 2022.

COST REDUCTION PROGRAM

In 2020, we had implemented a cost savings program, which we had completed at the end of the second quarter of 2021. As part of this program, we announced the permanent closure of the uncoated freesheet manufacturing at our Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine and converting operations at the Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. Additionally, we announced the closure of the converting center in Dallas, Texas. The Kingsport paper machine has been idled since April 2020. The Ridgefields converting center ceased operations at the end of the third quarter of

40

 

2020, while the Port Huron mill shut down at the end of February 2021 and the Dallas converting center ceased operations at the beginning of July 2021.

Restart of the paper machine and converting operations at Ashdown, Arkansas mill

On July 15, 2021, we announced our intention to restart the paper machine and converting operations at the Ashdown, Arkansas mill, which has been idled since April 2020, to add an additional 185,000 tons per year of uncoated freesheet production capacity to our manufacturing network. The increase was necessary to meet growing customer demand as the economy recovers from the COVID-19 pandemic. The additional paper capacity will result in a capacity reduction of 185,000 ADMT per year of baled SBSK pulp at the mill. The machine restarted in the fourth quarter of 2021 and is now in full operation.

REVIEW OF OPERATIONS

This section presents a discussion and analysis of our second quarter and first half of 2022 and 2021 sales, operating income (loss) and other information relevant to the understanding of our results of operations.

 

ANALYSIS OF NET SALES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Six months ended

 

 

 

Successor

 

 

 

Predecessor

 

 

Variance

 

 

Successor

 

 

 

Predecessor

 

 

Variance

 

 

 

June 30, 2022

 

 

 

June 30, 2021

 

 

$

 

 

%

 

 

June 30, 2022

 

 

 

June 30, 2021

 

 

$

 

 

%

 

Sales

 

 

1,087

 

 

 

 

916

 

 

 

171

 

 

19%

 

 

 

2,097

 

 

 

 

1,787

 

 

 

310

 

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shipments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paper - manufactured (in thousands of ST)

 

 

576

 

 

 

 

549

 

 

 

27

 

 

5%

 

 

 

1,141

 

 

 

 

1,095

 

 

 

46

 

 

4%

 

Communication Papers

 

 

477

 

 

 

 

454

 

 

 

23

 

 

5%

 

 

 

940

 

 

 

 

907

 

 

 

33

 

 

4%

 

Specialty and Packaging papers

 

 

99

 

 

 

 

95

 

 

 

4

 

 

4%

 

 

 

201

 

 

 

 

188

 

 

 

13

 

 

7%

 

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

 

 

12

 

 

 

 

18

 

 

 

(6

)

 

(33%)

 

 

 

24

 

 

 

 

36

 

 

 

(12

)

 

(33%)

 

Paper - total (in thousands of ST)

 

 

588

 

 

 

 

567

 

 

 

21

 

 

4%

 

 

 

1,165

 

 

 

 

1,131

 

 

 

34

 

 

3%

 

Pulp (in thousands of ADMT)

 

 

281

 

 

 

 

352

 

 

 

(71

)

 

(20%)

 

 

 

575

 

 

 

 

733

 

 

 

(158

)

 

(22%)

 

 

Sales in the second quarter of 2022 increased by $171 million, or 19% when compared to sales in the second quarter of 2021. This increase in sales is mostly due to an increase in our net average selling prices for pulp and paper and an increase in our paper sales volume. This increase was partially offset by a decrease in our pulp sales volume in part related to logistic challenges in transporting goods to customers.

Sales in the first half of 2022 increased by $310 million, or 17% when compared to sales in the first half of 2021. This increase in sales is mostly due to an increase in our net average selling prices for pulp and paper and an increase in our paper sales volumes. This increase was partially offset by a decrease in our pulp sales volumes in part related to logistic challenges in transporting goods to customers.

 

ANALYSIS OF CHANGE IN OPERATING INCOME (LOSS)

Second quarter of 2022 compared to Second quarter of 2021

Operating income from continuing operations in our Pulp and Paper segment amounted to $75 million in the second quarter of 2022, a decrease of $2 million, when compared to operating income from continuing operations of $77 million in the second quarter of 2021. Our results were negatively impacted by:

 

•

Higher input costs ($88 million) mostly related to higher costs of fiber, chemicals and energy mostly related to inflation

 

•

Higher operating expenses ($81 million) mostly due to higher freight cost as well as higher maintenance in part due to the timing of some major maintenance

 

•

Higher depreciation/impairment charges ($10 million). Depreciation charges were higher by $11 million when compared to the second quarter of 2021 due to the application of the acquisition method of accounting as of the date of the Merger, resulting in a new basis of the Company’s assets, which were measured at fair value. We recorded $1 million of accelerated depreciation under Impairment of long-lived assets in the second quarter of 2021 related to our cost reduction program and there were no accelerated depreciation charges in the second quarter of 2022

 

•

Lower gains from our foreign currency hedging program, partially offset by the positive impact of a lower Canadian dollar on our Canadian dollar denominated expenses ($9 million)

 

•

Higher conversion charges ($7 million) in the second quarter of 2022. We recorded $12 million of asset conversion costs at our Kingsport mill as part of the conversion to a linerboard facility compared to $5 million in the second quarter of 2021

41

 

 

These decreases were partially offset by:

 

•

Higher net average selling prices for pulp and paper ($181 million)

 

•

There were no restructuring charges in the second quarter of 2022 compared to $6 million in the second quarter of 2021

 

•

Higher other income ($4 million)

 

•

Higher volume and mix ($2 million)

First half of 2022 compared to first half of 2021

Operating income from continuing operations in our Pulp and Paper segment amounted to $114 million in the first half of 2022, an increase of $36 million, when compared to operating income from continuing operations of $78 million in the first half of 2021. Our results were positively impacted by:

 

•

Higher net average selling prices for pulp and paper ($345 million)

 

•

Higher volume and mix ($10 million)

 

•

There were no restructuring charges in the first half of 2022 compared to $8 million in the first half of 2021

 

•

Higher other income ($2 million)

These increases were partially offset by:

 

•

Higher operating expenses ($150 million) mostly related to higher freight costs as well as higher maintenance costs in part due to the timing of some major maintenance.

 

•

Higher input costs ($128 million) mostly related to higher cost of fiber, chemicals and energy mostly due to inflation

 

•

Higher depreciation/impairment charges ($20 million). Depreciation charges were higher by $27 million when compared to the first half of 2021 due to the application of the acquisition method of accounting as of the date of the Merger, resulting in a new basis of the Company’s assets, which were measured at fair value. We recorded $7 million of accelerated depreciation under Impairment of long-lived assets in the first half of 2021 related to our cost reduction program and there were no accelerated depreciation charges in the first half of 2022

 

•

Lower gains from our foreign currency hedging program partially offset by a lower Canadian dollar on our Canadian dollar denominated expenses ($19 million)

 

•

Higher conversion charges ($12 million) in the first half of 2022. We recorded $25 million of asset conversion costs at our Kingsport mill as part of the conversion to a linerboard facility compared to $13 million in the first half of 2021

OTHER FACTORS

Corporate

We incurred $9 million of corporate charges in the second quarter of 2022 compared to $29 million in the second quarter of 2021. This decrease was mostly due to transaction costs of $3 million in the second quarter of 2022 related to our announced agreement to acquire Resolute compared to $18 million in the second quarter of 2021 related to our Merger. In addition, there were no restructuring charges in the second quarter of 2022 compared to $1 million in the second quarter of 2021.

We incurred $23 million of corporate charges in the first half of 2022, a decrease of $16 million compared to corporate charges of $39 million in the first half of 2021. This decrease was mostly due to transaction costs of $6 million in the first half of 2022 related to our announced agreement to acquire Resolute as well as our Merger, compared to $18 million in the first half of 2021 related to our Merger. In addition, there were no restructuring charges in the first half of 2022 compared to $2 million in the first half of 2021.

Interest Expense, net

We incurred $24 million of net interest expense in the second quarter of 2022, an increase of $4 million compared to net interest expense of $20 million in the second quarter of 2021. Net interest expense in the second quarter of 2022 is related to the $775 million Senior Secured Notes due 2028 issued on October 18, 2021, the new ABL Revolving Credit Facility entered into on November 30, 2021, as well as the First Lien Term Loan facility entered on November 30, 2021. In the second quarter of 2022, we had capitalized interest of $5 million, compared to $2 million in the second quarter of 2021, mostly related to our mill conversion. In the second quarter of 2021, we had paid $11 million in make-whole premium fees related to the early retirement of the 4.4% Notes originally due March 2022. See section “Capital Resources” below for more information on our new debt structure following our Merger on November 30, 2021.

We incurred $45 million of net interest expense in the first half of 2022, an increase of $10 million compared to net interest expense of $35 million in the first half of 2021. Net interest expense in the first half of 2022 is related to the $775 million Senior Secured Notes due 2028 issued on October 18, 2021, the new ABL Revolving Credit Facility entered into on November 30, 2021, the First Lien Term Loan facility entered on November 30, 2021 as well as a write-off of $6 million related to unamortized debt issuance cost in the

42

 

first quarter of 2022. These interest expenses were partially offset by lower interest on the 4.4% Notes due to the early retirement in April 2021 as well as a non-cash gain of $10 million on the fair value increment of the 6.25% Notes and 6.75% Notes upon partial repayment in January 2022. In the first half of 2022, we had capitalized interest of $9 million, compared to $3 million in the first half of 2021, mostly related to our mill conversion. In the second quarter of 2021, we had paid $11 million in make-whole premium fees related to the early retirement of the 4.4% Notes originally due March 2022. See section “Capital Resources” below for more information on our new debt structure following our Merger on November 30, 2021.

Non-Service Components of net periodic benefit cost

For the second quarter and first half of 2022, our Non-Service Components of net periodic benefit cost was a benefit of $17 million and $26 million, respectively, an increase of $11 million and $14 million when compared to the second quarter and first half of 2021. This increase benefit was mostly related to a non-cash pension settlement gain of $8 million recorded in the second quarter of 2022. Refer to Item 1, Financial Statements and Supplementary Data, under Note 6 “Pension Plans and Other Post-Retirement Benefit Plans” for additional information.

Income Taxes

For the second quarter of 2022, our income tax expense was $13 million, consisting of a current income tax expense of $21 million and a deferred income tax benefit of $8 million. This compares to an income tax expense of $11 million in the second quarter of 2021, consisting of a current income tax expense of $16 million and a deferred income tax benefit of $5 million. We made payments, net of income tax refunds, of $4 million during the second quarter of 2022. The effective tax rate was 22% compared with an effective tax rate of 32% in the second quarter of 2021. The effective tax rate for the second quarter of 2021 was impacted by certain transaction costs incurred during the quarter related to the potential acquisition of our Company by Paper Excellence which provided no tax benefit.

 

For the first half of 2022, our income tax expense was $16 million, consisting of a current income tax expense of $22 million and a deferred income tax benefit of $6 million. This compares to an income tax expense of $8 million in the first half of 2021, consisting of a current income tax expense of $8 million and no deferred income tax expense. We made payments, net of income tax refunds, of $6 million during the first half of 2022. The effective tax rate was 22% compared to an effective tax rate of 50% in the first half of 2021. The effective tax rate for the first half of 2021 was significantly impacted by certain transaction costs incurred during the period related to the potential acquisition of our Company by Paper Excellence which provided no tax benefit.

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 may experience ongoing decreasing demand for most of our existing paper products. In addition, current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions in certain countries due to economic slowdowns and government restrictions on movement. The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and pricing of other pulp products.

OUTLOOK

For the balance of 2022, we expect North American paper demand to remain strong as COVID-19 restrictions continue to ease in North America and employment levels remain high. Pulp markets are expected to continue to remain tight, but uncertain in light of continued COVID-19 lockdowns in China and ocean logistic challenges. We will benefit from recent price increase announcements. The increased prices are expected to be partially offset by cost inflation on energy, transportation and raw materials.

DISCONTINUED OPERATIONS

For the second quarter and first half of 2022, we reported earnings from discontinued operations, net of taxes, of $5 million and $18 million, respectively (second quarter and first half of 2021 - earnings from discontinued operations, net of taxes of $14 million and nil, respectively).

Mandated sale of Kamloops, British Columbia mill

As a condition to obtain the approval of the November 30, 2021 Merger from the Canadian Competition Bureau, we were required to commit to the divestiture of our Kamloops, British Columbia pulp mill, within a short period of time following the Merger. On June 1, 2022, the mill was sold to an independent acquirer approved by the Commissioner. The assets and liabilities related to the pulp mill

43

 

for periods prior to the sales, were presented as held for sale in the Consolidated Balance Sheet. At the time of the Merger, the sale of the pulp mill meet the criteria for discontinued operations and as such, earnings were included within Earnings (loss) from discontinued operations, net of taxes in the Consolidated Statement of Earnings (Loss) and Comprehensive income (loss) for all periods presented Refer to Item 1, Financial Statements and Supplementary Data, under Note 3 “Discontinued Operations” for additional information on the Discontinued Operations.

Sale of our Personal Care business

On March 1, 2021, we completed the sale of our Personal Care business to American Industrial Partners (“AIP”), for a purchase price of $920 million in cash. Based on its magnitude and because we exited the Personal Care business, the sale represented a significant strategic shift that had 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 1, Financial Statements and Supplemental Data, under Note 3, “Discontinued Operations”.

STOCK-BASED COMPENSATION EXPENSE

As a result of the acquisition by Paper Excellence, on November 30, 2021, we recognized an accelerated vesting on all the outstanding stock-based awards under the Omnibus Plan. These awards were then cancelled and converted into the right to receive cash payment, which was made in December 2021. In turn, the Omnibus Plan was terminated and is expected to be replaced in 2022 by another long-term incentive program.

For the first half of 2021, stock-based compensation expense recognized in the predecessor results from continuing and discontinued operations were $6 million.

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 $400 million ABL Revolving Credit facility, of which $344 million was undrawn and available as of June 30, 2022. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.

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

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

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 $219 million in the first half of 2022, a $129 million increase compared to cash flows from operating activities, including discontinued operations, of $90 million in the first half of 2021. This increase in cash flows from operating activities is primarily due to a decrease in working capital requirements as well as an increase in profitability. We made income tax payments, net of refunds, of $6 million during the first half of 2022 compared to income tax payments, net of refunds, of $1 million during the first half of 2021.

Investing Activities

Cash flows provided from investing activities, including discontinued operations, in the first half of 2022 amounted to $49 million, a $727 million decrease compared to cash flow provided from investing activities, including discontinued operations, of $776 million in the first half of 2021.

The source of cash provided from investing activities in the first half of 2022 was attributable to the proceeds from the sale of our Kamloops mills ($237 million) and proceeds from sale of property, plant and equipment of $23 million and was partially offset by additions to property, plant and equipment of $211 million.

44

 

The source of cash provided from investing activities in the first half of 2021 was attributable to the proceeds from the sale of our Personal Care business ($897 million) and was partially offset by the additions to property, plant and equipment of $122 million.

Our annual capital expenditures for 2022 should increase mostly due to our Kingsport mill conversion and are expected to be between $370 million and $390 million.

Financing Activities

Cash flows used for financing activities, including discontinued operations, totaled $364 million in the first half of 2022 compared to cash flows used for financing activities, including discontinued operations, of $829 million in the first half of 2021.

The use of cash flows from financing activities in the first half of 2022 was attributable to the redemptions of the 6.25% Notes due 2042 and the 6.75% Notes due 2044 (“Existing Domtar Notes”) pursuant to the Domtar Notes Change of Control Offers that terminated on January 3, 2022. To partially finance these repayments, we utilized $127 million under the Delayed Draw Term Loan facility as well as borrowing under our ABL Revolving Credit Facility, which was fully repaid in the second quarter of 2022 with the proceeds from the sales of our Kamloops mill ($150 million). As a result, we repaid $134 million of the 6.25% Notes due 2042 and $100 million of the 6.75% Notes due 2044. In addition, $133 million of the Senior Secured Notes were redeemed as a result of the Domtar Existing Notes Change of Control Offers.

The use of cash flows for financing activities in the first half of 2021 was for the repayment of the Term Loan and the 4.40% Notes, including the make-whole premium ($605 million) as well as for the repurchase of our common stock ($223 million) of which a $200 million payment was made under an ASR agreement.

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $1,349 million as of June 30, 2022, compared to $1,616 million as of December 31, 2021.     

ABL Revolving Credit Facility

On November 30, 2021, we entered into our ABL Revolving Credit Facility that matures on November 30, 2026. Our 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.

Borrowings under our ABL Revolving Credit Facility are limited by borrowing base calculations based on the sum of specified percentages of eligible accounts receivable, plus specified percentages of eligible inventory, plus specified percentages of qualified cash, minus the amount of any applicable reserves. Borrowings bear interest at a floating rate, which can be either an adjusted Eurodollar rate plus an applicable margin or, at our option, a base rate plus an applicable margin.

Our obligations under our ABL Revolving Credit Facility are guaranteed by our immediate parent (a company which has no assets other than Domtar shares) and our wholly-owned material U.S. subsidiaries and wholly-owned material Canadian subsidiaries. Our ABL Revolving Credit Facility has a first-priority lien on the current assets of such U.S. and Canadian subsidiaries, and a second-priority lien on the fixed assets of our wholly-owned material U.S. subsidiaries, excluding principal properties (second in priority to the liens securing our First Lien Term Loan Facility (“Term Loan Facility”) discussed below), in each case, subject to permitted liens.

Borrowings under the ABL Revolving Credit Facility bear interest at LIBOR, EURIBOR, Canadian bankers' acceptance or prime rate, as applicable, plus a margin linked to the Company’s utilization of the credit. In addition, the Company pays facility fees quarterly at rates linked to the Company’s utilization of the credit. The Company does not anticipate a significant impact to its financial position from the planned phase out of LIBOR. Our ABL Revolving Credit Facility contains customary covenants, including, but not limited to, restrictions on our ability and that of our subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends, sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness, enter into transactions with affiliates or change our line of business.

Our ABL Revolving Credit Facility requires the maintenance of a fixed charge coverage of 1.00 to 1.00 at the end of each fiscal quarter for the trailing twelve-month period, when specified excess availability is less than the greater of $35 million and 10% of the lesser of the borrowing base and maximum borrowing capacity. This covenant did not apply as of June 30, 2022.

As of June 30, 2022, we had no borrowings and $56 million of letters of credit outstanding under this facility.

Existing Domtar Notes Change of Control Offers

Following the change of control of Domtar, Domtar was obligated, pursuant to the indenture governing the 6.25% Notes due 2042 and the 6.75% Notes due 2044 (“Existing Domtar Notes”), to make the Existing Domtar Notes Change of Control Offers, pursuant to which Domtar offered to repurchase all of the Existing Domtar Notes from holders at a purchase price of 101%. Up to $250 million

45

 

under the First Lien Term Loan was available on a delayed draw basis (“Delayed Draw Term Loan”) and up to $250 million aggregate principal amount of the 6.75% Senior Secured Notes was earmarked for the repurchase of the Existing Domtar Notes pursuant to the Existing Domtar Notes Change of Control Offers. Up to $250 million aggregate principal amount of the Senior Secured Notes was subject to special mandatory redemption to the extent proceeds were not used to fund the redemptions of the Existing Domtar Notes pursuant to the 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.

Term Loan Facility

On November 30, 2021, we entered into a Term Loan Facility maturing November 30, 2028, of which $525 million was immediately drawn and up to $250 million was available as a Delayed Draw Term Loan.

Borrowings under our Term Loan Facility amortize in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount in 2022 and 5% per annum thereafter.

The interest rate margin applicable to borrowings under our Term Loan Facility will be, at our option, either (1) the base rate plus an applicable margin or (2) LIBOR plus an applicable margin. Our Term Loan Facility will be subject to a LIBOR floor of 0.75%.

We will be required to prepay our Term Loan Facility and Senior Secured Notes with 100% of the net cash proceeds of certain asset sales subject to certain reinvestment rights. We will be required to prepay our Term Loan Facility with 100% of the net cash proceeds of certain debt issuances and 50% of excess cash flow in each case, subject to certain exceptions.

Our obligations under our Term Loan Facility are guaranteed by our immediate parent (a company with no assets other than Domtar shares) and all of the Issuer’s direct and indirect wholly-owned material U.S. subsidiaries. Our Term Loan Facility as well as the Senior Secured Notes have a first priority lien on the fixed assets of our wholly-owned material U.S. subsidiaries, representing 75% of the Consolidated Fixed Assets, and a second-priority lien on the current asset collateral in the U.S. (second in priority to the liens securing our ABL Revolving Credit Facility discussed above), in each case, subject to other permitted liens.

Our Term Loan Facility contains customary negative covenants consistent with those applicable to the Notes, including, but not limited to, restrictions on our ability and that of our restricted subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends or make other restricted payments, sell or otherwise transfer assets or enter into transactions with affiliates.

On January 7, 2022, we utilized $127 million under the Delayed Draw Term Loan 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. We repaid $4 million of the facility in the first half of 2022, leaving total drawings under the Term Loan Facility of $648 million as of June 30, 2022.

Senior Secured Notes

Pearl Merger Sub Inc., the initial issuer of the $775 million aggregate principal amount of 6.75% Senior Secured Notes due 2028 (the “Notes”), was a newly formed, wholly-owned subsidiary of Pearl Excellence Holdco L.P., a Delaware limited partnership. This Note issue was part of financing related to the acquisition of Domtar by Pearl Excellence Holdco L.P. Upon the completion of the acquisition, the initial issuer was merged with and into Domtar with Domtar surviving the Merger and becoming the obligor of the Notes.

The Notes mature on October 1, 2028 and interest on the Notes is payable in cash semi-annually in arrears on April 1 and October 1 of each year, commencing on April 1, 2022.

Pending completion of the Domtar Existing Notes Change of Control Offers that terminated on January 3, 2022, $250 million of the proceeds of the Notes issue was set aside designed to fund approximately half of the funds required to complete the Change of Control Offers. Such funds are included in Cash and cash equivalents on the Balance Sheet at December 31, 2021. Funds not utilized were to be used to redeem a portion of the Senior Secured Notes at a 100% price. On January 7, 2022, $133 million of the Senior Secured Notes were redeemed 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 June 30, 2022.

Our obligations under the Senior Secured Notes are guaranteed by our immediate parent and all of the Issuer’s direct and indirect wholly-owned material U.S. subsidiaries. Our Senior Secured Notes as well as the Term Loan Facility are secured by a lien on substantially all of the Issuer’s direct and indirect wholly-owned material U.S. subsidiaries’ fixed assets, representing 75% of the Consolidated Fixed Assets, and a second-priority lien on the current asset collateral in the U.S. (second in priority to the liens securing our ABL Revolving Credit Facility discussed above), in each case, subject to other permitted liens.

46

 

Our Senior Secured Notes contain customary negative covenants consistent with those applicable to the Notes, including, but not limited to, restrictions on our ability and that of our restricted subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends or make other restricted payments, sell or otherwise transfer assets or enter into transactions with affiliates.

Term Loan

On May 5, 2020, we entered into a $300 million Term Loan Agreement with a maturity date of May 5, 2025. We used borrowings under the Term Loan Agreement to repay other debt, and to pay related fees and expenses. On March 11, 2021, the Company fully repaid its Term Loan Agreement, in the amount of $294 million and wrote-off $2 million of unamortized debt issuance costs related to this repayment.

Use of proceeds from the sale of our Personal Care business

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

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

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, compliance with laws, 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 June 30, 2022, 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 June 30, 2022, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.  

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 “Recent Accounting Pronouncements,” of the financial statements in this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes and contingencies related to legal claims. These critical accounting estimates and policies have been reviewed with the Audit Committee of our Board of Directors. We believe these accounting policies, and others, should be reviewed as they are essential to understanding our results of operations, cash flows and financial condition. Actual results could differ from those estimates.

For more details on critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.

47

 

There has not been any material change to our policies since December 31, 2021. For more details, refer to Note 2 “Recent Accounting Pronouncements” of the financial statements in this Quarterly Report on Form 10-Q.    

FORWARD-LOOKING STATEMENTS

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

 

•

continued decline in usage of fine paper products in our core 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;

 

•

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”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2021.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. Unless specifically required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking statements to reflect new events or circumstances.

 


48

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2021. There has not been any material change in our exposure to market risk since December 31, 2021. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 5 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.

 

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of June 30, 2022, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.

 

 

PART II OTHER INFORMATION

See Note 13 “Commitments and Contingencies” of the financial statements in this Quarterly Report on Form 10-Q for the discussion regarding legal proceedings.

For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2021, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. There were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2021.

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

As of June 30, 2022, there are no publicly traded common shares of Domtar Corporation.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 


49

 

 

ITEM 6. EXHIBITS

 

 

 

 

 

 

 

 

    Incorporated  by reference to:


Exhibit

Number

 

Exhibit Description

 

Form

Exhibit

Filing Date

 

2.1

 

 

Agreement and Plan of Merger, dated as of July 5, 2022, by and among Resolute Forest Products Inc., Domtar Corporation, Terra Acquisition Sub Inc., Karta Halten B.V. and Paper Excellence B.V.

 

 

8-K

 

2.1

 

11-07-2022

 

 

 

 

 

 

 

10.1

 

Voting and Support Agreement, dated as of July 5, 2022, by and between Domtar Corporation and Hamblin Watsa Investment Counsel Ltd.

 

8-K

10.1

11-07-2022

 

 

 

 

 

 

 

31.1

 

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

 

 

32.1

 

Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

 

 

32.2

 

Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase

 

 

 

 

 

101.PRE

 

Inline XBRL Extension Presentation Linkbase

 

 

 

 

 

 

 

 

 

 

 

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

 

 

 

 

50

 

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

 

DOMTAR CORPORATION

 

 

Date: August 5, 2022

 

 

By:

/s/ Daniel Buron

 

Daniel Buron

 

Executive Vice President and Chief Financial Officer

 

 

By:

/s/ Josée Mireault

 

Josée Mireault

 

Director, Corporate Law and Assistant Secretary

 

 

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