2017 ANNUAL REPORT [ LOOK CLOSER ] LOOK CLOSERCASH GENERATIONCASH GENERATION DOMTAR HAS RETURNED
$1.5 BILLION
TO SHAREHOLDERS SINCE 2011
DIVIDENDS AND SHARE BUYBACKS
(CUMULATIVE)
UNDISTRIBUTED FREE CASH FLOW1
(CUMULATIVE)
$1.5B
2011
2012
2013
2014
2015
2016
2017
1 Free cash flow is a non-GAAP financial measure.
Please see “Reconciliation of non-GAAP Financial Measures”
at the end of this document.
DOMTAR 2017 ANNUAL REPORT
1
[ CASH GENERATION ]CASH GENERATIONCASH GENERATIONDomtar has paid nearly $600 million in dividends and over $900 million towards share buybacks since 2011, for a total shareholder return of $1.5 billion. On a cumulative basis, this is 69% of the $2.2 billion of free cash flow1 we have generated since making our commitment in 2011 to return the majority of free cash to shareholders. That’s value creation and a promise kept.Our strong cash generation has been powered mainly by our integrated pulp and paper business. We have maintained high performance and market leadership in our categories by managing costs and providing superior service to our customers. We have also been quick to align our production capacity with customer demand, while leveraging the flexibility of our mills to maximize productivity.Domtar’s disciplined and low-cost pulp and paper business continues to generate cash and value for shareholders.
FLEXIBLE
ASSETS
FLEXIBLEASSETSLOOK CLOSER FLEXIBLE
ASSETS
REPURPOSING
POTENTIAL PROVIDES
OPTIONALITY
CONVERSION TO PULP PRODUCTION
CONVERSION TO SPECIALTY PAPER
CLOSURE OF COMMODITY PAPER CAPACITY
DRYDEN
PLYMOUTH
ASHDOWN
MARLBORO
TOTAL
(1.5 MILLION
SHORT TONS)
1.3 MILLION
AIR DRY
METRIC
TONS
DOMTAR 2017 ANNUAL REPORT
2 - 3
FLEXIBLEASSETSDomtar has permanently removed and converted 1.5 million tons of paper capacity to balance our supply with customer demand over the past decade. Our flexible assets, access to abundant fiber, and skilled and experienced workforce have allowed us to secure the future of several of our mills and their communities by repurposing our assets to adapt to changing market conditions.For example, repurposing has resulted in the capacity to produce up to 900,000 tons annually of high-quality fluff pulp at two mills, positioning Domtar as the world’s third largest supplier. At other locations, we’ve shut down paper machines and increased existing softwood pulp capacity. This additional pulp capacity, totaling approximately one million tons, is sold in markets with growing demand—absorbent hygiene in the case of fluff pulp, and towel and tissue for softwood.There’s more to come. In 2018, we expect to make a final decision on another major mill conversion, further diversifying our revenue sources in growing markets.[ FLEXIBLE ASSETS ]
SOLID
FOUNDATI ON
LOOK CLOSERFOUNDATISOLIDFOUNDATION SALES
PROGRESSION
$1 BILLION IN PERSONAL CARE
PRODUCTS SOLD IN 2017
FOUNDATI ON 2012
2011
$1B
2013
2014
2015
2016
2017
SOLID
DOMTAR 2017 ANNUAL REPORT
4 - 5
Beginning in 2011, Domtar set out to establish a global presence in the personal care market, focused on adult incontinence and infant products. We have gone from no revenue to $1 billion in 2017, mainly through acquisitions.We operate six manufacturing facilities in the United States and Europe that can produce multiple product categories. At several locations, we have added capacity and flexibility to serve the volume and fulfilment requirements of major retailers.It has taken time to build the team and develop the strategy to grow organically in our categories. We’ve had some successes, particularly as a supplier of tailored store-branded diapers. We’re also gaining traction in the institutional market for adult incontinence products, and expanding our direct-to-consumer sales of these products following an acquisition in 2016.Through a clear channel strategy, innovation and differentiation, we aim to gain market share. We are committed to winning in personal care in the long term.[ SOLID FOUNDATION ]FOUNDATISOLIDFOUNDATION
FIBER
INNOVATI ON
LOOK CLOSER INNOVATIFIBER INNOVATION OPPORTUNITIES
IN NEW POTENTIAL MARKETS
FIBER
INNOVATI ON
LIGNIN
ADVANCED
FIBERS
THERMOCHEMICAL
FUELS
BIOMATERIALS
NANOCRYSTALLINE
CELLULOSE
CELLULOSIC
SUGARS
EXTRACTIVES
At Domtar, our expertise lies in chemically breaking down wood. Using trees as a feedstock, it’s possible to develop biodegradable alternatives to materials or chemicals made with fossil fuels. As the world transitions from a fossil fuel-based to a bio-based economy, we have an opportunity to create new revenue sources by using wood to go beyond our current product range. We have created a Biomaterials group to pursue this opportunity. Our low-ash, low-sulphur Bio-ChoiceTM lignin is used for the production of resins, thermoplastics and other chemicals. We are also focused on exploring higher-value product platforms such as extractives, advanced fibers, sugars and thermochemical fuels.Domtar’s fiber expertise combined with our asset base is helping us secure opportunities in new potential markets and define sustainability for future generations. DOMTAR 2017 ANNUAL REPORT 6 - 7 INNOVATIFIBER INNOVATION[ FIBER INNOVATION ] LOOK CLOSER AT DOMTAR
You will see a leading innovative fiber-based products, technologies, and services company; committed
to a sustainable and better future. We are a company with a history of proactively adapting to changing
market conditions, while generating strong cash flow and rewarding shareholders.
1 Free cash flow is a non-GAAP financial measure.
Please see “Reconciliation of non-GAAP Financial Measures”
at the end of this document.
The past year marked further progress in Domtar’s journey towards sustainable growth and long-term value creation. Led by the strong performance of our papers business, higher sales of market pulp, and good productivity across our mill system, we achieved solid operating results in 2017. Over half of our consolidated sales were in growing markets—specialty papers, fluff and softwood pulp, and personal care products. Domtar’s current business mix reflects the capital deployment decisions we have made over the last several years to strengthen our core paper business, repurpose assets to manufacture products with growing demand, and establish meaningful positions in new markets. We have executed the necessary steps—organizationally, financially and culturally—to transition Domtar into a diversified, agile business, backed by a portfolio of competitive assets and nearly 10,000 skilled employees.Domtar today holds top-three positions in three market segments, accounting for nearly three quarters of our business. We are the North American leader in uncoated freesheet; we are the third largest global fluff pulp producer by installed capacity; and we are ranked second in North American sales of store-brand infant diapers. In all of our markets, we are a supplier of choice, delivering innovation, quality and great service to our customers.Shareholders who have supported our journey have been rewarded for their confidence in Domtar’s management team and employees. We returned $104 million in dividends in 2017. Since 2011, we have returned $1.5 billion of capital through share buybacks and a growing dividend, or 69% of our cumulative free cash flow1 over this period. We are proud to have made good on our promise to return the majority of cash to shareholders. We’re even more proud to have generated $2.2 billion of free cash flow1 over the past seven years.PULP AND PAPERWe are adjusting our capacity to customer demand, implementing continuous improvements to reduce costs and maintain strong customer service, and investing in our mills annually to sustain reliability and product quality. The success of our actions is reflected in the cash generation over the past years, and we have confidence this will continue. We are well positioned to support customer demand, and we are fully committed to remaining a partner of choice as the leading North American uncoated freesheet producer for the long term. With a relentless focus on operational excellence and production discipline, we continue to transition our paper business and unlock value from our mill assets. We have reduced our uncoated freesheet capacity by 1.5 million tons. We converted a mill to produce higher-value products in growing markets, namely specialty papers, and converted three mills to produce market pulp, which demonstrates the underlying value of our assets.MESSAGE TO SHAREHOLDERS Domtar to day holds top-three
positions in three market segments,
account ing for nearly three
quar ters of our business.
Domtar now owns 1.8 million tons of high-quality market pulp capacity, mainly serving global softwood and fluff pulp markets. This includes the recently converted Ashdown uncoated freesheet machine, where we continue to make good progress with fluff pulp qualifications at several internal and external customer locations in North America and abroad. What was once one of the largest operating paper machines in North America is now a world-class fluff pulp machine. Domtar is the world’s third largest manufacturer of high-quality fluff pulp, helping to meet the growing demand for absorbent hygiene products.PERSONAL CAREBeginning with a strategy in 2011, we have built a billion-dollar global personal care business with manufacturing locations in North America and Europe, and distribution to customers in 50 countries. Following multiple acquisitions and investments in infrastructure and people, we are using innovative and differentiated go-to-market strategies to win in both the adult incontinence and infant diaper segments.We are making progress in both of these highly competitive sectors, but results have been impacted by competitive market conditions, pricing pressure and rising raw material costs. Despite these headwinds, sales increased 10% in 2017 as a result of our HDIS acquisition and new customer wins, and we have been focused on actions to strengthen our operations and enhance our flexibility. We will continue to focus on driving cost savings while converting our strong pipeline of potential new customers into sales growth.TRANSITIONING TO GROWTH As we continue our transition to growth, we are focused on repurposing opportunities and remain on the lookout for mergers and acquisitions that will accelerate our trajectory and maximize value for our shareholders.Near term, we have initiated a containerboard feasibility study by an independent third party after internal analysis confirmed the suitability of several existing assets for this purpose. We expect to make a final decision during 2018.Longer term, we are assessing opportunities to leverage our expertise in fiber, our existing assets and our supply chain, to develop higher value applications for the individual components of wood fiber. I am proud of the strides we have made in unlocking and recombining the chemical building blocks of trees in new and interesting ways to make advanced, sustainable biomaterials. DOMTAR 2017 ANNUAL REPORT 8 - 9 We are focused on repurposing
opportunities and remain on the
lookout for mergers and acquisitions
that will accelerate our trajectory and
maximize value for our shareholders.
BUILDING A SUSTAINABLE BUSINESSActing responsibly and being a steward of the environment is deeply embedded in Domtar’s culture. Our pursuit of ethical and sustainable business practices differentiates us in the eyes of our customers, who care about the integrity of their supply chain. This also provides Domtar with a distinct advantage in recruiting the next generation of talent. Caring about our environment, our communities and our people also enables us to better meet our business objectives. Our 2017 Sustainability Report shows that we have achieved a 33% reduction in waste sent to landfills since 2013, a 13% reduction in greenhouse gas emissions since 2010, and made significant efficiency improvements in our use of water at our pulp and paper mills. Furthermore, we have reduced recordable safety incidents by more than 50% over the past 10 years, and our employees have more than doubled the number of volunteer hours to improve the communities where we live. BUILDING A MORE DIVERSE WORKFORCE That brings me to our most important asset—our employees. We are building a stronger company by hiring talented people with experience in different industries and who come from different backgrounds. Given the fast pace of change in our businesses, we believe our efforts to enhance the diversity of our workforce will be a competitive advantage that helps us advance our culture of innovation. LOOK CLOSERDomtar’s core values of agility, caring and innovation remain constant and support our management approach to transitioning and growing our businesses. We are proud papermakers, but our product mix will continue to evolve significantly. We have many opportunities in our pipeline, and the financial capacity and expertise to execute our strategy. As in the past, we remain focused on the long term while continuing to deliver results in the short term.I wish to thank our shareholders for their confidence and the members of the Board of Directors for their counsel and support on this journey.John D. WilliamsPresident and Chief Executive OfficerMESSAGE TO SHAREHOLDERS LEADERSHIP AND GOVERNANCE
Domtar upholds the highest standards of business integrity
and corporate social responsibility. Our commitment to
operating responsibly is supported by our Code of Business
Conduct and Ethics—applicable to Board members and
employees alike—strict Corporate Governance Guidelines
and a robust compliance program.
We have adopted a wide range of policies, regularly reviewed
and updated, to promote strong governance, best practices,
diversity and sustainability. For more information on
governance at Domtar, or to consult our proxy statement,
please visit domtar.com.
MANAGEMENT COMMITTEE
BOARD OF DIRECTORS
John D. Williams
President and
Chief Executive Officer
Daniel Buron
Senior Vice President
and Chief Financial
Officer
Michael D. Garcia
President
Pulp and Paper
Division
Michael Fagan
President
Personal Care
Division
Robert E. Apple
Chairman of the Board
Domtar Corporation
Chief Operating Officer
MasTec, Inc.
Miami, Florida
David J. Illingworth
Corporate Director
Orchid, Florida
Zygmunt Jablonski
Senior Vice President
and Chief Legal
and Administrative
Officer
Patrick Loulou
Senior Vice President
Corporate
Development
David G. Maffucci
Corporate Director
Isle of Palms,
South Carolina
Giannella Alvarez
Chief Executive Officer
Beanitos, Inc.
Austin, Texas
Brian M. Levitt
Chairman of the Board
The Toronto
Dominion Bank
Montreal, Quebec
Pamela B. Strobel
Corporate Director
Chicago, Illinois
Denis Turcotte
Managing Partner
Brookfield Asset
Management Inc.
Toronto, Ontario
John D. Williams
President and
Chief Executive Officer
Domtar Corporation
Charlotte, North Carolina
Mary A. Winston
President
WinsCo Enterprises, Inc.
Charlotte, North Carolina
DOMTAR 2017 ANNUAL REPORT 10 - 11
MANAGEMENT COMMITTEE ANDBOARD OF DIRECTORS
MAKING USEFUL PRODUCTS
FOR EVERY DAY
CORPORATE OFFICES
MARKET PULP
CONVERTING AND FORMS
REGIONAL REPLENISHMENT
Fort Mill, South Carolina
Montreal, Quebec
PULP AND PAPER
(Annual pulp manufacturing
capacity in air dry metric tons)
Ashdown, Arkansas
(516,000 tons)1
DIVISION HEADQUARTERS
Fort Mill, South Carolina
Dryden, Ontario
(327,000 tons)
MANUFACTURING
Addison, Illinois
Brownsville, Tennessee
Dallas, Texas
DuBois, Pennsylvania
Griffin, Georgia
Owensboro, Kentucky
Ridgefields, Tennessee
Rock Hill, South Carolina
Tatum, South Carolina
CENTERS – CANADA
Richmond, Quebec
Toronto, Ontario
Winnipeg, Manitoba
REPRESENTATIVE
OFFICE – INTERNATIONAL
Hong Kong, China
LOCAL DISTRIBUTION CENTERS
Washington Court House, Ohio
Atlanta, Georgia
ARIVA – CANADA
Halifax, Nova Scotia
Montreal, Quebec
Mount Pearl, Newfoundland
and Labrador
Ottawa, Ontario
Quebec City, Quebec
Toronto, Ontario
Birmingham, Alabama
Buffalo, New York
Cincinnati, Ohio
Cleveland, Ohio
Des Moines, Iowa
Houston, Texas
Jackson, Mississippi
Kansas City, Kansas
Louisville, Kentucky
Memphis, Tennessee
Kamloops, British Columbia
(354,000 tons)
Plymouth, North Carolina
(390,000 tons)
CHIP MILLS
Hawesville, Kentucky
Johnsonburg, Pennsylvania
Kingsport, Tennessee
Marlboro (Bennettsville),
South Carolina
CONVERTING AND
CENTERS – UNITED STATES
Nashville, Tennessee
REGIONAL REPLENISHMENT
Minneapolis, Minnesota
DISTRIBUTION – ONSITE
Charlotte, North Carolina
Ashdown, Arkansas
Rothschild, Wisconsin
Windsor, Quebec
Chicago, Illinois
Dallas, Texas
Delran, New Jersey
Indianapolis, Indiana
Jacksonville, Florida
Mira Loma, California
Seattle, Washington
Omaha, Nebraska
Phoenix, Arizona
Plain City, Ohio
Richmond, Virginia
Salt Lake City, Utah
San Antonio, Texas
San Lorenzo, California
St. Louis, Missouri
Vancouver, Washington
Walton, Kentucky
Wayne, Michigan
Wisconsin Rapids, Wisconsin
UNCOATED FREESHEET
(Annual paper manufacturing
capacity in short tons)
Ashdown, Arkansas
(265,000 tons)
Espanola, Ontario
(69,000 tons)
Hawesville, Kentucky
(596,000 tons)
Johnsonburg, Pennsylvania
(344,000 tons)
Kingsport, Tennessee
(426,000 tons)
Marlboro (Bennettsville),
South Carolina
(274,000 tons)
Nekoosa, Wisconsin
(168,000 tons)
Port Huron, Michigan
(113,000 tons)
Rothschild, Wisconsin
(131,000 tons)
Windsor, Quebec
(642,000 tons)
1 The mill has the capability to produce up to 516,000 tons of fluff pulp per year. We
expect capacity to be running at approximately 430,000 tons per year until the
mill is no longer capacity constrained.
BUSINESS OVERVIEW PERSONAL CARE
DIVISION HEADQUARTERS
Raleigh, North Carolina
MANUFACTURING AND
DISTRIBUTION
Aneby, Sweden
Delaware, Ohio
Greenville, North Carolina
Jesup, Georgia
Toledo, Spain
Waco, Texas
SALES OFFICES
Daytona Beach, Florida
Emmerloord, The Netherlands
Keebergen, Belgium
Olivette, Missouri
Oslo, Norway
Linz, Austria
Madrid, Spain
Pusignan, France
Rheinfelden, Switzerland
Schwalbach am Taunus, Germany
Stockholm, Sweden
Texarkana, Arkansas
Wakefield, United Kingdom
Domtar is the largest integrated manufacturer and
marketer of uncoated freesheet papers in North America,
and an important supplier of specialty and packaging
papers. We also are a large manufacturer of high quality
papergrade, fluff and specialty pulps for customers
around the world.
The foundation of our business is driven by 13 pulp and
paper mills with access to nearly 17 million green tons of
fiber. Since 2007, we have converted 1.5 million tons of
commodity paper capacity into growing and profitable
businesses. These included fluff and papergrade pulp and
specialty paper grades, and we believe there are further
opportunities for repurposing.
PAPER
Domtar sold nearly 3 million short
tons of paper in 2017, mainly to
customers in the United States
and Canada, maintaining its North
American leadership position in
uncoated freesheet.
Business papers are one of our largest product categories under
communication papers. They are sold mainly to major North American
retailers, independent office supply dealers, and paper merchants. We offer
a selection of our own recognized brands, including Xerox® Paper and
Specialty Media, First Choice® and EarthChoice® Office Paper, and assist
our customers in developing store brands.
Our communication papers are also used for commercial printing and
publishing. Our customers in this category are printers and converters
who further process the paper into its final end-use state. Cougar®,
Lynx® Opaque Ultra and Husky® Opaque Offset are among our most
recognized brands.
DOMTAR 2017 ANNUAL REPORT 12 - 13BUSINESS OVERVIEWPULP AND PAPER SEGMENT We continue to leverage our innovation and new product
development pipeline to grow our position in specialty paper
grades. Our three main product categories include:
• Food packaging—everything from hamburger wrappers and
foil pouches to sugar packets, popcorn bags, butter wrap,
baking cups and pan liners.
• Medical applications—including bandage wraps, sterilizable
pouches, surgical gowns and medical wipes.
• Specialty papers—for printing labels, security paper and
specialty imaging.
We also supply base stock for thermal papers for cash register
receipts, ATM print outs, and lottery and entertainment tickets,
as well as an extensive range of industrial papers for applications
such as wallboard tape, sandpaper and tile backing, paint filters
and other uses.
MARKET DYNAMICS1
In 2017, 7.4 million short tons of uncoated freesheet paper
were manufactured in North America, a 2.9% decline
compared to the previous year. North American demand
was approximately 7.5 million short tons, a 4.8% decrease
compared to 2016. Global demand for uncoated freesheet
was estimated at 45.1 million short tons, flat compared to
the previous year. For its part, the specialty and packaging
papers market is growing in line with GDP.
PULP
Domtar sold over 1.7 million air dry metric tons (ADMT ) of
market pulp—papergrade, fluff and specialty—to customers
in over 40 countries in 2017, a 14% increase compared to the
previous year.
This growth was driven by stronger global demand and an
increase in our manufacturing capacity with the addition of our
fluff pulp line at the Ashdown mill in Arkansas. Commissioned
at the end of 2016, Ashdown’s fluff pulp line is one of the largest
and most advanced in the world.
Most of the pulp we sell is used in products that serve
growing end-use markets. Our papergrade pulp is used for
manufacturing everyday consumer products such as bathroom
and facial tissue, and paper towels. Domtar Lighthouse® fluff
pulp is mainly used in the absorbent core of infant diapers, adult
incontinence products, feminine hygiene products and airlaid
nonwovens. Our specialty pulp customers produce a wide
variety of products ranging from specialty and packaging
papers to electrical insulating papers and building products.
Although market pulp is subject to short-term
fluctuations in selling prices, the trend in average
prices over a period of consecutive years has been
positive.
1 Sources: Pulp and Paper Products Council, RISI
BUSINESS OVERVIEWPULP AND PAPER SEGMENT PULP AND PAPER TOTAL
INJURY FREQUENCY RATES
1.05
0.86
0.84
2015
2016
2017
MARKET DYNAMICS1
Global demand of chemical market pulp was
approximately 61.7 million ADMT in 2017,
a 3.7% increase over 2016. North American
demand was 7.9 million ADMT in 2017, a
2.7% increase while demand in China was
21 million ADMT, a 7.6% increase when
compared to 2016.
Papergrade wood pulp consumption is
expected to grow by an average of 1.5%
per year. Demand for wood pulp in China is
projected to generate the largest amount
of growth when compared to the rest of the
world over the next five years, growing by
1.5 million tons per year. Growth is expected
to average 4.4% per year in 2017-2021, while
global wood pulp consumption in tissue
papers is projected to reach 29 million tons
in 2021, or 5 million tons higher than in 2016.
World fluff pulp demand is forecast to
expand at a 4.7% annual rate over the next
five years. This is expected to be driven by the
growth in the use of disposable diapers in less
developed economies and increasing usage
of incontinence products in more developed
economies as the population ages.
SEGMENTED INFORMATION
Years ended December 31
2015
2016
2017
(In millions of dollars)
4,458
Sales (including sales to Personal Care)
270
Operating income
297
Depreciation and amortization
221
Capital expenditures
Total assets
3,667
Paper shipments–manufactured (‘000 ST) 3,163
1,414
Pulp shipments (‘000 ADMT)
4,239
217
284
287
3,637
3,021
1,513
4,216
250
254
128
3,649
2,891
1,722
MANUFACTURING CAPACITY BY REGION
Paper
Market Pulp
U.S. 77%
Canada 23%
SALES BY REGION
Paper
U.S. 54%
Canada 46%
Market Pulp
U.S. 81%
Canada 13%
Other 6%
Other 57%
U.S. 40%
Canada 3%
SHIPMENTS BY GRADE
Paper
Market Pulp2
Communication 83%
Specialty and
Packaging 17%
Softwood 61%
Fluff 34%
Hardwood 5%
2 Including pulp shipments
to Personal Care
DOMTAR 2017 ANNUAL REPORT 14 - 15
BUSINESS OVERVIEWPULP AND PAPER SEGMENT
BUSINESS OVERVIEWPERSONAL CARE SEGMENTDomtar is a leading manufacturer of high-quality and innovative branded and partner-branded absorbent hygiene products, serving the adult incontinence and infant markets, primarily in North America and Europe.We design and manufacture adult incontinence products such as protective underwear, briefs, underpads, pads and washcloths, as well as infant diapers and training pants. We also offer a complete range of related absorbency and hygiene products, including body liners for accidental bowel leaks. Despite this being a highly competitive sector, with many players, we have strong relationships with established retailers in North America and Europe. Our products are highly engineered and built on research. We begin with consumer needs and work together to come up with the best possible solutions. Innovation drives our ability to create high-quality and cost-effective products, whether it’s through consumer testing, developing new materials or designing new processes.Adult incontinence products are mainly sold to health institutions. We also supply major retailers and sell through the direct-to-consumer channel. Our recognized brands include Attends®, IncoPack®, Indasec®, Reassure® and Butterfly®. Domtar is a leading provider of infant diaper store brands in North America. Helping retailers develop strong store brands —we call them partner brands—is our key differentiator in the infant market. We also develop and market our own brands, including Comfees®.Our EAM business develops and manufactures airlaid and ultrathin laminated absorbent cores for our own products and also sells them to third parties. EAM’s customers include some of the world’s largest branded and private label feminine hygiene, adult incontinence, infant diaper, healthcare and packaging companies.We operate six manufacturing facilities in the United States and Europe that can produce multiple product categories. PERSONAL CARE TOTAL
INJURY FREQUENCY
RATES
0.88
0.68
0.73
2015
2016
2017
MARKET DYNAMICS
The aging population of baby boomers and
longer average lifespans in North America
and Europe provide a fundamental long-
term demand driver for adult incontinence
products.
In the infant market, future demand in our
principal markets is expected to remain flat or
grow at low single-digit rates, based on birth
rate and demographic trends.
Demand in both of our addressable markets
is significant and growing, and large players
dominate each space.
SEGMENTED INFORMATION
Years ended December 31
2015
20161
2017
(In millions of dollars)
Sales
Operating income (loss)
Depreciation and amortization
Capital expenditures
Total assets
869
61
62
57
1,822
917
57
64
55
1,884
1,005
(527)
67
48
1,406
1 Including HDIS since November 1, 2016
SALES BY PRODUCT CATEGORY
Adult Incontinence 62%
Infant 30%
Other 8%
SALES BY REGION
U.S. 52%
Europe 45%
Other 3%
SALES BY CHANNEL
Healthcare 45%
Retail 39%
Direct-to-Consumer 9%
Other 7%
DOMTAR 2017 ANNUAL REPORT 16 - 17
BUSINESS OVERVIEWPERSONAL CARE SEGMENT
SELECTED FINANCIAL
FIGURES
Years ended December 31
2015
2016
2017
(In millions of dollars unless otherwise noted)
Consolidated sales per segment
Pulp and Paper
Intersegment sales
Personal Care
Consolidated sales
Operating income (loss) per segment
Pulp and Paper
Personal Care
Corporate
Operating income (loss)
Net earnings (loss)
Cash flows from operating activities
Capital expenditures
Free cash flow1
Total assets
Long-term debt, including current portion
Net debt-to-total capitalization ratio1
Total shareholders’ equity
Weighted average number of common shares
outstanding in millions (diluted)
4,458
(63)
869
5,264
270
61
(43)
288
142
453
289
164
5,654
1,251
30%
2,652
63.4
4,239
(58)
917
5,098
217
57
(51)
223
128
465
347
118
5,680
1,281
30%
2,676
62.7
4,216
(64)
1,005
5,157
250
(527)
(40)
(317)
(258)
449
182
267
5,212
1,130
29%
2,483
62.7
1 Non-GAAP financial measure. Please see “Reconciliation of non-GAAP Financial Measures” at the end of this document.
SALES BY BUSINESS
SEGMENT
SALES
BY REGION
DIVIDEND DECLARED
PER COMMON SHARE
(Dollar per share)
Pulp and Paper 81%
Personal Care 19%
U.S. 68%
Europe 12%
Canada 9%
Asia 9%
Other 2%
1.60
1.66
1.66
2015
2016
2017
FINANCIALOVERVIEW
FIBER INNOVATIONFIBER INNOVATIONSOLIDFOUNDATIONSOLIDFOUNDATIONFLEXIBLE ASSETSFLEXIBLE ASSETSFLEXIBLE ASSETSCASH GENERATIONCASH GENERATIONCASH GENERATION DOMTAR 2017 ANNUAL REPORT 18 - 19 (This page intentionally left blank)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2017
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
(State or other jurisdiction of
incorporation or organization)
234 Kingsley Park Drive
Fort Mill, SC
(Address of principal executive offices)
29715
(Zip Code)
Registrant’s telephone number, including area code: (803) 802-7500
20-5901152
(I.R.S. Employer
Identification No.)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common stock traded on
the New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant
Act. YES È NO ‘
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Indicate by check mark if
Act. YES ‘ NO È
the Registrant
is not
required to file reports pursuant
to Section 13 or 15(d) of
the
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 È NO ‘
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months
such
files). YES È NO ‘
required to submit and post
such shorter period that
the Registrant was
(or
for
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company ‘
È
‘ (Do not check if a small reporting company)
‘
Accelerated filer
Small reporting 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
Act). YES ‘ NO È
the Registrant
is a shell company (as defined in Rule 12b-2 of
the Exchange
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the
closing price of the shares of common stock on The New York Stock Exchange on June 30, 2017, was $2,407,172,587.
The number of shares of Registrant’s Common Stock outstanding as of February 16, 2018 was 62,697,173.
Portions of the Registrant’s Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 8,
2018, are incorporated by reference into Part III of this Report.
DOMTAR CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Corporate Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pulp and Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personal Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Strategic Initiatives and Financial Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Approach to Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward-looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4 MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . .
Market Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and Stock Repurchase Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Results of Operations and Segment Review . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting Pronouncements and Critical Accounting Estimates and
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
PAGE
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ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK . . . .
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . .
Management’s Reports to Shareholders of Domtar Corporation . . . . . . . . . . . . . . . . . .
Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . .
ITEM 11 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
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ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . .
138
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . .
Schedule II – Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16 FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
138
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3
PART I
ITEM 1. BUSINESS
GENERAL
We design, manufacture, market and distribute a wide variety of
fiber-based products including
communication papers, specialty and packaging papers and absorbent hygiene products. The foundation of our
business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. More
than 50% of our pulp production is consumed internally to manufacture paper and other consumer products, with
the balance sold as market pulp. We are the largest integrated marketer of uncoated freesheet paper in North
America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers,
converters and end-users. We are also a marketer and producer of a broad line of incontinence care products as
well as infant diapers. To learn more, visit www.domtar.com.
We operate the following business segments: Pulp and Paper and Personal Care. We had revenues of
$5.2 billion in 2017, of which approximately 81% was from the Pulp and Paper segment and approximately 19%
was from the Personal Care segment.
Throughout this Annual Report on Form 10-K, unless otherwise specified, “Domtar Corporation,” “the
Company,” “Domtar,” “we,” “us” and “our” refer to Domtar Corporation, its subsidiaries, as well as its
investments.
AVAILABILITY OF INFORMATION
In this Annual Report on Form 10-K, we incorporate by reference certain information contained in other
documents filed with the Securities and Exchange Commission (“SEC”) and we refer you to such information.
We file annual, quarterly and current reports and other information with the SEC. You may read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100F Street, NE, Washington DC, 20549.
You may obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330. The
SEC maintains a website at www.sec.gov that contains our quarterly and current reports, proxy and information
statements, and other information we file electronically with the SEC. You may also access, free of charge, our
reports filed with the SEC through our website. Reports filed or furnished to the SEC will be available through
our website as soon as reasonably practicable after they are filed or furnished to the SEC. The information
contained on or connected to our website, www.domtar.com, is not incorporated by reference into this Form
10-K and should in no way be construed as a part of this or any other report that we filed with or furnished to the
SEC.
OUR CORPORATE STRUCTURE
At December 31, 2017, Domtar Corporation had a total of 62,695,685 shares of common stock issued and
outstanding.
Our common stock is traded on the New York Stock Exchange and the Toronto Stock Exchange under the
symbol “UFS”.
Information regarding our common stock is included in Item 8, Financial Statements and Supplementary
Data under Note 21 “Shareholders’ Equity”.
4
OUR BUSINESS SEGMENTS
We have two reportable segments as described below, which also represent our two operating segments.
Each reportable segment offers different products and services and requires different manufacturing processes,
technology and/or marketing strategies. The following summary briefly describes the operations included in each
of our reportable segments.
• Pulp and Paper: Our Pulp and Paper segment consists of the design, manufacturing, marketing and
distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood
market pulp.
• Personal Care: Our Personal Care segment consists of the design, manufacturing, marketing and
distribution of absorbent hygiene products.
Information regarding our reportable segments is included in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, as well as Item 8, Financial Statements and
Supplementary Data under Note 24 “Segment Disclosures”. Geographic information is also included under
Note 24 of the Financial Statements and Supplementary Data.
FINANCIAL HIGHLIGHTS PER SEGMENT
(In millions of dollars, unless otherwise noted)
Sales: (1)
Pulp and Paper
Personal Care
Consolidated sales
Operating income (loss): (1)
Pulp and Paper
Personal Care
Corporate
Total
Segment assets:
Pulp and Paper
Personal Care
Corporate
Total
Year ended
December 31, 2017
Year ended
December 31, 2016
Year ended
December 31, 2015
$4,395
869
$5,264
$ 270
61
(43)
$ 288
$4,152
1,005
$5,157
$ 250
(527)
(40)
$ (317)
$3,649
1,406
157
$5,212
$4,181
917
$5,098
$ 217
57
(51)
$ 223
$3,637
1,884
159
$5,680
(1) Factors that affected the year-over-year comparison of financial results are discussed in the year-over-year
and segment analysis included in Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
PULP AND PAPER
Our Manufacturing Operations
We produce approximately 4.0 million metric tons of softwood, fluff and hardwood pulp at 12 of our 13 mills
(Port Huron being a non-integrated paper mill). More than 50% of our pulp is consumed internally to manufacture
paper, with the balance being sold as market pulp. We also purchase limited papergrade pulp from third parties for
specific grades and to optimize the logistics of our pulp capacity while reducing transportation costs.
We are the largest integrated manufacturer and marketer of uncoated freesheet paper in North America. We
have nine integrated pulp and paper mills and one non-integrated paper mill (eight in the United States and two
in Canada), with an annual paper production capacity of approximately 3.0 million tons of uncoated freesheet
paper. Our paper manufacturing operations are supported by 13 converting and forms manufacturing operations
5
(including a network of 10 plants located offsite from our paper making operations). Approximately 77% of our
paper production capacity is in the United States and the remaining 23% is located in Canada.
We produce market pulp in excess of our internal requirements at our pulp and paper mills in Ashdown,
Espanola, Hawesville, Windsor, Marlboro and Nekoosa. We also produce papergrade, fluff and specialty pulps at
our three stand-alone pulp mills in Kamloops, Dryden and Plymouth. We can sell approximately 1.8 million
metric tons of pulp per year depending on market conditions. Approximately 54% of our trade pulp production
capacity is in the U.S., and the remaining 46% is located in Canada.
The table below lists our operating pulp and paper mills and their annual production capacity:
PRODUCTION FACILITY
Fiberline Pulp Capacity
Saleable
Paper (1)
# lines
(‘000 ADMT) (2)
# machines
Category (3)
(‘000 ST) (2)
Uncoated freesheet
Ashdown, Arkansas
Windsor, Quebec
Hawesville, Kentucky
Kingsport, Tennessee
Marlboro, South Carolina
Johnsonburg, Pennsylvania
Nekoosa, Wisconsin
Rothschild, Wisconsin
Port Huron, Michigan
Espanola, Ontario
Total Uncoated freesheet
Pulp
Kamloops, British Columbia
Dryden, Ontario
Plymouth, North Carolina (4)
Total Pulp
Total
Total Trade Pulp (5)
—
3
1
1
1
1
1
1
1
2
12
1
1
1
3
15
Communication
Communication
Communication
Communication
Specialty & Packaging
Communication
Specialty & Packaging
Communication
Specialty & Packaging
Specialty & Packaging
707
447
412
304
320
228
155
65
—
327
2,965
354
327
390
1,071
4,036
1,842
2
2
2
1
1
2
3
1
4
2
20
—
—
—
—
20
265
642
596
426
274
344
168
131
113
69
3,028
—
—
—
—
3,028
(1) Paper capacity is based on an operating schedule of 360 days and the production at the winder.
(2) ADMT refers to an air dry metric ton and ST refers to short ton.
(3) Represents the majority of the capacity at each of these facilities.
(4) On September 23, 2016, we announced a plan to optimize fluff pulp manufacturing at our Plymouth, North
Carolina mill. On February 11, 2018, we permanently closed a pulp dryer and idled related assets. The
above table reflects the closure of a pulp dryer and idling of related assets. More information regarding this
project is included in Item 8, Financial Statements and Supplementary Data under Note 16 “Closure and
Restructuring Costs and Liability”.
(5) Estimated third-party shipments dependent upon market conditions. This also includes shipments to our
Personal Care segment.
Our Raw Materials
The manufacturing of pulp and paper requires wood fiber, chemicals and energy. We discuss these three
major raw materials used in our manufacturing operations below.
Wood Fiber
United States pulp and paper mills
The fiber used by our pulp and paper mills in the United States is softwood and hardwood, both readily
available in the market from multiple third-party sources. The mills obtain fiber from a variety of sources,
6
depending on their location. These sources include a combination of supply contracts, wood lot management
arrangements, advance stumpage purchases and spot market purchases.
Canadian pulp and paper mills
The fiber used at our Windsor pulp and paper mill is hardwood originating from a variety of sources,
including purchases on the open market in Canada and the United States, contracts with Quebec wood producers’
marketing boards, public land where we have wood supply allocations and from Domtar’s private lands. The
softwood and hardwood fiber for our Espanola pulp and paper mill and the softwood fiber for our Dryden pulp
mill, are obtained from third parties, directly or indirectly from public lands and through designated wood supply
allocations. The fiber used at our Kamloops pulp mill is all softwood, originating mostly from third-party
sawmill operations in the southern-interior part of British Columbia.
Cutting rights on public lands related to our pulp and paper mills in Canada represent about
1.6 million cubic meters of softwood and 0.8 million cubic meters of hardwood, for a total of 2.4 million cubic
meters of wood per year. Access to harvesting of fiber on public lands in Ontario and Quebec is subject to
licenses and review by the respective governmental authorities.
During 2017,
the
cost of wood fiber
relating to our Pulp and Paper
segment
comprised
approximately 21% of the total consolidated cost of sales.
Chemicals
We use various chemical compounds in our pulp and paper manufacturing operations that we purchase,
primarily on a centralized basis, through contracts varying between one and ten years in length to ensure product
availability. Most of the contracts have pricing that fluctuates based on prevailing market conditions. For pulp
manufacturing, we use numerous chemicals including caustic soda, sodium chlorate, sulfuric acid, lime and
peroxide. For paper manufacturing, we also use several chemical products including starch, precipitated calcium
carbonate, optical brighteners, dyes and aluminum sulfate.
During 2017, the cost of chemicals relating to our Pulp and Paper segment comprised approximately 12% of
the total consolidated cost of sales.
Energy
Our operations produce and consume substantial amounts of energy. Our primary energy sources include:
biomass, natural gas and electricity. Approximately 75% of the total energy required to manufacture our products
come from renewable fuels such as bark and spent pulping liquor, generated as byproducts from our
manufacturing processes. The remainder of the energy comes from smaller amounts of other fossil fuels and
purchased steam procured under supply contracts. Under most of these contracts, suppliers are committed to
provide quantities within pre-determined ranges that provide us with our needs for a particular type of fuel at a
specific facility. Most of these contracts have pricing that fluctuate based on prevailing market conditions.
Biomass and fossil fuels are consumed primarily to produce steam that is used in the manufacturing process and,
to a lesser extent, to provide direct heat used in the chemical recovery process.
We own cogenerating assets at all of our integrated pulp and paper mills, as well as hydro assets at three
equivalent of
locations: Espanola, Nekoosa
approximately 71% of our electricity requirements with the balance supplied from local utilities. Electricity is
primarily used to drive motors, pumps and other equipment, as well as provide lighting.
and Rothschild. These generating assets produce
the
During 2017, net energy costs relating to our Pulp and Paper segment comprised approximately 5% of the
total consolidated cost of sales.
7
Our Transportation
Transportation of raw materials, wood fiber, chemicals and pulp into our mills is mostly done by rail and
trucks, although barges are used in certain circumstances. We rely strictly on third parties for the transportation
of our pulp and paper products between our mills, converting operations, distribution centers and customers. Our
paper products are shipped mostly by truck and logistics are managed centrally in collaboration with each
location. Our pulp is either shipped by vessel, rail or truck. We work with all the major railroads and
approximately 300 trucking companies in the United States and Canada. Service agreements are typically
negotiated on an annual basis. We pay diesel fuel surcharges which vary depending on the mode of transportation
used, and the cost of diesel fuel.
During 2017, outbound transportation costs relating to our Pulp and Paper segment comprised
approximately 10% of the total consolidated cost of sales.
Our Product Offering and Go-to-Market Strategy
PAPER
Our uncoated freesheet papers are categorized into communication and specialty and packaging papers.
Communication papers are further categorized into business and commercial printing and publishing papers.
Our business papers include copy and electronic imaging papers, which are used with inkjet and laser
printers, photocopiers and plain-paper fax machines, as well as computer papers, preprinted forms and digital
papers. These products
accounted for
approximately 52% of our shipments of paper products in 2017.
and home use. Business papers
are primarily for office
Our commercial printing and publishing papers include uncoated freesheet papers, such as offset papers and
opaques. These uncoated freesheet grades are used in sheet and roll fed offset presses across the spectrum of
commercial printing end-uses,
including digital printing. Our publishing papers include tradebook and
lightweight uncoated papers used primarily in book publishing applications such as textbooks, dictionaries,
catalogs, magazines, hard cover novels and financial documents. These products also include base papers that are
converted into finished products, such as envelopes, tablets, business forms and data processing/computer forms.
Commercial printing and publishing papers accounted for approximately 31% of our shipments of paper products
in 2017.
We also produce paper for several specialty and packaging markets. These products consist primarily of
thermal printing, flexible packaging, food packaging, medical packaging, medical gowns and drapes, sandpaper
backing, carbonless printing, labels and other coating and laminating applications. We also manufacture papers
for industrial and specialty applications including carrier papers, treated papers, security papers and specialized
printing and converting applications. These specialty and packaging papers accounted for approximately 17% of
our shipments of paper products in 2017. These grades of papers require a certain amount of innovation and
agility in the manufacturing system.
8
The chart below illustrates our main paper products and their applications:
Category
Type
Grade
Communication Papers
Specialty and Packaging Papers
Business Papers
Commercial Printing and Publishing
Papers
Uncoated Freesheet
Uncoated Freesheet
Copy
Premium imaging
Technology papers
Offset
Colors
Index
Tag
Bristol
Opaques
Premium opaques
Lightweight
Tradebook
Thermal papers
Food packaging
Bag stock
Security papers
Imaging papers
Label papers
Medical disposables
Application Photocopies
Office
documents
Presentations
Presentations
Reports
Commercial
printing
Direct mail
Pamphlets
Brochures
Cards
Posters
Stationery
Brochures
Annual reports
Books
Catalogs
Forms &
Envelopes
Food & candy packaging
Fast food takeout bag stock
Check and security papers
Surgical gowns
Our customer service personnel work closely with sales, marketing and production staff to provide service
and support to merchants, converters, end-users, stationers, printers and retailers. We promote our products
directly to end-users and others who influence paper purchasing decisions in order to enhance brand recognition
and increase product demand. In addition, our sales representatives work closely with mill-based product
development personnel and undertake joint marketing initiatives with customers in order to better understand
their business needs and to support their future requirements.
We sell business papers primarily to paper stationers, merchants, office equipment manufacturers and retail
outlets. We distribute uncoated commercial printing and publishing papers to end-users and commercial printers,
mainly through paper merchants, as well as selling directly to converters. We sell our specialty and packaging
papers mainly to converters, who apply a further production process such as coating, laminating, folding or
waxing to our papers before selling them to a variety of specialized end-users.
The chart below illustrates our channels of distribution for our paper products:
Communication Papers
Specialty and Packaging Papers
Business Papers
Commercial Printing and
Publishing Papers
Category
Domtar sells
to:
Retailers
↓
Merchants
↓
Customer sells
to:
Printers /
End-users
Printers /
Retailers /
End-users
PULP
Office
Equipment
Manufacturers
/ Stationers
↓
Retailers /
Stationers /
End-users
Merchants
↓
Converters
↓
End-Users
Converters
↓
Printers /
Converters /
End-users
Merchants /
Retailers
End-users
Our pulp products are comprised of softwood, fluff and hardwood kraft. These grades are sold to customers
in over 40 countries worldwide. Our pulp is used in a variety of end products, such as diapers and personal
hygiene products, bathroom and facial tissue, specialty and packaging papers, customers who make printing and
writing grades, building products and electrical insulating papers.
9
We sell market pulp to customers in North America mainly through a North American sales force while
sales to most overseas customers are made directly or through commission agents. We maintain pulp supplies at
strategically located warehouses, which allow us to respond to customer orders on short notice.
Our Customers
Our
ten largest customers represented approximately 45% of our Pulp and Paper segment sales
or approximately 36% of our total sales in 2017. In 2017, Staples, a customer of our Pulp and Paper segment,
represented approximately 10% of our total sales. The majority of our customers purchase products through
individual purchase orders. In 2017, approximately 71% of our Pulp and Paper segment sales were in the United
States, 11% were in Canada, and 18% were in other countries.
PERSONAL CARE
Our Operations
Our Personal Care business consists of the design, manufacturing, marketing and distribution of absorbent
hygiene products, including adult incontinence and infant diaper products. We are one of the leading suppliers of
adult incontinence products sold into North America and Europe, servicing institutional and consumer channels,
marketed primarily under our Attends®, IncoPack®, Indasec® and Reassure® brands,
in addition to our
customers’ brands.
We operate six manufacturing facilities, with each having the ability to produce multiple product categories.
At our Jesup facility, we have research and development capabilities and production lines which manufacture
high quality airlaid and ultrathin laminated absorbent cores and we also have research and development activities
in our divisional headquarters in Raleigh, North Carolina. We operate in the United States and in Europe.
Our Industry Dynamics
Aging population
We compete in an industry with fundamental drivers for long-term growth. The worldwide aging population
suggests that adult incontinence will become much more prevalent over the next several decades, as baby
boomers enter their senior years and medical advances continue to extend the average lifespan. By the year 2030,
approximately 74 million Americans are estimated to be 65 years old or older, representing over 20% of the
United States population.
Increased healthcare spending
While we are expected to benefit from the overall increase in healthcare spending due to an aging
population, it is not clear how pressures to limit this spending brought forth through administrative changes by
various national governments may impact the source of that funding. Additional changes in the balance of public
versus private funding may be forthcoming and these could impact overall consumption or the channels in which
consumption occurs.
Infant products
We compete within the competitive and volatile store brand segment of infant diapers and training pants.
Future demand based on birth rate and demographic trends is forecasted to have flat to low growth in North
America and Europe. The importance of the category to key retailers is expected to remain strong given the
purchasing power and strategic importance of the infant diaper shopper. Today, our business is focused on
10
securing multiyear contracts with large retailers that control the majority of volume in North America, leading to
intense competition with other manufacturers in the industry. In Europe, we are investing in our infant diaper
assets and are focused on leveraging our existing position in adult incontinence and our infant expertise in North
America to grow our business.
We believe that our product assortment provides our customers with the complete bundle of products at a
scale required to meet their national distribution requirements.
Our Raw Materials
The primary raw materials used in our manufacturing process are fluff pulp, nonwovens, and super
absorbent polymers. A significant portion of the fluff pulp used in our Personal Care business is supplied
internally from our Pulp and Paper business. The majority of our nonwoven and super absorbent polymers are
purchased centrally based on multiyear contracts with pricing that fluctuates with market conditions. Other raw
materials used in our manufacturing process include polypropylene film, elastics and adhesives which are also
purchased with multiyear contracts.
Our Product Offering and Go-to-Market Strategy
Our products, which include branded and private label briefs, protective underwear, underpads, pads and
washcloths, as well as baby diapers, youth pants and infant training pants, are available in a variety of sizes,
differing performance levels and product attributes. Our broad product portfolio covers most price points across
each category.
We serve the healthcare, retail and direct-to-consumer channels. Through the utilization of our flexible
production platform, manufacturing expertise and efficient supply chain management, we believe that we are
able to provide a complete and high-quality line of products to customers across all channels, under our own
brands or those of our customers. We maintain a direct sales organization in the United States and certain
European countries.
Our Product Development
We currently offer a comprehensive, full suite of products, and we continue to focus on product
development to improve products for our customers. We continue to explore materials, designs and processes
that will allow us to manufacture products that absorb wetness more quickly, reduce skin dryness and improve
containment.
OUR STRATEGIC INITIATIVES AND FINANCIAL PRIORITIES
As a leading fiber-based technology company, Domtar is focused on driving innovation, enhancing our
operating platforms, and delivering high quality products. To further bolster our position and drive enhanced
value for our stockholders, Domtar is focused on four key business objectives: (1) driving value in our Pulp and
Paper business through strategic investment; (2) building on our core competencies in wood fiber to diversify and
expand Domtar’s footprint in growth markets and industries; (3) maintaining a balanced and disciplined approach
to capital allocation that allows for investments in growth opportunities and rewards stockholders with capital
returns; and (4) operating with a focus on environmental responsibility and sustainability. We are confident that
the continued focus on these objectives will bolster the competitive position of our business and drive value for
our stakeholders, including stockholders, customers and employees.
Driving value in the Pulp and Paper business. Domtar’s Pulp and Paper business remains an important part
of our growth plan, and we have strategies and operating priorities designed to maximize the value of the
business. Our key priorities include: pursuing asset repurposing opportunities, operating an optimal portfolio of
11
strategic assets, increasing productivity in our pulp business and pursuing new sources of paper consumption. We
believe that execution on these priorities will enable Domtar to expand into complementary growth areas and
protect its market position in Pulp and Paper.
Expanding into areas of growth and leveraging our fiber expertise. We are focused on optimizing and
expanding our operations in markets with positive demand dynamics through the repurposing of assets,
investments for organic growth and strategic acquisitions. Domtar has a history of proactively adapting to
changing market conditions, and today, we are repositioning the Company towards areas of growth. We are well
positioned to capitalize on new opportunities in the wood fiber market. The Company already has the financial
resources, infrastructure, raw materials, technologies and expertise necessary to deliver new products. We
believe that we have built a strong foundation for diversification and continue to make important, but disciplined,
progress.
Maintaining a balanced and disciplined approach to capital allocation that allows for investments in
growth opportunities and rewards stockholders with capital returns. We believe in a balanced and disciplined
approach to capital allocation, and we are committed to deploying capital only to the areas that will achieve the
best possible return for our stockholders. Domtar’s free cash flow allows us to invest in growth opportunities and
maintain a strong and flexible financial position for operating and strategic initiatives, while still returning capital
to our stockholders. To continue generating free cash flow, we are focused on assigning our capital expenditures
effectively and minimizing working capital requirements by reducing discretionary spending, reviewing
procurement costs and pursuing the balance of production and inventory control.
Operating responsibly on behalf of all of Domtar’s stakeholders. We try to make a positive difference
every day by pursuing sustainable growth, valuing relationships, and responsibly managing our resources. We
aim to care for our customers, end-users and stakeholders in the communities where we operate, all seeking
assurances that resources are managed in a sustainable manner. We strive to provide these assurances by
certifying our distribution and manufacturing operations and measuring our performance against internationally
recognized benchmarks. Domtar is committed to the responsible use of forest resources across our operations and
we are enrolled in programs and initiatives to encourage landowners to pursue certification to improve their
market access and increase their revenue opportunities. We believe that each of these initiatives also creates
value for our stockholders and is part of our larger business strategy and commitment to environmental
sustainability.
OUR COMPETITION
The markets in which our businesses operate are highly competitive with well-established domestic and
foreign manufacturers.
In the paper business, our paper production does not rely on proprietary processes or formulas, except in
highly specialized papers or customized products. In uncoated freesheet, we compete primarily on the basis of
product quality, breadth of offering, service solutions and competitively priced paper products. We have an
extensive offering of high quality Forest Stewardship Council (“FSC”)-certified paper products. While we have a
leading position in the North American uncoated freesheet market, we also compete with other paper grades,
including coated freesheet, and with electronic transmission and document storage alternatives. As the use of
these alternative products continues to grow, we continue to see a decrease in the overall demand for paper
products. All of our pulp and paper manufacturing facilities are located in the United States or in Canada where
we sell approximately 82% of our products. Domtar is one of the five largest manufacturers of uncoated freesheet
papers in North America that represent approximately 80% of the total production capacity. On a global basis,
there are hundreds of manufacturers that produce and sell uncoated freesheet paper. The level of competitive
pressures from foreign producers in the North American market is highly dependent upon exchange rates,
particularly the rate between the U.S. dollar and the Euro as well as the U.S. dollar and the Brazilian real.
12
The market pulp we sell is fluff, softwood or hardwood pulp. The pulp market is highly fragmented with
many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood
fiber, product quality and competitively priced pulp products. The fluff pulp we sell is used in absorbent
products, incontinence products, diapers and feminine hygiene products. The softwood and hardwood pulp we
sell is primarily slow growth northern bleached softwood and hardwood kraft, and we produce specialty
engineered pulp grades with a pre-determined mix of wood species. Our softwood and hardwood pulps are sold
to customers who make a variety of products for specialty paper, packaging, tissue and industrial applications,
and customers who make printing and writing grades. We also seek product differentiation through the
certification of our pulp mills to the FSC chain-of-custody standard and the procurement of FSC-certified virgin
fiber. All of our market pulp production capacity is located in the United States or in Canada, and we sell
approximately 57% of our pulp to other countries.
For the adult incontinence business, competition is primarily faced across four major product categories:
protective underwear, pads, briefs and underpads, with customers served through the healthcare, retail (mass
retailers, dollar stores, supermarkets, warehouse clubs), and direct to consumer channels. The retail channel in
Europe is more fragmented than in North America, with a mix of larger chains and smaller players.
Approximately 74% of institutional and homecare expenditures are reimbursed by governments in Western
Europe.
For the infant diaper business, competition is primarily across three major product categories: diapers,
training pants and youth pants with customers served through the retail (mass retailers, dollar stores,
supermarkets, warehouse clubs) and direct to consumer channels. In North America, branded labels represent the
majority of the infant market with the top two manufacturers supplying a significant portion of the branded
demand. The remaining demand is represented by private label, and is split among the competition. In Europe,
the top manufacturer supplies approximately 50% of the demand with branded labels, and the remaining is
represented by private label. Products are marketed in multiple channels: mass retailers, dollar stores,
supermarkets, warehouse clubs, internet and home health care.
In both the adult
incontinence and infant diaper businesses,
the principal methods and elements of
competition include brand recognition and loyalty, product innovation, quality and performance, price and
marketing and distribution capabilities. Growing competitive market pressures in the healthcare and retail
markets over the last year, including the entry of new competitors in the private label category, excess industry
capacity and the pressure to limit healthcare spending by governmental agencies, are expected to result in lower
than previously anticipated sales and margins.
OUR EMPLOYEES
We have approximately 10,000 employees, of which approximately 60% are employed in the United States,
28% in Canada and 12% in Europe. Approximately 48% of our employees are covered by collective bargaining
agreements, generally on a facility-by-facility basis. Certain agreements covering approximately 1,067
employees will expire in 2018 and others will expire between 2019 and 2021.
OUR APPROACH TO SUSTAINABILITY
Domtar aims to deliver value to our customers, employees, shareholders and communities by viewing our
business decisions within the larger context of sustainability. As a renewable fiber-based company, we take a
long-term view on managing natural resources for the future. We prize efficiency in everything we do. We strive
to minimize waste and encourage recycling. We aim to have the highest standards for ethical conduct, for caring
about the health and safety of each other, and for maintaining the environmental quality in the communities
where we live and work. We value the partnerships we have formed with non-governmental organizations and
believe they make us a better company. We focus on agility to respond to new opportunities, and we are
committed to turning innovation into value creation. By embracing sustainability as our operating philosophy, we
13
seek to internalize the fact that the choices we have and the impact of the decisions we make on our stakeholders
are all interconnected. We believe that our business and the people and communities who depend on us are better
served as we weave this focus on sustainability into the things we do.
Domtar executes this commitment to sustainability at every level and every location across the company.
With the support of the Board of Directors, our Management Committee empowers senior managers from
manufacturing, technology, finance, sales and marketing and corporate staff functions to regularly come together
and establish key sustainability performance metrics, and to routinely assess and report on progress. We have a
vice-president position to help lead this effort, allowing the company’s organizational structure to better reflect
the priority the company places on sustainable performance. We believe that weaving sustainability into our
business better positions Domtar for the future.
OUR ENVIRONMENTAL COMPLIANCE
Our business is subject to a wide range of general and industry-specific laws and regulations in the United
States and other countries where we have operations, relating to the protection of the environment, including
those governing wood harvesting, air emissions, climate change, waste water discharges, storage, management
and disposal of hazardous substances and wastes, contaminated sites, landfill operation and closure obligations
and health and safety matters. Compliance with these laws and regulations is a significant factor in the operation
of our business. We may encounter situations in which our operations fail to maintain full compliance with
applicable environmental requirements, possibly leading to civil or criminal fines, penalties or enforcement
actions, including those that could result in governmental or judicial orders that stop or interrupt our operations
or require us to take corrective measures at substantial costs, such as the installation of additional pollution
control equipment or other remedial actions.
Compliance with environmental laws and regulations involves capital expenditures as well as additional
operating costs. Additional
information regarding environmental matters is included in Item 8, Financial
Statements and Supplementary Data under Note 22 “Commitments and Contingencies” and in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations under the section of
Critical accounting policies, caption “Environmental matters and asset retirement obligations”.
OUR INTELLECTUAL PROPERTY
Many of our brand name products are protected by registered trademarks. Our key trademarks include
Cougar®, Lynx® Opaque Ultra, Husky® Opaque Offset, First Choice®, EarthChoice®, Attends®, NovaThin®,
NovaZorb®, IncoPack®, Indasec®, Reassure® and Ariva®. These brand names and trademarks are important to
our business. Our numerous trademarks have been registered in the United States and/or in other countries where
our products are sold. The current registrations of these trademarks are effective for various periods of time.
These trademarks may be renewed periodically, provided that we, as the registered owner, and/or licensee
comply with all applicable renewal requirements, including the continued use of the trademarks in connection
with similar goods.
We own U.S. and foreign patents and have several pending patent applications. Our management regards
these patents and patent applications as important but does not consider any single patent or group of patents to
be materially important to our business as a whole.
14
OUR EXECUTIVE OFFICERS (“MANAGEMENT COMMITTEE”)
Name
Age
Position and Business Experience
John D. Williams
63
President and Chief Executive Officer of the Company since January 2009. He is
also a member of the Board of Directors.
Previously, Mr. Williams served as President of SCA Packaging Europe between
2005 and 2008. Prior to assuming his leadership position with SCA Packaging
Europe, Mr. Williams held increasingly senior management and operational roles in
the packaging business and related industries.
Mr. Williams is Lead Independent Director of the Board of Directors of Owens
Corning and the Chair of the advisory board of the Stern Center for Sustainable
Business at New York University.
Senior Vice-President and Chief Financial Officer of the Company since March
2007. Mr. Buron was previously Senior Vice-President and Chief Financial Officer
of Domtar Inc. since May 2004. He joined Domtar Inc. in 1999. Prior to May 2004,
he was Vice-President, Finance, Pulp and Paper sales division and, prior to
September 2002, he was Vice-President and Controller. He has over 25 years of
experience in finance. Mr. Buron is a Director of the McGill University Health
Centre Foundation.
President, Pulp and Paper Division of the Company. Mr. Garcia joined Domtar in
2014. Prior to joining the Company, he was the chief executive officer at EVRAZ
Highveld Steel & Vanadium Co., South Africa’s second largest steel producer.
Mr. Garcia has more than 25 years of international management experience in paper,
steel, and aluminum manufacturing and marketing. He has broad global experience,
including executive assignments in Asia and Africa. Mr. Garcia is a Director of the
Federal Reserve Bank of Richmond, Charlotte Branch.
President, Personal Care Division of the Company. Mr. Fagan joined Domtar in
2011, following the acquisition of Attends Healthcare Products, Inc. Mr. Fagan has
been with Attends since 1999, when he was hired as Senior Vice-President of Sales
and Marketing. He was promoted to President and CEO in 2006. Prior to joining
Attends, Mr. Fagan held a variety of sales development roles with Procter &
Gamble, the previous owners of the Attends line of products.
Senior Vice-President and Chief Legal and Administrative Officer of the Company.
Mr. Jablonski joined Domtar in 2008, after serving in various in-house counsel
positions for major manufacturing and distribution companies in the paper industry
for 13 years. From 1985 to 1994, he practiced law in Washington, DC.
Senior Vice-President, Corporate Development since he joined the Company in
March 2007. Previously, he held a number of positions in the telecommunications
sector as well as in management consulting. His over 20 year career has spanned a
number of areas and functions such as corporate strategy, M&A, operations, and
business development.
Daniel Buron
54
Michael D. Garcia
53
Michael Fagan
56
Zygmunt Jablonski
64
Patrick Loulou
49
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements relating to trends in, or representing
management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance 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,”
15
“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 Domtar Corporation’s results of operations or financial condition. These factors
include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
continued decline in usage of fine paper products in our core North American market;
our ability to implement our business diversification initiatives, including strategic acquisitions;
product selling prices;
raw material prices, including wood fiber, chemical and energy;
conditions in the global capital and credit markets, and the economy generally, particularly in the U.S.,
Canada and Europe;
performance of Domtar Corporation’s manufacturing operations, including unexpected maintenance
requirements;
the level of competition from domestic and foreign producers;
cyberattack or other security breaches;
the effect of, or change in, forestry, land use, environmental and other governmental regulations
(including tax positions and estimates of the impact of U.S. Tax Reform on our 2017 and future
results), 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,
accounts receivable or other assets for impairment or other reasons;
including impairment of property, plant and equipment,
inventory,
changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian
dollar and European currencies;
the effect of timing of retirements and changes in the market price of Domtar Corporation’s common
stock on charges for stock-based compensation;
performance of pension fund investments and related derivatives, if any; and
the other factors described under “Risk Factors,” Item 1A.
You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date
made, when evaluating the information presented in this Annual Report on Form 10-K. Unless specifically
required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking
statements to reflect new events or circumstances.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below in addition to the other information presented in
this Annual Report on Form 10-K.
16
Conditions in the global political and economic environment, including the global capital and credit markets,
can adversely affect the Company’s business, results of operations and financial position.
A significant or prolonged downturn in the general economic environment may affect the Company’s sales
and profitability. The Company has exposure to counterparties with which it routinely executes transactions.
Such counterparties include commercial banks, insurance companies and other financial institutions, some of
which may be exposed to bankruptcy or liquidity risks. A bankruptcy or illiquidity event by one of its significant
counterparties may materially and adversely affect the Company’s access to capital, future business and results of
operations. In addition, the Company’s customers and suppliers may be adversely affected by severe economic
conditions. This could result in reduced demand for its products or its inability to obtain necessary supplies at
reasonable costs, or at all.
The Company may be negatively impacted by political issues or crisis in individual countries or regions,
including sovereign risk related to a default by or deterioration in the credit worthiness of local governments.
Any of these effects, and others the Company cannot anticipate, may have a negative effect and may adversely
affect the Company’s business.
Certain countries in Europe provide medicare coverage for adult incontinence products. The governments of
these countries may decide to no longer reimburse part or all of the costs of adult incontinence products, and this
may have a negative impact on the Company’s operating results in the future.
The Company faces intense competition in its markets, and the failure to compete effectively could have a
material adverse effect on its business and results of operations.
The Company competes with U.S., Canadian and European producers and, for many of its product lines
with global producers, some of which may have greater financial resources and lower production costs than the
Company. The principal basis for competition is selling price. The Company’s ability to maintain satisfactory
margins depends largely on its ability to control its costs. Our industries also are particularly sensitive to other
factors including innovation, design, quality and service, with varying emphasis on these factors depending on
the product line. The Company cannot provide assurance that it will compete effectively and maintain current
levels of sales and profitability. If the Company cannot compete effectively, such failure could have a material
adverse effect on its business and results of operations.
Failure to successfully implement the Company’s business diversification initiatives could have a material
adverse effect on its business, results of operations and financial position.
The Company is pursuing strategic initiatives that management considers important to our long-term
success. The most recent initiatives include, but are not limited to, the integration of adult incontinence and baby
diaper businesses acquired during the past six years and the 2016 conversion of a paper machine to produce fluff
pulp. The intent of these initiatives is to help grow the business and counteract the secular decline in our North
American paper business. These initiatives may involve organic growth, select joint ventures and strategic
acquisitions. The success of these initiatives will depend on, among other things, our ability to identify potential
strategic initiatives, understand the key trends and principal drivers affecting those businesses and to execute the
initiatives in a cost effective manner. There are significant risks involved with the execution of these initiatives,
including significant business, economic and competitive uncertainties, many of which are outside the
Company’s control.
Strategic acquisitions may expose the Company to additional risks. The Company may have to compete for
acquisition targets and any acquisition it makes may fail to accomplish our strategic objectives or may not
perform as expected. In addition, the costs of integrating an acquired business may exceed our estimates and may
require significant time and attention from senior management. Accordingly, the Company cannot predict
whether it will succeed in implementing these strategic initiatives. If it fails to successfully diversify our
business, it may have a material adverse effect on the Company’s competitive position, financial condition and
operating results.
17
The Company’s paper products are vulnerable to long-term declines in demand due to competing technologies or
materials.
The Company’s paper business competes with electronic transmission and document storage alternatives, as
well as with paper grades it does not produce, such as uncoated groundwood. As a result of such competition, the
Company is experiencing ongoing decreasing demand for most of its existing paper products. As the use of these
alternatives grows, demand for paper products is likely to decline further. Declines in demand for our paper
products may adversely affect the Company’s business, results of operations and financial position.
The pulp and paper industry is highly cyclical. Fluctuations in the prices of and the demand for the Company’s
pulp and paper products could result in lower sales volumes and smaller profit margins.
The pulp and paper industry is highly cyclical. Historically, economic and market shifts, fluctuations in
capacity and changes in foreign currency exchange rates have created cyclical changes in prices, sales volume
and margins for the Company’s pulp and paper products. The length and magnitude of industry cycles have
varied over time and by product, but generally reflect changes in macroeconomic conditions and levels of
industry capacity. Most of the Company’s paper products are commodities that are widely available from other
producers. Because commodity products have few distinguishing qualities from producer
to producer,
competition for these products is based primarily on price, which is determined by supply relative to demand.
The overall levels of demand for the pulp and paper products that the Company manufactures and
distributes, and consequently its sales and profitability, reflect fluctuations in levels of end-user demand, which
depend in part on general macroeconomic conditions in North America and worldwide, the continuation of the
current level of service and cost of postal services, as well as competition from electronic substitution. See
“Conditions in the global political and economic environment, including the global capital and credit markets,
can adversely affect the Company’s business, results of operations and financial position” and “The Company’s
paper products are vulnerable to long-term declines in demand due to competing technologies or materials”.
Industry supply of pulp and paper products is also subject to fluctuation, as changing industry conditions can
influence producers to idle or permanently close individual machines or entire mills. Such closures can result in
significant cash and/or non-cash charges. In addition, to avoid substantial cash costs in connection with idling or
closing a mill, some producers will choose to continue to operate at a loss, sometimes even a cash loss, which
could prolong weak pricing environments due to oversupply. Oversupply can also result from producers
introducing new capacity in response to favorable pricing trends.
Industry supply of pulp and paper products is also influenced by overseas production capacity, which has
grown in recent years and is expected to continue to grow.
As a result, prices for all of the Company’s pulp and paper products are driven by many factors outside of its
control, and the Company has little influence over the timing and extent of price changes, which are often
volatile. Because market conditions beyond the Company’s control determine the prices for its commodity
products, the price for any one or more of these products may fall below its cash production costs, requiring the
Company to either incur cash losses on product sales or cease production at one or more of its pulp and paper
manufacturing facilities. The Company continuously evaluates potential adjustments to its production capacity,
which may include additional closures of machines or entire mills, and the Company could recognize significant
cash and/or non-cash charges relating to any such closures in future periods. See Item 8, Financial Statements
and Supplementary Data under Note 16 “Closure and restructuring costs and liability”. Therefore, the Company’s
profitability with respect to these products depends on managing its cost structure, particularly wood fiber,
chemical, transportation and energy costs, which represent the largest components of its operating costs and can
fluctuate based upon factors beyond its control. If the prices or demand for its pulp and paper products decline, or
if its wood fiber, chemical, transportation or energy costs increase, or both, this could adversely affect the
Company’s results of operations and financial position.
18
The Company is affected by changes in currency exchange rates.
The Company has manufacturing operations in the United States, Canada, Sweden and Spain. As a result, it
is exposed to movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and
liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency
movements. As a result, the Company’s earnings are affected by increases or decreases in the value of the
Canadian dollar and of other European currencies relative to the U.S. dollar. The Company’s European
subsidiaries are exposed to movements in foreign currency exchange rates on transactions denominated in a
different currency than their Euro functional currency. Additionally, there has been, and may continue to be,
volatility in currency exchange rates. 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 instruments (currency options and foreign exchange forward contracts) to mitigate
its exposure to fluctuations in foreign currency exchange rates or to designate them as hedging instruments in
order to hedge the subsidiary’s cash flow risk for purposes of the Consolidated Financial Statements. There can
be no assurance that the Company will be protected against substantial foreign currency fluctuations. This factor
could adversely affect the Company’s results of operations and financial position.
The Company relies heavily on a small number of significant customers, including one customer that represented
approximately 10% of the Company’s sales in 2017. A significant change in customer relationships or in
customer demand for our products could materially adversely affect the Company’s business, financial condition
or results of operations.
The Company heavily relies on a small number of significant customers. The Company’s largest customer,
Staples, represented approximately 10% of the Company’s sales in 2017. A significant reduction in sales to any
of the Company’s key customers, which could be due to factors outside its control, such as purchasing
diversification or financial difficulties experienced by these customers, could materially adversely affect the
Company’s business, financial condition or results of operations. Consolidation among its customers could also
create significant cost margin pressure and lead to more complexity across broader geographic boundaries for
both the Company and its key retailers.
The Company’s operations require substantial capital, and it may not have adequate capital resources to provide
for all of its capital requirements.
The Company’s businesses are capital intensive and require ongoing capital expenditures in order to
maintain its equipment, increase its operating efficiency and comply with environmental laws. In 2017, the
Company’s total capital expenditures were $182 million.
If the Company’s available cash resources and cash generated from operations are not sufficient to fund its
operating needs and capital expenditures, the Company would have to obtain additional funds from borrowings
or other available sources or reduce or delay its capital expenditures. The Company may not be able to obtain
additional funds on favorable terms, or at all. In addition, the Company’s debt service obligations will reduce its
available cash flows. If the Company cannot maintain or upgrade its equipment as it requires or allocate funds to
ensure environmental compliance, it could be required to curtail or cease some of its manufacturing operations,
or it may become unable to manufacture products that compete effectively in one or more of its product lines.
The Company and its subsidiaries may incur substantially more debt. This could increase risks associated with
its leverage.
The Company and its subsidiaries may incur substantial additional indebtedness in the future. Although the
revolving credit facility contains restrictions on the incurrence of additional indebtedness, including secured
indebtedness,
to a number of qualifications and exceptions, and additional
indebtedness incurred in compliance with these restrictions could be substantial. Refer to Item 8, Financial
Statements and Supplementary Data under Note 19 “Long-term debt” for more details.
these restrictions are subject
19
The Company’s ability to generate the significant amount of cash needed to pay interest and principal on the
Company’s unsecured long-term notes and service its other debt and financial obligations and its ability to
refinance all or a portion of its indebtedness or obtain additional financing depends on many factors beyond the
Company’s control.
In 2017, the Company paid approximately $125 million in required interest and principal payments. The
Company’s ability to make payments on and refinance its debt, including the Company’s unsecured long-term
notes and amounts borrowed under its revolving credit facility and term loan, if any, and other financial
obligations and to fund its operations will depend on its ability to generate substantial operating cash flow. The
Company’s cash flow generation will depend on its future performance, which will be subject to prevailing
economic conditions and to financial, business and other factors, many of which are beyond its control.
The Company’s business may not generate sufficient cash flow from operations and future borrowings may
not be available to the Company under its revolving credit facility or otherwise in amounts sufficient to enable
the Company to service its indebtedness, including the Company’s unsecured long-term notes, and borrowings, if
any, under its revolving credit facility and securitization or to fund its other liquidity needs. If the Company
cannot service its debt, the Company will have to take actions such as reducing or delaying capital investments,
selling assets, restructuring or refinancing its debt or seek additional equity capital. Any of these remedies may
not be executed on commercially reasonable terms, or at all, and may impede the implementation of its business
strategy. Furthermore, the revolving credit facility may restrict the Company from adopting any of these
alternatives. Because of these and other factors that may be beyond its control, the Company may be unable to
service its indebtedness.
The Company could incur substantial costs as a result of compliance with, violations of or liabilities under
applicable environmental laws and regulations. It could also incur costs as a result of asbestos-related personal
injury litigation.
The Company is subject to a wide range of general and industry-specific laws and regulations in the United
States and other countries where we have operations, relating to the protection of the environment and natural
resources, including those governing air emissions, greenhouse gases and climate change, wastewater discharges,
harvesting, silvicultural activities, storage, management and disposal of hazardous substances and wastes, the
cleanup of contaminated sites, landfill operation and closure obligations, forestry operations and endangered
species habitat, and health and safety matters. In particular, the pulp and paper industry in the United States is
subject to the United States Environmental Protection Agency’s (“EPA”) Cluster Rules.
The Company has incurred, and expects that it will continue to incur, significant capital, operating and other
expenditures complying with applicable environmental laws and regulations as a result of remedial obligations.
The Company incurred $67 million of operating expenses and $2 million of capital expenditures in connection
with environmental compliance and remediation in 2017. As of December 31, 2017, the Company had a
provision of $44 million for environmental expenditures, including certain asset retirement obligations (such as
for landfill capping).
The Company could also incur substantial costs, such as civil or criminal fines, sanctions and enforcement
actions (including orders limiting its operations or requiring corrective measures, installation of pollution control
equipment or other remedial actions), cleanup and closure costs, and third-party claims for property damage and
personal injury as a result of violations of, or liabilities under, environmental laws and regulations. The
Company’s ongoing efforts to identify potential environmental concerns that may be associated with its past and
present properties may lead to future environmental investigations. Those efforts may result in the determination
of additional environmental costs and liabilities which cannot be reasonably estimated at this time.
As the owner and operator of real estate, the Company may be liable under environmental laws for cleanup,
closure and other damages resulting from the presence and release of hazardous substances, including asbestos,
20
on or from its properties or operations, including properties that it no longer owns. The amount and timing of
environmental expenditures is difficult to predict, and, in some cases, the Company’s liability may be imposed
without regard to contribution or to whether it knew of, or caused, the release of hazardous substances and may
exceed forecasted amounts or the value of the property itself. The discovery of additional contamination or the
imposition of additional cleanup obligations at the Company’s or third-party sites may result in significant
additional costs. Any material liability the Company incurs could adversely impact its financial condition or
preclude it from making capital expenditures that would otherwise benefit its business.
In addition, the Company may be subject to asbestos-related personal injury litigation arising out of
exposure to asbestos on or from its properties or operations, and may incur substantial costs as a result of any
defense, settlement, or adverse judgment in such litigation. The Company may not have access to insurance
proceeds to cover costs associated with asbestos-related personal injury litigation.
Enactment of new environmental laws or regulations or changes in existing laws or regulations (such as
changes in climate change regulation), or interpretation thereof, might require significant expenditures. For
additional
to Item 8, Financial Statements and Supplementary Data under Note 22
“Commitments and Contingencies”. The Company may be unable to generate funds or other sources of liquidity
and capital to fund environmental liabilities or expenditures.
information,
refer
Failure to comply with applicable laws and regulations could have a material adverse effect on our business,
financial results or condition.
In addition to environmental laws, the Company’s business and operations are subject to a broad range of
other laws and regulations in the United States and Canada as well as other jurisdictions in which the Company
operates,
including antitrust and competition laws, occupational health and safety laws, healthcare
reimbursement laws, such as Medicare and Medicaid, and employment laws. Many of these laws and regulations
are complex and subject to evolving and differing interpretation. If the Company is determined to have violated
any such laws or regulations, whether inadvertently or willfully, it may be subject to civil and criminal penalties,
including substantial fines, loss of authorizations to participate in or exclusion from government programs,
claims for damages by third parties or fines or monetary penalties which may have a material adverse effect on
the Company’s financial position, results of operations or cash flows. For additional information, refer to Item 8,
Financial Statements and Supplementary Data under Note 22 “Commitments and Contingencies” under the
caption “Spanish Competition Investigation”.
The Company’s financial results could be affected by changes in U.S. and foreign tax laws or in the mix of our
U.S. and foreign earnings, as well as adjustments to our estimates of uncertain tax issues or results from audits
by U.S. or foreign tax authorities.
The Company is subject
to U.S. and foreign tax laws and regulations. Tax laws, regulations, and
administrative practices in various jurisdictions may be subject to significant change, with or without notice, due
to economic, political and other conditions, and significant judgment is required in evaluating and estimating our
provision and accruals for these taxes. Recently, international tax norms governing each country’s jurisdiction to
tax cross-border international trade have evolved partly due to the Base Erosion and Profit Shifting project led by
the Organization for Economic Cooperation and Development and supported by the G20. Changes in these laws
and regulations, or any change in the position of tax authorities regarding their application, administration or
interpretation could adversely affect the Company’s financial results. In addition, a number of countries are
actively pursuing changes to their tax laws applicable to multinational corporations, such as the recently enacted
U.S. Tax Cuts and Jobs Acts (“U.S. Tax Reform”). Finally, foreign governments may enact tax laws in response
to the U.S. Tax Reform that could result in further changes to global taxation and materially impact the Company
financial results.
The U.S. Tax Reform significantly changes how the U.S. taxes corporations. The U.S. Tax Reform requires
complex computations to be performed that were not previously required in U.S. tax law, significant judgments
21
to be made in interpretation of the provision of the U.S Tax Reform and significant estimates in calculations, and
the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury
Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the
U.S. Tax Reform will be applied or otherwise administered that is different from the Company interpretation. As
the Company complete its analysis of the U.S Tax Reform, collect and prepare necessary data, and interpret any
additional guidance, the Company may make adjustments to provisional amounts that was recorded that may
materially impact its provision for income taxes in the period in which the adjustments are made.
The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with
differing statutory tax rates or changes in the valuation of deferred tax assets and liabilities. The Company is also
subject to the examination of its tax returns and other matters by tax authorities and governmental bodies. The
Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine
the adequacy of its provision for taxes and as of December 31, 2017, has a reserve for liabilities relating to
uncertain tax positions of $37 million. Taxing authorities may disagree with the positions the Company has taken
regarding the tax treatment or characterization of its transactions. If any tax authorities were successful in
challenging the tax treatment or characterization of any of our transactions, it could also adversely affect its
financial results.
The Company’s Pulp and Paper business may have difficulty obtaining wood fiber at favorable prices, or at all.
Wood fiber is the principal raw material used by the Company’s Pulp and Paper business, comprising
approximately 21% of the consolidated cost of sales in 2017. Wood fiber is a commodity, and prices historically
have been cyclical. The primary source for wood fiber is timber. Environmental litigation and regulatory
developments, alternative use for energy production and reduction in harvesting related to the housing market,
have caused, and may cause in the future, significant reductions in the amount of timber available for commercial
harvest in the United States and Canada. In addition, future domestic or foreign legislation and litigation
concerning the use of timberlands, the protection of endangered species, the promotion of forest health and the
response to and prevention of catastrophic wildfires could also affect timber supplies. Availability of harvested
timber may be further limited by adverse weather, fire, insect infestation, disease, ice storms, wind storms,
flooding and other natural and man-made causes, thereby reducing supply and increasing prices. Wood fiber
pricing is subject to regional market influences, and the Company’s cost of wood fiber may increase in particular
regions due to market shifts in those regions. Any sustained increase in wood fiber prices would increase the
Company’s operating costs, and the Company may be unable to increase prices for its products in response to
increased wood fiber costs due to additional factors affecting the demand or supply of these products.
The Company currently meets its wood fiber requirements by purchasing wood fiber from third parties and
by harvesting timber pursuant to its forest licenses and forest management agreements. If the Company’s cutting
rights, pursuant to its forest licenses or forest management agreements are reduced, or any third-party supplier of
wood fiber stops selling or is unable to sell wood fiber to the Company, its financial condition or results of
operations could be materially and adversely affected.
An increase in the cost of the Company’s purchased energy or other raw materials would lead to higher
manufacturing costs, thereby reducing its margins.
The Company’s operations consume substantial amounts of energy such as electricity, natural gas, fuel oil,
coal and hog fuel. Energy prices, particularly for electricity, natural gas and fuel oil, have been volatile in recent
years. As a result, fluctuations in energy prices will impact the Company’s manufacturing costs and contribute to
earnings volatility. While the Company purchases substantial portions of its energy under supply contracts, most
of these contracts are based on market pricing.
Other raw materials the Company uses include various chemical compounds, such as precipitated calcium
carbonate, sodium chlorate, sulfuric acid, dyes, peroxide, methanol and aluminum sulfate, super absorbent
22
polymers and nonwovens. The costs of these other raw materials have been volatile historically, and they are
influenced by capacity utilization, energy prices and other factors beyond the Company’s control.
Due to the commodity nature of the Company’s products, the relationship between industry supply and
demand for these products, rather than solely changes in the cost of raw materials, will determine the Company’s
ability to increase prices. Consequently, the Company may be unable to pass on increases in its operating costs to
its customers. Any sustained increase in other raw materials or energy prices without any corresponding increase
in product pricing would reduce the Company’s operating margins and may have a material adverse effect on its
business and results of operations.
The Company depends on third parties for transportation services.
The Company relies primarily on third parties for transportation of the products it manufactures and/or
distributes, as well as delivery of its raw materials. In particular, a significant portion of the goods it
manufactures and raw materials it uses are transported by railroad or trucks, which are highly regulated. If any of
its third-party transportation providers were to fail to deliver the goods that the Company manufactures or
distributes in a timely manner, the Company may be unable to sell those products at full value, or at all.
Similarly, if any of these providers were to fail to deliver raw materials to the Company in a timely manner, it
may be unable to manufacture its products in response to customer demand. In addition, if any of these third
parties were to cease operations or cease doing business with the Company, it may be unable to replace them at
reasonable cost. Any failure of a third-party transportation provider to deliver raw materials or finished products
in a timely manner could harm the Company’s reputation, negatively impact its customer relationships and may
have a material adverse effect on its financial condition and results of operations.
The Company could experience disruptions in operations and/or increased labor costs due to labor disputes or
restructuring activities.
Employees at 17 of the Company’s facilities, representing approximately half of the Company’s employees,
are represented by unions through collective bargaining agreements generally on a facility-by-facility basis.
Certain of these agreements will expire in 2018 and others will expire between 2019 and 2021. As of
December 31, 2017, five collective bargaining agreements, representing 331 employees, are up for renegotiation.
In the future, the Company may not be able to negotiate acceptable new collective bargaining agreements, which
could result in strikes or work stoppages or other labor disputes by affected workers. Renewal of collective
bargaining agreements could also result in higher wages or benefits paid to union members. In addition, labor
organizing activities could occur at any of the Company’s facilities. Therefore, the Company could experience a
disruption of its operations or higher ongoing labor costs, which could have a material adverse effect on its
business and results of operations.
The Company continues to evaluate potential adjustments to its production capacity, which may include
additional closures of machines or entire mills, and the Company could recognize significant cash and/or
non-cash charges relating to any such closures in the future.
A material disruption at one or more of the Company’s manufacturing facilities could prevent it from meeting
customer demand, reduce its sales and/or negatively impact its results of operations.
Any of the Company’s manufacturing facilities, or any of its machines within an otherwise operational
facility, could cease operations unexpectedly due to a number of events, including:
•
•
•
unscheduled maintenance outages;
prolonged power failures;
equipment failure;
23
•
chemical spill or release;
• malfunction of a boiler;
•
•
•
•
•
•
•
•
the effect of a drought or reduced rainfall on its water supply;
labor difficulties;
government regulations;
disruptions in the transportation infrastructure, including roads, bridges, railroad tracks and tunnels;
adverse weather, fires, floods, earthquakes, hurricanes or other catastrophes;
cyberattack or other security breaches;
terrorism or threats of terrorism; or
other operational problems, including those resulting from the risks described in this section.
Events such as those listed above have resulted in operating losses in the past. Future events may cause
shutdowns, which may result in additional downtime and/or cause additional damage to the Company’s facilities.
Any such downtime or facility damage could prevent the Company from meeting customer demand for its
products and/or require it to make unplanned capital expenditures. If one or more of these machines or facilities
were to incur significant downtime, it may have a material adverse effect on the Company’s results of operations
and financial position.
The efficiency of our operations could be adversely affected by disruptions to our Information Technology (IT)
Services.
The Company’s information technology systems, some of which are dependent on services provided by
third parties, serve an important role in the efficient operation of its business. The protection of customers,
employees and company data is critical to the Company’s business. This role includes ordering and managing
materials from suppliers, managing its inventory, converting materials to finished products, facilitating order
entry and fulfillment and processing of transactions, summarizing and reporting its financial results, facilitating
internal and external communications, administering human resources functions, retaining certain personal
information and providing other processes necessary to manage its business. The Company is exposed to the risk
of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of
intellectual property or other sensitive information or may be the result of unintentional events. Like most
companies, the Company’s information technology systems may be vulnerable to interruption due to a variety of
events beyond the Company’s control, including, but not limited to, natural disasters, terrorist attacks, power and/
or telecommunications failures, computer viruses, hackers and other security issues. The Company has
technology security initiatives and disaster recovery plans in place to mitigate the Company’s risk to these
vulnerabilities, including protection of confidential or personal information, but these measures may not be
adequate or implemented properly to ensure that the Company’s operations are not disrupted. The Company’s IT
systems have been, and will likely continue to be, subject to computer viruses or other malicious codes,
unauthorized access attempts, phishing and other cyber-incidents. The Company cannot guarantee that its
security efforts will prevent breaches or breakdowns to its IT systems or those of its third party providers.
Potential consequences of a material cyber incident, which could result in confidential or personal information
being accessed, obtained, damaged or used by unauthorized or improper persons, include damage to the
Company’s reputation, litigation, inefficiencies or production downtimes and increased cyber security protection
and remediation costs. Such consequences could have a negative impact on the Company’s ability to meet
customers’ orders, resulting in a delay or decrease to its revenue and a reduction to its operating margins.
The Company could encounter difficulties restructuring operations or closing or disposing of facilities.
The Company is continuously seeking the most cost-effective means and structure to serve our customers
and to respond to changes in our markets. Accordingly, from time to time, the Company has, and is likely to
24
again close facilities, sell non-core assets and otherwise restructure operations in an effort to improve cost
competitiveness and profitability. As a result, restructuring and divesture costs have been, and are expected to be,
a recurring component of our operating costs, and may vary significantly from year to year depending on the
scope of such activities. Divestures and restructuring may also result in significant financial charges for the
impairment of assets, including goodwill and other intangible assets. Furthermore, such activities may divert the
attention of management, disrupt our ordinary operations, or result in a reduction in the volume of products
produced and sold. There is no guarantee that any such activities will achieve its goal, and if the Company cannot
successfully manage the associated risks, its financial condition and results of operations could be adversely
affected.
The Company has liabilities with respect to its pension plans and the actual cost of its pension plan obligations
could exceed current provisions. As of December 31, 2017, the Company’s defined benefit plans had a surplus of
$131 million on certain plans and a deficit of $130 million on others.
The Company does not expect any potential short-term liquidity issues to affect the pension funds since
pension fund obligations are primarily long-term in nature. Losses in pension fund investments, if any, would
result in future increased contributions by the Company. Additional contributions to these pension funds would
be required to be paid over 5 year or 10 year periods, depending upon the applicable legislation for funding
pension deficits. Losses, if any, would also impact results of operations over a longer period of time and
immediately increase liabilities and reduce equity.
The Company’s future funding obligations for its defined benefit pension plans depend upon changes to the
level of benefits provided by the plans, the future performance of assets set aside in trusts for these plans, the
level of interest rates used to determine minimum funding levels, actuarial data and experience, and any changes
in government laws and regulations. As of December 31, 2017, the Company’s defined benefit pension plans
held assets with a fair value of $1,765 million.
The Company’s intellectual property rights are valuable, and any inability to protect them could reduce the value
of its products and its brands.
The Company relies on patent, trademark and other intellectual property laws of the United States and other
countries to protect its intellectual property rights. However, the Company may be unable to prevent third parties
from using its intellectual property without its authorization, which may reduce any competitive advantage it has
developed. If the Company had to litigate to protect these rights, any proceedings could be costly, and it may not
prevail. The Company cannot guarantee that any United States or foreign patents, issued or pending, will provide
it with any competitive advantage or will not be challenged by third parties. Additionally, the Company has
obtained and applied for United States and foreign trademark registrations, and will continue to evaluate the
registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any
of its pending patent or trademark applications will be approved by the applicable governmental authorities and,
even if the applications are approved, third parties may seek to oppose or otherwise challenge these registrations.
The failure to secure any pending patent or trademark applications may limit the Company’s ability to protect the
intellectual property rights that these applications were intended to cover.
If the Company is unable to successfully retain and develop executive leadership and other key personnel, it may
be unable to fully realize critical organizational strategies, goals and objectives.
The success of the Company is substantially dependent on the efforts and abilities of its key personnel,
including its executive management team, to develop and implement its business strategies and manage its
operations. The failure to retain key personnel or to develop successors with appropriate skills and experience for
key positions in the Company could adversely affect the development and achievement of critical organizational
strategies, goals and objectives. There can be no assurance that the Company will be able to retain or develop the
key personnel it needs and the failure to do so may adversely affect its financial condition and results of
operations.
25
The Company’s balance sheet includes a significant amount of intangible assets. The Company may be required
to record a material charge to earnings due to impairment of intangible assets carried on its balance sheet.
As a result of business acquisitions in the past years, mostly in the Personal Care segment, the Company
carries on its balance sheet intangible assets. As of December 31, 2017, the Company’s balance sheet included
intangible assets of $633 million, of which $337 million related to intangible assets subject to amortization and
$296 million related to indefinite-lived intangible assets. The Company performs annual evaluations or more
frequently if indicators arise, for potential impairment of the carrying value of its intangible assets. Impairment
assessments inherently involve management judgment as to the assumptions used to estimate fair value of the
intangible asset being tested. Changes in assumptions or estimates can materially affect the determination of fair
value. The major factors that influence the analysis of fair value are the Company’s estimates for future sales
growth and the discount rate associated with the asset being tested.
In connection with the Company’s annual impairment testing performed in the fourth quarter of 2017, we
performed a quantitative assessment for each indefinite-lived intangible asset (trade names and catalog rights) of
the Personal Care segment. The tests indicated that the indefinite-lived intangible assets had fair values that
exceeded their carrying amounts. Certain Personal Care division indefinite-lived intangible assets are considered
to be at risk for future impairment given their respective fair values exceeded their respective carrying values
by 30% or less at the time the test was performed. As of December 31, 2017, the carrying value of these
indefinite-lived intangible assets was $164 million. If assumed revenue growth is not achieved in future periods
and/or there is an increase to the rate used to discount the estimated cash flows, there is the potential for partial or
full impairment related to the indefinite-lived intangible assets. If we are required to impair all or a significant
amount of the carrying value of related intangible assets, and consequently record a non-cash impairment charge,
the Company’s net earnings could be materially and adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
A description of our mills and related properties is included in Part I, Item I, Business, of this Annual Report
on Form 10-K.
Production facilities
We own substantially all of our production facilities with the exception of some production facilities where
either a certain portion is subject to a lease in connection with an industrial development bond arrangement, or
are leased with a third party or are fee-in-lieu-of-tax agreements, and lease substantially all of our sales offices,
regional replenishment centers and warehouse facilities. We believe our properties are in good operating
condition and are suitable and adequate for the operations for which they are used. We own substantially all of
the equipment used in our facilities.
Forestlands
We manage approximately 5 million acres of forestlands that are directly licensed or owned by Domtar in
Canada, through efficient management and the application of certified sustainable forest management practices.
We also have access to fiber from an additional 24 million acres of public forestlands in Canada that are licensed
and managed by third parties. We believe that these forestlands will provide a continuous supply of wood for
future needs.
26
Listing of facilities and locations
CORPORATE OFFICES
Fort Mill, South Carolina
Montreal, Quebec
Rock Hill, South Carolina
Tatum, South Carolina
Washington Court House, Ohio
Representative Office—
International
Hong Kong, China
PULP & PAPER
DIVISION HEADQUARTERS
Fort Mill, South Carolina
Uncoated Freesheet
Ashdown, Arkansas
Espanola, Ontario
Hawesville, Kentucky
Johnsonburg, Pennsylvania
Kingsport, Tennessee
Marlboro (Bennettsville), South
Carolina
Nekoosa, Wisconsin
Port Huron, Michigan
Rothschild, Wisconsin
Windsor, Quebec
Pulp
Dryden, Ontario
Kamloops, British Columbia
Plymouth, North Carolina
Chip Mills
Hawesville, Kentucky
Johnsonburg, Pennsylvania
Kingsport, Tennessee
Marlboro (Bennettsville), South
Carolina
Converting and Distribution—
Onsite
Ashdown, Arkansas
Rothschild, Wisconsin
Windsor, Quebec
Converting and Forms
Manufacturing
Addison, Illinois
Brownsville, Tennessee
Dallas, Texas
DuBois, Pennsylvania
Griffin, Georgia
Owensboro, Kentucky
Ridgefields, Tennessee
Local Distribution Centers
Atlanta, Georgia
Birmingham, Alabama
Buffalo, New York
Cincinnati, Ohio
Cleveland, Ohio
Des Moines, Iowa
Houston, Texas
Jackson, Mississippi
Kansas City, Kansas
Louisville, Kentucky
Minneapolis, Minnesota
Nashville, Tennessee
Omaha, Nebraska
Phoenix, Arizona
Plain City, Ohio
Richmond, Virginia
Salt Lake City, Utah
San Antonio, Texas
San Lorenzo, California
St. Louis, Missouri
Vancouver, Washington
Walton, Kentucky
Wayne, Michigan
Wisconsin Rapids, Wisconsin
Regional Replenishment
Centers—United States
Mira Loma, California
Jacksonville, Florida
Chicago, Illinois
Indianapolis, Indiana
Delran, New Jersey
Charlotte, North Carolina
Dallas, Texas
Seattle, Washington
Regional Replenishment
Centers—Canada
Richmond, Quebec
Toronto, Ontario
Winnipeg, Manitoba
27
Ariva—Canada
Ottawa, Ontario
Toronto, Ontario
Montreal, Quebec
Quebec City, Quebec
Halifax, Nova Scotia
Mount Pearl, Newfoundland and
Labrador
PERSONAL CARE
DIVISION HEADQUARTERS
Raleigh, North Carolina
Personal Care—Manufacturing
and Distribution
NORTH AMERICA
Delaware, Ohio
Greenville, North Carolina
Waco, Texas
EAM Corporation
Jesup, Georgia
EUROPE
Aneby, Sweden
Toledo, Spain
Personal Care—
Sales offices
Daytona Beach, Florida
Emmerloord, The Netherlands
Keebergen, Belgium
Olivette, Missouri
Oslo, Norway
Linz, Austria
Madrid, Spain
Pusignan, France
Rheinfelden, Switzerland
Schwalbach am Taunus,
Germany
Stockholm, Sweden
Texarkana, Arkansas
Wakefield, United Kingdom
ITEM 3. LEGAL PROCEEDINGS
In the normal course of operations, the Company becomes involved in various legal actions mostly related
to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. The
Company periodically reviews the status of these proceedings and assesses the likelihood of any adverse
judgments or outcomes of these legal proceedings, as well as analyzes probable losses. Although the final
outcome of any legal proceeding is subject to a number of variables and cannot be predicted with any degree of
certainty, management currently believes that the ultimate outcome of current legal proceedings will not have a
material adverse effect on the Company’s long-term results of operations, cash flow or financial position.
However, an adverse outcome in one or more of the significant legal proceedings could have a material adverse
effect on the Company’s results, financial condition or cash flow in a given quarter or year.
For a discussion of commitments, legal proceedings and related contingencies, refer to Item 8, Financial
Statements and Supplementary Data under Note 22 “Commitments and Contingencies” for more details.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Domtar Corporation’s common stock is traded on the New York Stock Exchange and the Toronto Stock
Exchange under the symbol “UFS”. The following table sets forth the price ranges of our common stock during
2017 and 2016.
2017 Quarter
First
Second
Third
Fourth
Year
2016 Quarter
First
Second
Third
Fourth
Year
HOLDERS
New York Stock
Exchange ($)
Toronto Stock Exchange
(CDN$)
High
Low
Close
High
Low
Close
43.69
41.91
44.08
49.81
36.36
35.84
36.69
42.20
36.52
38.42
43.39
49.52
57.06
57.11
54.80
63.91
48.48
47.98
47.31
52.93
48.55
49.84
54.12
62.23
49.81
35.84
49.52
63.91
47.31
62.23
40.50
42.68
39.53
41.59
30.43
33.70
33.24
34.25
40.50
35.01
37.13
39.03
52.57
54.85
52.13
54.86
42.41
43.91
43.32
45.62
52.57
45.21
48.69
52.41
42.68
30.43
39.03
54.86
42.41
52.41
At December 31, 2017, the number of shareholders of record (registered and non-registered) of Domtar
Corporation common stock was approximately 18,800.
DIVIDENDS AND STOCK REPURCHASE PROGRAM
During 2017, the Company declared four quarterly dividends of $0.415 per share, to holders of our common
stock. Dividends of $26 million were paid on April 17, 2017, July 17, 2017, October 16, 2017 and January 15,
2018, respectively, to shareholders of record as of April 3, 2017, July 3, 2017, October 2, 2017 and January 2,
2018, respectively.
During 2016, the Company declared one quarterly dividend of $0.40 per share and three quarterly dividends
of $0.415 per share, to holders of our common stock. The total dividends of approximately of $25 million,
$26 million, $26 million and $26 million were paid on April 15, 2016, July 15, 2016, October 17, 2016 and
January 17 2017, respectively, to shareholders of record as of April 4, 2016, July 5, 2016, October 3, 2016 and
January 3, 2017, respectively.
On January 29, 2018, the Company Board of Directors approved a quarterly dividend of $0.435 per share,
an increase of $0.02 or 4.8%, to be paid to holders of the Company common stock. This dividend is to be paid on
April 16, 2018 to shareholders of record on April 2, 2018.
The Company’s Board of Directors has authorized a stock repurchase program (the “Program”) of up to
$1.3 billion. Under the Program, the Company is authorized to repurchase from time to time shares of its
outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of
29
stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and
regulatory considerations. The Program may be suspended, modified or discontinued at any time and the
Company has no obligation to repurchase any amount of its common stock under the Program. The Program has
no set expiration date. The Company repurchases its common stock, in part to reduce the dilutive effects of its
stock options, awards, and to improve shareholders’ returns.
The Company makes open market purchases of its common stock using general corporate funds.
the Company may enter into structured stock repurchase agreements with large financial
Additionally,
institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements
would require the Company to make up-front payments to the counterparty financial institutions which would
result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment
at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements,
depending upon the price of the stock.
During 2017, there were no shares repurchased under the Program. As of December 31, 2017, the
approximate dollar value of shares that may yet be purchased under the Program was $323 million.
During 2016, the Company repurchased 304,915 shares (2015 – 1,210,932) at an average price of $32.21
(2015 – $41.40) for a total cost of $10 million (2015 – $50 million).
Since the inception of the Program, the Company repurchased 24,853,827 shares at an average price of
$39.33 for a total cost of $977 million. All shares repurchased are recorded as Treasury stock on the
Consolidated Balance Sheets under the par value method at $0.01 per share.
30
PERFORMANCE GRAPH
This graph compares the return on a $100 investment in the Company’s common stock on December 31,
2012 with a $100 investment in an equally-weighted portfolio of a peer group(1), and a $100 investment in the
S&P 400 MidCap Index. This graph assumes that returns are in local currencies and assumes quarterly
reinvestment of dividends. The measurement dates are the last trading day of the period as shown.
Return on $100 Investment
250
200
150
100
50
s
r
a
l
l
o
D
0
2012
2013
2014
2015
2016
2017
Domtar Corporation
Peer Group
S&P 400
S&P 500
S&P 500 Materials
Old Peer Group
(1) On May 18, 2007, the Human Resources Committee of the Board of Directors established performance
measures as part of the Performance Conditioned Restricted Stock Units (“PCRSUs”) Agreement including
the achievement of a total shareholder return compared to a peer group.
The peer group includes: WestRock Company, Ontex Group NV, Glatfelter Corporation, International Paper
Co., Kimberly-Clark Corporation, Neenah Paper, Inc., Packaging Corp. of America, Resolute Forest
Products Inc., SCA, Sonoco Products Company, Stora Enso Oyj and UPM-Kymmene Corp. This new peer
group consists of the companies in the old peer group with the addition of Ontex Group NV and WestRock
Company. The change in peer group was made to be consistent with the peer group used for our definitive
Proxy Statement to be filed on or about March 31, 2018. Ontex Group NV performance history is included
starting in 2014 and WestRock Company starting in 2015, as both companies did not exist prior to those
periods.
31
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected historical financial data of the Company for the periods and as of the dates
indicated. The selected financial data as of and for the fiscal years then ended have been derived from the audited
financial statements of Domtar Corporation.
The following table should be read in conjunction with Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data.
FIVE YEAR FINANCIAL SUMMARY
(In millions of dollars, except per share figures)
Statement of Income Data:
Sales
Closure and restructuring costs and
impairment of goodwill and
property, plant and equipment 1
Depreciation and amortization
Operating income 1
Net (loss) earnings 2
Net (loss) earnings per common
December 31,
2017
December 31,
2016
Year ended
December 31,
2015
December 31,
2014
December 31,
2013
$5,157
$5,098
$5,264
$5,563
$5,391
580
321
(317)
(258)
61
348
223
128
81
359
288
142
32
384
364
431
40
376
161
91
share—basic 3
$ (4.11)
$ 2.04
$ 2.24
$ 6.65
$ 1.37
Net (loss) earnings per common
share—diluted 3
Cash dividends paid per common and
$ (4.11)
$ 2.04
$ 2.24
$ 6.64
$ 1.36
exchangeable share 3
$ 1.66
$ 1.63
$ 1.58
$ 1.30
$ 1.00
Balance Sheet Data:
Cash and cash equivalents
Property, plant and equipment, net
Total assets
Long-term debt due within one year
Long-term debt
Total shareholders’ equity
$ 139
2,765
5,212
1
1,129
2,483
$ 125
2,825
5,680
63
1,218
2,676
$ 126
2,835
5,654
41
1,210
2,652
$ 174
3,131
6,175
169
1,171
2,890
$ 655
3,289
6,267
4
1,499
2,782
1
2
3
In the fourth quarter of 2017, we recorded a non-cash goodwill impairment charge associated with our
Personal Care segment of $578 million. For additional information, refer to Item 8, Financial Statement and
Supplementary Data under Note 4 “Impairment of Goodwill and Property, Plant and Equipment.”
In the fourth quarter of 2017, we recorded a net tax benefit of $140 million related to the U.S. Tax Cuts and
Jobs Act of 2017, which is composed of a benefit of $186 million for the remeasurement of deferred tax
assets and liabilities and a charge of $46 million for the repatriation tax. For additional information, refer to
Item 8, Financial Statement and Supplementary Data under Note 10 “Income Taxes.”
Earnings per common share and cash dividends paid per common and exchangeable share have been
adjusted on a post-split basis.
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
should be read in conjunction with Domtar Corporation’s audited consolidated financial statements and notes
thereto included in Item 8, Financial Statements and Supplementary Data. Throughout this MD&A, unless
otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers to Domtar
Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange
and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is
determined on the basis of accounting principles generally accepted in the United States.
The information contained on our website, www.domtar.com, is not incorporated by reference into this
Form 10-K and should in no way be construed as a part of this or any other report that we file with or furnish to
the SEC.
In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton,
an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT”
refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in
U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless
otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net
earnings (loss), and shipment volumes are based on the twelve months period ended December 31, 2017, 2016
and 2015. The twelve month periods are also referred to as 2017, 2016 and 2015. Reference to notes refers to
footnotes to the consolidated financial statements and notes thereto included in Item 8, Financial Statements and
Supplementary Data.
This MD&A is intended to provide investors with an understanding of our recent performance, financial
condition and outlook. Topics discussed and analyzed include:
• Overview
•
2017 Highlights
• Outlook
• Consolidated Results of Operations and Segment Review
• Liquidity and Capital Resources
• Recent Accounting Pronouncements and Critical Accounting Estimates and Policies
OVERVIEW
We have two reportable segments as described below, which also represent our two operating segments.
Each reportable segment offers different products and services and requires different manufacturing processes,
technology and marketing strategies. The following summary briefly describes the operations included in each of
our reportable segments.
Pulp and Paper: Our Pulp and Paper segment consists of the design, manufacturing, marketing and
distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market
pulp.
Personal Care: Our Personal Care segment consists of the design, manufacturing, marketing and
distribution of absorbent hygiene products.
2017 HIGHLIGHTS
• Operating income and net earnings decreased by 242% and 302%, respectively from 2016
33
•
Sales increased by 1% from 2016. Net average selling prices for pulp were up while net average selling
prices for paper and personal care products were down from 2016. Our manufactured paper volumes were
down while our pulp volumes were up when compared to 2016. In addition, sales in 2017 included a full
year of Home Delivery Incontinent Supplies (“HDIS”) which was acquired on October 1, 2016 compared
to one quarter included in 2016
• Recognition of a non-cash goodwill impairment charge associated with our Personal Care segment of
$578 million
• Recognition of a net tax benefit of $140 million related to the U.S. Tax Cuts and Jobs Act of 2017 (“U.S.
Tax Reform”), which is composed of a benefit of $186 million for the remeasurement of deferred tax
assets and liabilities and a charge of $46 million for the repatriation tax
• We paid $104 million in dividends
FINANCIAL HIGHLIGHTS
(In millions of dollars, unless
otherwise noted)
Sales
Operating (loss) income 1
Net (loss) earnings 2
Net (loss) earnings per
common share (in
dollars) 3:
Basic
Diluted
Total assets
Total long-term debt,
including current
portion
Twelve months ended
Variance 2017 vs. 2016
Variance 2016 vs. 2015
December 31,
2017
December 31,
2016
December 31,
2015
$
%
$
%
$5,157
(317)
(258)
$5,098
223
128
$5,264
288
142
$
59
(540)
(386)
1%
-242%
-302%
$ (166)
(65)
(14)
-3%
-23%
-10%
$ (4.11)
$ (4.11)
$ 2.04
$ 2.04
$ 2.24
$ 2.24
$(6.15)
$(6.15)
$ (0.20)
$ (0.20)
At December 31,
2017
At December 31,
2016
$5,212
$5,680
$1,130
$1,281
1
2
3
In the fourth quarter of 2017, we recorded a non-cash goodwill impairment charge associated with our Personal
Care segment of $578 million. See Item 8, Financial Statements and Supplementary Data under Note 4
“Impairment of Goodwill and Property, Plant and Equipment” for more information.
In the fourth quarter of 2017, we recorded a net tax benefit of $140 million related to the U.S. Tax Reform,
which is composed of a benefit of $186 million for the remeasurement of deferred tax assets and liabilities and
a charge of $46 million for the repatriation tax. See Item 8, Financial Statements and Supplementary Data
under Note 10 “Income Taxes” for more information.
See Item 8, Financial Statements and Supplementary Data under Note 6 “Earnings (loss) per Common Share”
for more information on the calculation of net earnings per common share.
OUTLOOK
In 2018, costs, including freight, labor and raw materials, are expected to marginally increase. Our paper
shipments should benefit from expected industry capacity closures, while paper prices should improve following the
recently-announced price increases and pulp will benefit from volume growth in fluff. Personal Care is expected to
be negatively impacted by an unfavorable tender balance, resulting in lower volume and operating margins.
34
CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW
This section presents a discussion and analysis of our 2017, 2016 and 2015 sales, operating income (loss)
and other information relevant to the understanding of our results of operations.
ANALYSIS OF NET SALES
By Business Segment
Pulp and Paper
Personal Care
Total for reportable segments
Intersegment sales
Consolidated
Shipments
Paper—manufactured
(in thousands of ST)
Communication Papers
Specialty and Packaging
papers
Paper—sourced from third
parties (in thousands of ST)
Paper—total (in thousands of
ST)
Pulp (in thousands of ADMT)
Variance 2017 vs. 2016 Variance 2016 vs. 2015
December 31,
2017
Twelve months ended
December 31,
2016
December 31,
2015
$4,216
1,005
5,221
(64)
5,157
$4,239
917
5,156
(58)
5,098
$4,458
869
5,327
(63)
5,264
$
(23)
88
65
(6)
59
%
-1%
10%
1%
1%
$
(219)
48
(171)
5
(166)
2,891
2,401
490
109
3,000
1,722
3,021
2,522
499
123
3,144
1,513
3,163
2,639
(130)
(121)
-4%
-5%
(142)
(117)
524
127
(9)
-2%
(25)
(14)
-11%
(4)
3,290
1,414
(144)
209
-5%
14%
(146)
99
%
-5%
6%
-3%
-3%
-4%
-4%
-5%
-3%
-4%
7%
ANALYSIS OF CHANGES IN SALES
Pulp and Paper
Personal Care
Consolidated sales
2017 vs. 2016
% Change in Net Sales due to
2016 vs. 2015
% Change in Net Sales due to
Net Price
Volume /
Mix
Currency Total Net Price
Volume /
Mix
Currency Total
— %
-1%
— %
— % -1% -3%
-1%
11%(a) — % 10% -3%
1%
-2% — % -5%
9%(a) — % 6%
— % 1% -3% — % — % -3%
(a)
Includes sales of HDIS since October 1, 2016.
ANALYSIS OF OPERATING INCOME (LOSS)
By Business Segment
Operating income (loss)
Pulp and Paper
Personal Care
Corporate
Consolidated operating
income (loss)
December 31,
2017 (a)
Twelve months ended
December 31,
2016
December 31,
2015
2017 vs. 2016 Variance
2016 vs. 2015 Variance
$
%
$
%
250
(527)
(40)
217
57
(51)
270
61
(43)
33
(584)
11
15%
-1025%
-22%
(53)
(4)
(8)
(20)%
(7)%
19%
(317)
223
288
(540)
-242%
(65)
(23)%
35
(a)
Includes a non-cash goodwill impairment charge associated with our Personal Care segment of $578
million.
2017 vs. 2016
$ Change in Segmented Operating Income (Loss) due to
Volume/
Mix(a) Net Price
Input
Costs (b)
Operating (c)
Expenses Currency
Depreciation/
Impairment (d) Restructuring (e)
Other Income/
Expense (f)
Pulp and Paper
Personal Care
Corporate
Consolidated operating
(17)
6
—
(2)
(10)
—
14
3
—
(76)
2
1
income (loss)
(11)
(12)
17
(73)
(a)
Includes results of HDIS since October 1, 2016.
15
(4)
(1)
10
60
(579)
—
(519)
31
(1)
—
30
8
(1)
11
18
Total
33
(584)
11
(540)
(b)
Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy
costs.
(c)
Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs.
In 2017, we recorded $578 million of non-cash impairment of goodwill related to our Personal Care
segment, compared to $29 million of accelerated depreciation recorded in 2016 related to the conversion of
a paper machine to a high quality fluff pulp line at our Ashdown mill. Depreciation charges were lower by
$30 million in 2017, excluding foreign currency impact.
(d)
(e)
2017 restructuring charges relate mostly to:
—Severance and termination costs ($2 million)
2016 restructuring charges relate mostly to:
—Fluff conversion related charges at Ashdown
($26 million)
—Plymouth optimization charges ($5 million)
—Severance and termination costs ($4 million)
—Credit related to pension settlement and
withdrawal liabilities ($3 million)
(f)
2017 operating expenses/income includes:
— Net gain on sale of property, plant and equipment
($13 million)
— Reversal of contingent consideration provision
2016 operating expenses/income includes:
— Foreign exchange loss ($6 million)
— Environmental provision ($2 million)
— Other income ($4 million)
($2 million)
— Bad debt expense ($1 million)
— Environmental provision ($3 million)
— Foreign exchange loss ($1 million)
— Other income ($4 million)
Commentary—2017 vs. 2016
Interest Expense, net
We incurred $66 million of net interest expense in 2017 compared to net interest expense of $66 million in
2016. Interest expense increased due to a reduction in capitalized interest and an increase in interest expense
related to the Term Loan Agreement. This increase was offset by the repayment at maturity of the 9.5% Notes
due in August 2016 and of the maturity of the 10.75% Notes due in June 2017.
36
Income Taxes
We recorded an income tax benefit of $125 million in 2017 compared to a tax expense of $29 million in
2016, which yields an effective tax rate of 33% and 18% for 2017 and 2016, respectively.
During 2017, we recorded a goodwill impairment charge of $578 million with minimal tax benefit which
impacted the effective tax rate by $200 million. This was partially offset by a net tax benefit of $140 million
related to the U.S. Tax Reform, which is composed of a benefit of $186 million for the remeasurement of
deferred tax assets and liabilities and a charge of $46 million for the repatriation tax. See “U.S. Tax Reform”
following for more information. The effective tax rate for 2017 was also significantly impacted by our foreign
operations being taxed at lower statutory tax rates and by recording $24 million of tax credits, mainly research
and experimentation credits.
During 2016, we recorded $18 million of tax credits, mainly research and experimentation credits, which
significantly impacted the effective tax rate. The effective tax rate for 2016 was also significantly impacted by
our foreign operations being taxed at lower statutory tax rates.
U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform”)
The U.S. Tax Reform was signed into law on December 22, 2017. The U.S. Tax Reform significantly
changes U.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax
rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a one-time
deemed repatriation tax on accumulated foreign earnings. As a result of the corporate tax rate reduction, we
revalued our ending net deferred tax liabilities, and recognized a provisional tax benefit of $186 million in our
consolidated statement of earnings for the year ended December 31, 2017.
The U.S Tax Reform provides for a mandatory one-time deemed repatriation tax on our undistributed
foreign earnings and profits. We recorded a provisional repatriation tax amount of $46 million, which we will
elect to pay over eight years, and which impacted the 2017 tax rate. The current portion of $4 million is included
on our Consolidated Balance Sheet in Income and other taxes receivables and the remaining $42 million is
included in Other liabilities and deferred credits. While we have made a reasonable estimate of the repatriation
tax amount, we continue to analyze various factors, including the impact of foreign tax credits available to offset
the tax. We continue to gather additional information and monitor for further interpretive guidance in order to
finalize our calculations and complete our accounting for the repatriation tax liability.
Additionally, we continue to assess the impact of the U.S. Tax Reform with respect to our current strategy
of reinvesting profits of foreign subsidiaries back into those foreign operations. We have not completed our
analysis of the impacts of the U.S Tax Reform and how these changes will impact operational decisions around
the utilization of cash residing in the foreign subsidiaries. If, after analysis, we determine that we will no longer
reinvest all earnings of our foreign subsidiaries, then we would need to determine if a provision for the
undistributed foreign earnings is required. As such, we have not recorded a tax liability amount for this item. It is
possible that such a tax liability, if recorded in the future, could have a significant impact on the effective tax rate
in the period that it is recorded.
We continue to assess the potential impact of the other components of the U.S. Tax Reform. Accordingly,
we have not made a policy election with regards to the Global Intangible Low-Taxed Income provisions of the
U.S. Tax Reform.
37
Valuation Allowances
In 2017, we recorded a net valuation allowance increase of $3 million related to certain foreign loss carryforwards
and a U.S. state credit, which impacted the effective tax rate for the year. In 2016, we recorded a net valuation reversal
of $1 million, related to foreign loss carryforwards, which impacted the effective tax rate for the year.
2016 vs. 2015
Pulp and Paper
Personal Care
Corporate
$ Change in Segmented Operating Income (Loss) due to
Volume/
Mix Net Price
Input
Costs (b)
Operating (c)
Expenses Currency
Depreciation/
Impairment (d) Restructuring (e)
(30)
5 (a)
—
44
(135)
(25)
30
— —
6
(10)
(9)
44
(5)
—
59
(2)
—
Other
Income/
Expense (f)
(13)
3
1
Total
(53)
(4)
(8)
(9)
(65)
(28)
—
—
(28)
Consolidated operating income
(loss)
(25)
(160)
74
(13)
39
57
Includes results of HDIS since October 1, 2016.
Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy
costs.
Includes maintenance, freight costs, SG&A expenses and other costs.
In 2016, we recorded $29 million of accelerated depreciation related to the conversion of a paper machine to
a high quality fluff pulp line at our Ashdown mill, compared to $77 million recorded in 2015. Depreciation
charges were lower by $9 million in 2016, excluding foreign exchange currency impact.
(a)
(b)
(c)
(d)
(e) .
2016 restructuring charges related mostly to:
—Fluff conversion related charges at Ashdown
2015 restructuring charges related mostly to:
—Fluff conversion related charges at Ashdown
($26 million)
($3 million)
—Plymouth optimization charges ($5 million)
—Severance and termination costs ($4 million)
—Credit related to pension settlement and withdrawal
—Termination costs at Attends Healthcare Limited
(“Attends Europe”) ($1 million)
liabilities ($3 million)
(f)
2016 operating expenses/income includes:
—Foreign exchange loss ($6 million)
—Environmental provision ($2 million)
—Other income ($4 million)
Commentary—2016 vs. 2015
Interest Expense, net
2015 operating expenses/income includes:
—Net gain on sale of property, plant & equipment
($15 million)
—Environmental provision ($4 million)
—Foreign exchange gain ($3 million)
—Bad debt expense ($5 million)
—Other expense ($4 million)
We incurred $66 million of net interest expense in 2016, a decrease of $66 million compared to net interest
expense of $132 million in 2015. This decrease was mostly due to a premium of $42 million paid in August 2015
on the partial repayment of the 9.5% Notes due 2016 and on the 10.75% Notes due 2017 as well as a decrease in
interest expense on these Notes as a result of the partial repayment. In addition, interest expense also decreased
due to the repayment at maturity of the 7.125% Notes due in August 2015 as well as the maturity of the
9.5% Notes in August 2016. This decrease was partially offset by interest expense related to the borrowing under
the Term Loan Agreement drawn down in the third quarter of 2015.
38
Income Taxes
For 2016, our income tax expense was $29 million compared to a tax expense of $14 million in 2015, which
yields an effective tax rate of 18% and 9% for 2016 and 2015, respectively.
During 2016, we recorded $18 million of tax credits, mainly research and experimentation credits, which
significantly impacted the effective tax rate. The effective tax rate for 2016 was also significantly impacted by
our foreign operations being taxed at lower statutory tax rates.
During 2015, we recorded $16 million of tax credits, mainly research and experimentation credits, which
significantly impacted the effective tax rate. Additionally, the effective tax rate for 2015 was also positively
impacted by the manufacturing deduction in the U.S., enacted law changes in various U.S. states, and the impact
of our foreign operations being taxed at lower statutory tax rates.
Valuation Allowances
In 2016, we recorded a net valuation allowance reversal of $1 million related to certain foreign loss
carryforwards, which impacted the effective tax rate for the year. In 2015, we also recorded a net valuation
reversal of $1 million, mainly related to foreign loss carryforwards, which impacted the effective tax rate for the
year.
Commentary—Segment Review
Pulp and Paper Segment
2017 vs. 2016
Sales in our Pulp and Paper segment decreased by $23 million, or 1%, when compared to sales in 2016. This
decrease in sales is mostly due to a decrease in our paper sales volumes, partially offset by an increase in our
pulp sales volumes. Our net average selling price for papers decreased while our net average selling price for
pulp increased.
Operating income in our Pulp and Paper segment amounted to $250 million in 2017, an increase of
$33 million, when compared to operating income of $217 million in 2016. Our results were positively impacted
by:
• Lower depreciation charges ($60 million) due to accelerated depreciation related to our 2014 decision
to convert a paper machine at our Ashdown facility to a high quality fluff pulp line in 2016 and lower
depreciation expenses due to certain assets being fully depreciated
• Lower restructuring costs mostly related to the conversion of a paper machine to a high quality fluff
pulp line at our Ashdown mill and the closure of a pulp dryer and idling of related assets at our
Plymouth mill related to our plan to optimize fluff pulp manufacturing, recorded in 2016 ($31 million)
• Lower input costs ($14 million) mostly related to lower fiber costs as a result of improved yields and
better weather and lower energy costs mostly due to the favorable impact of a boiler conversion,
partially offset by higher chemicals costs
•
Positive impact of our hedging program, partially offset by a stronger Canadian dollar on our Canadian
denominated expenses ($15 million)
• Higher other income/expense ($8 million)
These increases were partially offset by:
• Higher operating expenses ($76 million) mostly due to higher freight, compensation, warehousing and
packaging costs as well as lower productivity
39
• Lower volume and mix ($17 million) mostly related to lower volume of paper, partially offset by
higher volume of pulp
• Lower average selling prices for paper, partially offset by higher average selling prices for pulp ($2
million)
2016 vs. 2015
Sales in 2016 in our Pulp and Paper segment decreased by $219 million, or 5%, when compared to sales in
2015. This decrease in sales is mostly due to a 3% decrease in net average selling prices for pulp and paper as
well as a decrease in our paper sales volumes, partially offset by an increase in our pulp sales volumes of
approximately 2%.
Operating income in 2016 in our Pulp and Paper segment amounted to $217 million, a decrease of
$53 million, when compared to operating income of $270 million in 2015. Our results were negatively impacted
by:
• Lower average selling prices for paper and pulp ($135 million)
• Lower volume and mix ($30 million) mostly related to lower volume of paper partially offset by higher
volume of pulp
• Higher restructuring costs mostly related to the conversion at Ashdown described above and the
closure of a pulp dryer and idling of related assets at our Plymouth mill, related to our plan to optimize
fluff pulp manufacturing ($28 million)
• Higher other income/expense ($13 million)
These decreases were partially offset by:
• Lower depreciation charges ($59 million) due to lower accelerated depreciation related to our 2014
decision to convert a paper machine at our Ashdown facility to a high quality fluff pulp line and lower
depreciation expenses due to certain assets reaching the end of their useful lives
•
Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our
hedging program ($44 million)
• Lower input costs ($44 million) mostly related to lower fiber and energy costs due to improved market
and weather conditions
• Lower operating expenses ($6 million) mostly related to lower freight costs due to favorable global
economic factors including excess vessel capacity, carrier consolidation and lower oil prices as well as
lower maintenance costs due to timing of major maintenance when compared to 2015 and reduced
scope of outages and cost control measures, partially offset by lower productivity
Personal Care
2017 vs. 2016
Sales in 2017 in our Personal Care segment increased by $88 million, or 10%, when compared to sales in
2016. This increase in sales was driven by higher sales volume and mix of 11%, mostly due to the acquisition of
HDIS on October 1, 2016 and organic sales growth. This increase was partially offset by lower selling prices of
1% when compared to 2016.
Operating income decreased by $584 million compared to 2016. Our results were negatively impacted by:
• Higher depreciation/impairment charges ($579 million) mostly due to the non-cash impairment of
goodwill recorded in 2017 of $578 million
40
• Unfavorable average net selling prices ($10 million)
• Unfavorable foreign exchange impact, net of our hedging program ($4 million)
• Higher restructuring charges ($1 million)
• Unfavorable other income/expense ($1 million)
These decreases were partially offset by the following:
• Higher sales volume and mix ($6 million)
• Lower input costs ($3 million) mostly due to a decrease in price of super absorbent polymers, fluff pulp
and non-woven
• Lower operating expenses ($2 million) mostly due to lower manufacturing costs, partially offset by
higher salaries & wages
2016 vs. 2015
Sales in 2016 in our Personal Care segment increased by $48 million, or 6% when compared to sales in
2015. This increase in sales is driven by higher sales volume and mix of approximately 9% including sales of
HDIS since October 1, 2016. This increase was partially offset by lower selling prices of approximately 3%
while foreign exchange was flat when compared to 2015.
Operating income decreased by $4 million, or 7%, in 2016 compared to 2015. Our results were negatively
impacted by:
• Unfavorable average net selling prices ($25 million)
• Higher operating expenses ($10 million) mostly related to higher selling, general and administrative
expenses as well as higher salaries and wages due to additional labor, salary increases and an increase
in advertising expense
• Unfavorable foreign exchange impact, net of our hedging program ($5 million)
•
Increased depreciation charges ($2 million)
These decreases were partially offset by the following:
• Lower input costs ($30 million) mostly due to a decrease in price of super absorbent polymers, fluff
pulp and non-woven
• Higher sales volume and mix ($5 million)
•
Favorable other income/expense ($3 million)
In our absorbent hygiene products business, we compete in an industry with fundamental drivers for long-
term growth; however, competitive market pressures in the healthcare and retail markets grew significantly in the
last year. Although the impact of such pressures presents some uncertainties, we expect them to result in lower
than previously anticipated sales and operating margins.
While we expect an overall increase in healthcare spending due to an aging population, it is not clear how
pressures to limit this spending brought forth through administrative changes by various national governments
may impact the source of the funding. Additional changes in the balance of public versus private funding may be
forthcoming and these could impact overall consumption or the channels in which consumption occurs.
Additionally, excess industry capacity has increased pricing pressure in all markets and instigated a shift in the
infant and adult private label retail space as competitors historically almost absent in our markets have increased
their presence in such markets.
41
The principal methods and elements of competition remain brand recognition and loyalty, product
innovation, quality and performance, price and marketing and distribution capabilities.
In light of this weakened market outlook, our current business forecast was not sufficient to support the
carrying value of the goodwill associated with our Personal Care reporting unit, leading to the impairment of our
goodwill. In 2018, Personal Care is expected to be negatively impacted by an unfavorable tender balance,
resulting in lower volume and operating margins.
STOCK-BASED COMPENSATION EXPENSE
Under the Omnibus Incentive Plan, we may award to key employees and non-employee directors, at the
discretion of the Human Resources Committee of the Board of Directors, non-qualified stock options, incentive
stock options, stock appreciation rights, restricted stock units, performance-conditioned restricted stock units,
performance share units, deferred share units (“DSUs”) and other stock-based awards. The non-employee
directors only receive DSUs. We generally grant awards annually and use, when available, treasury stock to
fulfill awards settled in common stock and options exercised.
For the year ended December 31, 2017, stock-based compensation expense recognized in our results of operations
was $20 million (2016 – $16 million; 2015 – $10 million) for all of the outstanding awards. Compensation costs not
yet recognized amounted to $20 million (2016 – $17 million; 2015 – $16 million) and will be recognized over the
remaining service period of approximately 26 months. The aggregate value of liability awards settled in 2017 was
$7 million (2016 – $4 million; 2015 – $4 million). The total fair value of equity awards settled in 2017 was $3 million
(2016 – $2 million), representing the fair value at the time of settlement. The fair value at the grant date for these
settled equity awards was $4 million (2016 – $3 million). Compensation costs for performance awards are based on
management’s best estimate of the final performance measurement.
LIQUIDITY AND CAPITAL RESOURCES
Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and
capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect
to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent
necessary,
through borrowings under our contractually committed $700 million credit facility, of which
$700 million is currently undrawn and available, or through our $150 million receivables securitization facility,
of which $75 million is currently undrawn and available. Under adverse market conditions, there can be no
assurance that these agreements would be available or sufficient. See “Capital Resources” below.
Our ability to make payments on the requirements mentioned above will depend on our ability to generate
cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. Our credit and receivable securitization facilities and debt indentures impose
various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide
for unanticipated capital investments or to take advantage of business opportunities.
A portion of our cash is held outside the U.S. by foreign subsidiaries. The earnings of the foreign
subsidiaries reflect full provision for local income taxes. The U.S. Tax Reform includes a mandatory one-time
tax on accumulated earnings of foreign subsidiaries for which we recorded a provisional repatriation tax amount
of $46 million in the fourth quarter of 2017. We continue to assess the impact of the U.S. Tax Reform with
respect to our current strategy of reinvesting profits of foreign subsidiaries back into those foreign operations.
We have not completed our analysis of the impact of the U.S Tax Reform and how changes will impact
operational decisions around the utilization of cash residing in the 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.
42
Cash flows from operating activities totaled $449 million in 2017, a $16 million decrease compared to cash
flows from operating activities of $465 million in 2016. This decrease in cash flows from operating activities is
primarily due to a decrease in profitability, partially offset by a decrease in working capital requirements in 2017
when compared to 2016. We made income tax payments, net of refunds, of $33 million in 2017 compared to
income tax payments, net of refunds of $40 million in 2016. We paid $32 million of employer pension and other
post-retirement contributions in excess of pension and other post-retirement expense in 2017, compared to
$21 million in 2016.
Cash flows from operating activities totaled $465 million in 2016, a $12 million increase compared to cash
flows from operating activities of $453 million in 2015. This increase in cash flows from operating activities is
primarily due to a decrease in working capital requirements in 2016 when compared to 2015 as a result of
inventory draw down and cash collection on accounts receivable, partially offset by lower profitability. We made
income tax payments, net of refunds, of $40 million in 2016 compared to income tax payments, net of refunds of
$34 million in 2015. We paid $21 million of employer pension and other post-retirement contributions in excess
of pension and other post-retirement expense in 2016, compared to $1 million in 2015. We paid debt refinancing
costs of $42 million in 2015.
In 2015, we experienced an increase in working capital requirements, in part due to inventory build-up. We
paid debt refinancing costs of $42 million in the third quarter of 2015 and made income tax payments, net of
refunds of $34 million in 2015.
Investing Activities
Cash flows used for investing activities in 2017 amounted to $171 million, a $220 million decrease
compared to cash flows used for investing activities of $391 million in 2016.
The use of cash in 2017 was attributable to additions to property, plant and equipment of $182 million as
well as the earn-out payment related to the acquisition of HDIS in the fourth quarter of 2017 for $8 million. This
was partially offset by the proceeds from disposal of property, plant and equipment of $19 million.
The use of cash in 2016 was attributable to additions to property, plant and equipment of $347 million as
well as the acquisition of HDIS in the fourth quarter of 2016 for $45 million. This was partially offset by the
proceeds from disposal of property, plant and equipment of $1 million.
Our annual capital expenditures for 2018 are expected to be between $200 million and $220 million.
Cash flows used for investing activities in 2016 amounted to $391 million, a $147 million increase
compared to cash flows used for investing activities of $244 million in 2015.
The use of cash in 2015 was attributable to additions to property, plant and equipment of $289 million,
partially offset by the proceeds from disposal of property, plant and equipment of $36 million. In addition, during
the year, we sold $9 million of Asset-backed notes.
Financing Activities
Cash flows used for financing activities totaled $274 million in 2017 compared to cash flows used for
financing activities of $73 million in 2016.
The use of cash in 2017 was primarily the result of dividend payments ($104 million), the net repayments of
borrowings under our credit facilities (revolver and receivable securitization) ($95 million), repayment of
unsecured note ($63 million) and a decrease in our bank indebtedness ($12 million).
43
The use of cash in 2016 was primarily the result of dividend payments ($102 million) and the repurchase of
our common stock ($10 million). This was partially offset by the net proceeds from borrowings under our credit
facilities (revolver and receivable securitization) ($30 million) and an increase in our bank indebtedness
($12 million).
Cash flows used for financing activities totaled $73 million in 2016 compared to cash flows used for
financing activities of $249 million in 2015.
The use of cash in 2015 was primarily the result of dividend payments ($100 million), a net repayment of
our long-term debt ($89 million), the repurchase of our common stock ($50 million) and a reduction in our bank
indebtedness ($11 million).
Capital Resources
Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was
$991 million as of December 31, 2017 compared to $1,168 million as of December 31, 2016.
Notes Maturity
Our 10.75% Notes, in aggregate principal amount of $63 million, matured on June 1, 2017.
Our 9.5% Notes, in aggregate principal amount of $39 million, matured on August 1, 2016.
Term Loan
In the third quarter of 2015, a wholly owned subsidiary of Domtar borrowed $300 million under an
unsecured 10-year Term Loan Agreement that matures on July 20, 2025, with certain domestic banks. The
Company and certain significant domestic subsidiaries of
the Company unconditionally guarantee any
obligations from time to time arising under the Term Loan Agreement.
Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 1.875%. The Term
Loan Agreement contains customary covenants, including two financial covenants: (i) an interest coverage ratio,
as defined in the Term Loan Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a
leverage ratio, as defined in the Term Loan Agreement, that must be maintained at a level of not greater than
3.75 to 1. At December 31, 2017, we were in compliance with these financial covenants.
Revolving Credit Facility
In August 2016, we amended and restated our unsecured revolving credit facility (the “Credit Agreement”)
with certain domestic and foreign banks, increasing the amount available from $600 million to $700 million and
extending the Credit Agreement’s maturity date from October 3, 2019 to August 18, 2021. The amendment also
allows certain foreign subsidiaries to be borrowers under the facility. The maturity date of the facility may be
extended by one year and the lender commitments may be increased by up to $400 million, subject to lender
approval and customary requirements.
Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic
subsidiaries. Borrowings by foreign borrowers under the Credit Agreement are guaranteed by the Company, our
significant domestic subsidiaries and certain of our significant foreign subsidiaries.
Borrowings under the Credit Agreement bear interest at LIBOR, EURIBOR, Canadian bankers’ acceptance
or prime rate, as applicable, plus a margin linked to our credit rating. In addition, we pay facility fees quarterly at
rates dependent on our credit ratings.
44
The Credit Agreement contains customary covenants and events of default for transactions of this type,
including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be
maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must
be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying
material acquisitions). At December 31, 2017, we were in compliance with these financial covenants, and had no
borrowings (December 31, 2016 – $50 million). At December 31, 2017, we had no outstanding letters of credit
(December 31, 2016 – nil), leaving $700 million unused and available under this facility.
Receivables Securitization
We have a $150 million receivables securitization facility that matures in March 2019.
At December 31, 2017, borrowings under the receivables securitization facility amounted to $25 million and
we had $50 million of letters of credit under the program (December 31, 2016 – $70 million and $48 million,
respectively). The program contains certain termination events, which include, but are not limited to, matters
related to receivable performance, certain defaults occurring under the 2016 Credit Agreement or our failure to
satisfy material obligations. At December 31, 2017, we had $75 million unused and available under the
receivable securitization facility.
Common Stock
During 2017, we declared four quarterly dividends of $0.415 per share, to holders of our common stock.
Dividends of $26 million were paid on April 17, 2017, July 17, 2017, October 16, 2017 and January 15, 2018,
respectively, to shareholders of record as of April 3, 2017, July 3, 2017, October 2, 2017 and January 2, 2018,
respectively.
During 2016, we declared one quarterly dividend of $0.40 per share and three quarterly dividends of
$0.415 per share, to holders of our common stock. The total dividends of approximately of $25 million,
$26 million, $26 million and $26 million were paid on April 15, 2016, July 15, 2016, October 17, 2016 and
January 17, 2017, respectively, to shareholders of record as of April 4, 2016, July 5, 2016, October 3, 2016 and
January 3, 2017, respectively.
On January 29, 2018, our Board of Directors approved a quarterly dividend of $0.435 per share, an increase
of $0.02 or 4.8%, to be paid to holders of our common stock. This dividend is to be paid on April 16, 2018 to
shareholders of record on April 2, 2018.
OFF BALANCE SHEET ARRANGEMENTS
In the normal course of business, we finance certain of our activities off balance sheet through operating
leases.
GUARANTEES
Indemnifications
In the normal course of business, we offer indemnifications relating to the sale of our businesses and real
estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide
by covenants and the breach of representations and warranties included in sales agreements. Typically, such
representations and warranties relate to taxation, environmental, product and employee matters. The terms of
these indemnification agreements are generally for an unlimited period of time. At December 31, 2017, 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.
45
Pension Plans
We have indemnified and held harmless the trustees of our pension funds, and the respective officers,
directors, employees and agents of such trustees, from any and all costs and expenses arising out of the
performance of their obligations under the relevant trust agreements, including in respect of their reliance on
authorized instructions from us or for failing to act
in the absence of authorized instructions. These
indemnifications survive the termination of such agreements. At December 31, 2017, we have not recorded a
liability associated with these indemnifications, as we do not expect to make any payments pertaining to these
indemnifications.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
In the normal course of business, we enter
into certain contractual obligations and commercial
commitments. The following tables provide our obligations and commitments at December 31, 2017:
CONTRACT TYPE
(in millions of dollars)
Long-term debt (excluding interest)
Capital leases (including interest)
Operating leases
Long-term income taxes payable (1)
Total obligations
COMMITMENT TYPE
(in millions of dollars)
Other commercial commitments (2)
2018
2019
2020
2021
2022
THEREAFTER TOTAL
—
2
27
4
25 —
2
2
19
23
4
3
— 300
2
12
4
2
15
4
$ 33
$53
$ 25 $ 21 $318
$800
9
29
27
$865
$1,125
19
125
46
1,315
2018
2019
2020
2021
2022
THEREAFTER TOTAL
$ 68
$14
$ 2
1 —
1
$
86
(1)
In connection with the U.S. Tax Reform, we currently estimate paying $46 million in repatriation tax
through 2025. The amounts and timing of our tax payments may change as a result of additional guidance
expected to be issued in 2018. See Note 10 “Income Taxes” for additional information on the U.S. Tax
Reform.
(2)
Includes commitments to purchase property, plant and equipment, roundwood, wood chips, gas and certain
chemicals. Purchase orders in the normal course of business are excluded.
In addition, we expect to contribute a minimum total amount of $14 million to the pension plans in 2018 and
a minimum total amount of $5 million in 2018 to the other post-retirement benefits plans.
For 2018 and the foreseeable future, we expect cash flows from operations and from our various sources of
financing to be sufficient to meet our contractual obligations and commercial commitments.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Item 8, Financial Statements and Supplementary Data under Note 2 “Recent Accounting
Pronouncements”.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our principal accounting policies are described in Item 8, Financial Statements and Supplementary Data
under Note 1 “Summary of Significant Accounting Policies”. Notes referenced in this section are included in
Item 8, Financial Statements and Supplementary Data.
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates, assumptions and choices amongst acceptable
46
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,
lives of long-lived assets, closure and
impairment and useful
restructuring costs, goodwill and intangible assets impairment, pension and other post-retirement benefit plans,
income taxes, business combinations and contingencies related to legal claims. These critical accounting
estimates and policies have been reviewed with the Audit Committee of our Board of Directors. We believe these
accounting policies, and others as set forth in Note 1 “Summary of Significant Accounting Policies”, should be
reviewed as they are essential to understanding our results of operations, cash flows and financial position.
Actual results could differ from those estimates.
Environmental Matters and Asset Retirement Obligations
We maintain provisions for estimated environmental costs when remedial efforts are probable and can be
reasonably estimated. Environmental provisions relate mainly to air emissions, effluent treatment, silvicultural
activities and site remediation (together referred to as “environmental matters”). The environmental cost
estimates reflect assumptions and judgments as to probable nature, magnitude and timing of required
investigation, remediation and monitoring activities, as well as contribution by other responsible parties.
The most significant environmental provision is related to the Seaspan action. The provision estimates are
based on an awarded contract
the remediation plan approved by the relevant government
authorities. Additional information regarding Seaspan and other environmental matters is available in Note 22
“Commitments and Contingencies”.
to implement
While we believe that we have determined the costs for environmental matters likely to be incurred, based
on known information, our ongoing efforts to identify potential environmental concerns that may be associated
with the properties may lead to future environmental investigations. These efforts may result in the determination
of additional environmental costs and liabilities, which cannot be reasonably estimated at this time. In addition,
environmental laws and regulations and interpretation by regulatory authorities could change which could result
in significant changes to our estimates. For further details on “Climate change regulation” and other
environmental matters refer to Note 22 “Commitments and Contingencies”.
Asset retirement obligations are mainly associated with landfill operation and closure and bark pile
management. We recognize asset retirement obligations, at fair value, in the period in which we incur a legal
obligation associated with the retirement of an asset. The fair value is based on the expected cash flow approach,
in which multiple cash flow scenarios that reflect a range of possible outcomes are considered. Probabilities are
applied to each of the cash flow scenarios to arrive at an expected cash flow. The estimated cash flows are then
discounted using a credit adjusted risk-free interest rate in combination with business-specific and other relevant
risks to discount the cash flow. The rates used vary between 5.5% and 12.0%.
Cash flow estimates incorporate assumptions that marketplace participants would use in their estimates of
fair value, whenever that information is available without undue cost and effort. If unavailable, assumptions are
based on internal experts, third-party engineers’ studies and historical experience in remediation work. As at
December 31, 2017, we had an asset retirement obligation provision of $15 million for 13 locations (2016 – $14
million).
As at December 31, 2017, we had a provision of $44 million for environmental matters and other asset
retirement obligations (2016 – $50 million). Certain of these amounts have been discounted due to more certainty
of the timing of expenditures using the credit adjusted risk-free interest rate for the corresponding period until the
settlement date. The rates used vary, based on the prevailing rate at the moment of recognition of the liability and
on its settlement period. Additional costs, not known or identified, could be incurred for remediation efforts.
47
Based on policies and procedures in place to monitor environmental exposure, management believes that such
additional remediation costs would not have a material adverse effect on our financial position, result of
operations or cash flows.
Impairment of Property Plant and Equipment and Definite-Lived Intangible Assets
Property, plant and equipment and definite-lived intangible assets are reviewed for impairment upon the
occurrence of events or changes in circumstances indicating that, at the lowest level of determinable cash flows,
the carrying value of the assets may not be recoverable. Step I of the impairment test assesses if the carrying
value of the assets exceeds their estimated undiscounted future cash flows in order to assess if the property, plant
and equipment and definite-lived intangible assets are impaired. In the event the estimated undiscounted future
cash flows are lower than the net book value of the assets, a Step II impairment test must be carried out to
determine the impairment charge. In Step II, the assets are written down to their estimated fair values. Given that
there is generally no readily available quoted value for our property, plant and equipment and definite-lived
intangible assets, we determine fair value of our assets based on the present value of estimated future cash flows
expected from their use and eventual disposition, and by using the liquidation or salvage value in the case of
idled assets. The fair value estimate in Step II is based on the undiscounted cash flows used in Step I.
Estimates of undiscounted future cash flows used to test the recoverability of the property, plant and
equipment and definite-lived intangible assets includes key assumptions related to selling prices, inflation-
adjusted cost projections, forecasted exchange rates (when applicable) and estimated useful life. Changes in our
assumptions and estimates may affect our forecasts and may lead to an outcome where impairment charges
would be required. In addition, actual results may vary from our forecasts, and such variations may be material
and unfavorable, thereby triggering the need for future impairment tests where our conclusions may differ in
reflection of prevailing market conditions.
Useful Lives
On a regular basis, we review the estimated useful lives of our property, plant and equipment and our
definite-lived intangible assets. Assessing the reasonableness of the estimated useful lives of property, plant and
equipment and definite-lived intangible assets requires judgment and is based on currently available information.
Changes in circumstances such as technological advances, changes to our business strategy, changes to our
capital strategy or changes in regulation can result in useful lives differing from our estimates. Revisions to the
estimated useful lives of property, plant and equipment and definite-lived intangible assets constitute a change in
accounting estimate and are dealt with prospectively by amending depreciation and amortization rates.
A change in the remaining estimated useful life of a group of assets, or their estimated net salvage value,
will affect the depreciation or amortization rate used to depreciate or amortize the group of assets and thus affect
depreciation or amortization expense as reported in our results of operations. In 2017, we recorded depreciation
and amortization expense of $321 million compared to $348 million and $359 million in 2016 and 2015,
respectively. At December 31, 2017, we had property, plant and equipment with a net book value of
$2,765 million (2016 – $2,825 million) and definite-lived intangible assets, net of amortization of $337 million
(2016 – $337 million).
In the fourth quarter of 2014, we announced the conversion of a paper machine at our Ashdown, Arkansas
facility to a high quality fluff pulp line. As a result, we recognized $29 million of accelerated depreciation in
2016 (2015 – $77 million).
Closure and Restructuring Costs
Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are
measured at their fair value. For such recognition to occur, management, with the appropriate level of authority,
48
must have approved and committed to a firm plan and appropriate communication to those affected must have
occurred. These provisions may require an estimation of costs such as severance and termination benefits,
pension and related curtailments, environmental remediation and may also include expenses related to demolition
and outplacement. Actions taken may also require an evaluation of any remaining assets to determine required
impairments, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation
expense.
Estimates of cash flows and fair value relating to closures and restructuring require judgment. Closure and
restructuring liabilities are based on management’s best estimates of future events at December 31, 2017.
Although we do not anticipate significant changes, the actual costs may differ from these estimates due to
subsequent developments such as the results of environmental studies, the ability to find a buyer for assets set to
be dismantled and demolished and other business developments. As such, additional costs and further working
capital adjustments may be required in future periods.
During 2017, other costs related to previous and ongoing restructuring included $2 million of severance and
termination costs (2016 – $3 million; 2015 – $1 million) and pension settlement costs of nil (2016 – $1 million;
2015 – nil).
In 2016, in connection with our plan to optimize fluff pulp manufacturing at the Plymouth, North Carolina
mill, we recognized $5 million of severance and termination costs.
In 2016, due to the conversion of the paper machine at our Ashdown, Arkansas mill, we recognized
$26 million of costs related to the fluff pulp conversion outage. In 2016, as a result of a revision in our estimated
withdrawal liability for U.S. multiemployer plans, we recorded a credit to earnings of $4 million in Closure and
restructuring costs on the Consolidated Statement of Earnings and Comprehensive Income (Loss).
Additional information can be found under Note 16 “Closure and Restructuring Costs and Liability”.
Goodwill Impairment Assessment
As of December 31, 2017, we had no goodwill ($550 million as of December 31, 2016). All goodwill
resided in our Personal Care reporting segment.
Goodwill is evaluated for impairment at the beginning of the fourth quarter of every year or more frequently
whenever indicators of potential impairment exist.
For purposes of impairment testing, goodwill must be assigned to one or more reporting units. We
concluded that all the components of the Personal Care segment share similar economic characteristics and
should be aggregated into one reporting unit. Accordingly, goodwill impairment testing was performed for the
Personal Care reporting unit.
In the fourth quarter 2017, we conducted our annual impairment test and concluded that the fair value of the
reporting unit was below the carrying value of the net assets of the reporting unit and as such an impairment
charge was recorded for the full goodwill in the amount of $578 million.
We used an income method to determine the fair value of a reporting unit. Under the income method, we
estimated the fair value of the reporting unit based on the present value of estimated future cash flows.
Considerable management judgment is necessary to estimate future cash flows used to measure the fair
value. Key estimates supporting the cash flow projections include, but are not limited to, management’s estimates
of industry and market conditions as well as its estimates of revenue growth rates and profit margins, economic
indicators, tax rates and capital expenditures. The financial forecasts are consistent with our operating plans.
49
Growing competitive market pressures in the healthcare and retail markets over the last year, including the
entry of new competitors in the private label category, excess industry capacity and the pressure to limit
healthcare spending by governmental agencies, are expected to result in lower than previously anticipated sales
and operating margins. In light of this weakened market outlook, our current business forecast was not sufficient
to support the carrying value of the goodwill associated with our Personal Care reporting unit, leading to the
impairment of our goodwill.
The discount rate assumption used is based on the weighted average cost of capital adjusted for business-
specific and other relevant risks of the reporting units.
We also performed an overall reconciliation to corroborate the fair value from the income approach to
Domtar’s overall market capitalization.
Variations to our assumptions and estimates, particularly in the expected growth rates embedded in our cash
flow projections and the discount rate could have a significant impact on fair value.
The following table summarizes the approximate impact that a change in certain key assumptions would
have on the present value of estimated future cash flows at October 1, 2017, the date of our annual goodwill
impairment testing. Note that this sensitivity analysis assumes that all other assumptions and trends remain
constant for each independent variable.
KEY ASSUMPTIONS
Revenue growth rates (years 2019 – 2022)
1% increase
1% decrease
Terminal growth rates
0.5% increase
0.5% decrease
Discount rate
0.3% increase
0.3% decrease
Approximate impact on the
discounted cash flows
(in millions of dollars)
101
(101)
44
(39)
(35)
38
Additional information regarding goodwill is available in Note 3 “Acquisition of Businesses”, Note 4
“Impairment of Goodwill and Property, Plant and Equipment” and Note 12 “Goodwill”.
Indefinite-lived intangible assets impairment assessment
Indefinite-lived intangible assets consist of trade names ($245 million) and catalog rights ($41 million)
following the business acquisitions in the Personal Care segment and license rights ($6 million) and water rights
($4 million) in our Pulp and Paper segment.
We test indefinite-lived intangible assets at the asset level. Indefinite-lived intangible assets are not
amortized and are evaluated at the beginning of the fourth quarter of every year or more frequently whenever
indicators of potential impairment exist.
In performing the quantitative assessment, fair value of the indefinite-lived intangible assets is derived using
an income approach. Under this approach, we estimate the fair value of indefinite-lived intangible assets based
on the present value of estimated future cash flows (mainly a relief from royalty model). Considerable
management judgment is necessary to estimate future cash flows used to measure the fair value. Key estimates
supporting the cash flow projections include, but are not limited to, management’s assessment of industry and
market conditions as well as its estimates of revenue growth rates, royalty rates, economic indicators and tax
rates. The financial forecasts are consistent with our operating plans and those supporting the goodwill
impairment test described above.
50
The discount rate assumption used is based on the weighted-average cost of capital adjusted for business-
specific and other relevant risks. If the carrying amounts of the indefinite-lived intangible assets exceed their fair
value, an impairment loss is recognized in an amount equal to that excess.
In connection with the Company’s annual impairment testing performed in in the fourth quarter of 2017, we
performed a quantitative assessment for each indefinite-lived intangible asset (trade names and catalog rights) of
the Personal Care segment. The tests indicate that the indefinite-lived intangible assets have fair values that
exceeded their carrying amounts. Certain Personal Care division indefinite-lived intangible assets are considered
to be at risk for future impairment given their respective fair values exceeds their respective carrying values by
30% or less at the time the test was performed. As of December 31, 2017, the carrying value of these indefinite
lived intangible assets was $164 million.
Variations in our assumptions and estimates particularly in the expected growth rates and royalty rates
embedded in our cash flow projections and the discount rate could have a significant impact on fair value. A
significant reduction in the estimated fair values could result in significant non-cash impairment charges in the
future.
Pension Plans and Other Post-Retirement Benefit Plans
We have several defined contribution plans and multiemployer plans. The pension expense under these
plans is equal to our contribution. Defined contribution pension expense was $36 million for the year ended
December 31, 2017 (2016 – $37 million and 2015 – $32 million).
We sponsor both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. We
also sponsor a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans
are unfunded and include life insurance programs, medical and dental benefits. In addition, we provide
supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension
plans to certain senior management employees.
We account for pensions and other post-retirement benefits in accordance with Compensation-Retirement
Benefits Topic of the Financial Accounting Standards Board-Accounting Standards Committee which requires
employers to recognize the overfunded or underfunded status of defined benefit pension plans as an asset or
liability in its Consolidated Balance Sheets. Pension and other post-retirement benefit charges require
assumptions in order to estimate the projected and accumulate benefit obligations. These assumptions require a
significant amount of judgment and include:
• Expected long-term rate of return on plan assets—used to estimate the growth and expected return on
assets
• Discount rate—used to determine interest costs and the net present value of our obligations
• Rate of compensation increase—used to calculate the impact of future increases on our obligations
• Health care cost trends—used to calculate the impact of future health care costs on our obligations
• Employee related factors, such as mortality rates, turnover, retirement age and disabilities—used to
determine the extent of our obligations
Changes in these assumptions result in actuarial gains or losses, which are amortized over the expected
average remaining service life of the active employee group covered by the plans, only to the extent that the
unrecognized net actuarial gains and losses are in excess of 10% of the accrued benefit obligation at the
beginning of the year, over the average remaining service period of approximately eight years of the active
employee group covered by the pension plans, and 10 years of the active employee group covered by the other
post-retirement benefits plans.
51
An expected rate of return on plan assets of 5.3% was considered appropriate by our management for the
determination of pension expense for 2017. Effective January 1, 2018, we will use 5.2% as the expected return
on plan assets, which reflects the current view of long-term investment returns. The overall expected long-term
rate of return on plan assets is based on management’s best estimate of the long-term returns of the major asset
classes (cash and cash equivalents, equities and bonds) weighted by the actual allocation of assets at the
measurement date, net of expenses. This rate includes an equity risk premium over government bond returns for
equity investments and a value-added premium for the contribution to returns from active management. The
sources used to determine management’s best estimate of long-term returns are numerous and include country
specific bond yields, which may be derived from the market using local bond indices or by analysis of the local
bond market, and country-specific inflation and investment market expectations derived from market data and
analysts’ or governments’ expectations as applicable.
We set our discount rate assumption annually to reflect the rates available on high-quality, fixed income
debt instruments, with a duration that is expected to match the timing and amount of expected benefit payments.
High-quality debt
instruments are corporate bonds with a rating of AA or better. The discount rates at
December 31, 2017, for pension plans were estimated at 3.5% for the accrued benefit obligation and 3.9% for the
net periodic benefit cost for 2017 and for post-retirement benefit plans were estimated at 3.5% for the accrued
benefit obligation and 3.8% for the net periodic benefit cost for 2017.
We used a full yield curve approach to estimate the current service and interest cost components of net
periodic benefit cost for Canadian pension plans and U.S. funded pension plans. The estimate of these
components is made by applying the specific spot rates along the yield curve used in the determination of the
benefit obligation to the relevant projected cash flows. We used this approach to provide a more precise
measurement of current service and interest cost components by improving the correlation between projected
benefit cash flows to the corresponding spot yield curve rates.
The rate of compensation increase is another significant assumption in the actuarial model for pension (set
at 2.7% for the accrued benefit obligation and 2.8% for the net periodic benefit cost) and for post-retirement
benefits (set at 2.8% for the accrued benefit obligation and 2.8% for the net periodic benefit cost) and is
determined based upon our long-term plans for such increases.
For employee related factors, mortality rate tables tailored to our industry were used and the others factor
reflect our historical experience and management’s best judgment regarding future expectations.
For measurement purposes, a 4.9% weighted-average annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2017. The rate was assumed to decrease gradually to 4.1% by 2033
and remain at that level thereafter.
52
The following table provides a sensitivity analysis of the key weighted average economic assumptions used
in measuring the accrued pension benefit obligation, the accrued other post-retirement benefit obligation and
related net periodic benefit cost for 2017. The sensitivity analysis should be used with caution as it is
hypothetical and changes in each key assumption may not be linear. The sensitivities in each key variable have
been calculated independently of each other.
PENSION AND OTHER POST-RETIREMENT
BENEFIT PLANS
(In millions of dollars)
Expected rate of return on assets
Impact of:
1% increase
1% decrease
Discount rate
Impact of:
1% increase
1% decrease
Assumed overall health care cost trend
Impact of:
1% increase
1% decrease
Pension
Other Post-Retirement Benefit
Accrued
Benefit
Obligation
Net Periodic
Benefit Cost
Accrued
Benefit
Obligation
Net Periodic
Benefit Cost
N/A
N/A
(199)
244
N/A
N/A
(16)
16
(6)
19
N/A
N/A
N/A
N/A
(9)
11
4
(4)
N/A
N/A
—
1
1
(1)
Our pension plan funding policy is to contribute annually the amount required to provide for benefits earned
in the year, and to fund solvency deficiencies, funding shortfalls and past service obligations over periods not
exceeding those permitted by the applicable regulatory authorities. Past service obligations primarily arise from
improvements to plan benefits. The other post-retirement benefit plans are not funded and contributions are made
annually to cover benefit payments. We expect to contribute a minimum total amount of $14 million in 2018
compared to $47 million in 2017 (2016 – $31 million; 2015 – $13 million) to the pension plans. We expect to
contribute a minimum total amount of $5 million in 2018 compared to $3 million in 2017 to the other post-
retirement benefit plans (2016 – $5 million; 2015 – $5 million).
Benefit obligations and fair values of plan assets as of December 31, 2017 for our pension and post-
retirement plans were are follows:
Accrued benefit obligation at end of year
Fair value of assets at end of year
Funded status
December 31, 2017
December 31, 2016
Pension
plans
$
(1,764)
1,765
Other
post-retirement
benefit plans
$
(76)
—
Pension
plans
$
(1,584)
1,546
Other
post-retirement
benefit plans
$
(90)
—
1
(76)
(38)
(90)
For additional details on our pension plans and other post-retirement benefits plans, refer to Note 7 “Pension
Plans and Other Post-Retirement Benefit Plans”.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined according to differences between the carrying amounts and tax bases of the assets
53
and liabilities. The change in the net deferred tax asset or liability is included in earnings. Deferred tax assets and
liabilities are measured using enacted tax rates and laws expected to apply in the years in which assets and
liabilities are expected to be recovered or settled. Deferred tax assets and liabilities are classified as non-current
items on the Consolidated Balance Sheets. For these years, a projection of taxable income and an assumption of
the ultimate recovery or settlement period for temporary differences are required. The projection of future taxable
income is based on management’s best estimate and may vary from actual taxable income.
On a quarterly basis, we assess the need to establish a valuation allowance for deferred tax assets and, if it is
deemed more likely than not that our deferred tax assets will not be realized based on these taxable income
projections, a valuation allowance is recorded. In general, “realization” refers to the incremental benefit achieved
through the reduction in future taxes payable or an increase in future taxes refundable from the deferred tax
assets. Evaluating the need for an amount of a valuation allowance for deferred tax assets often requires
significant judgment. All available evidence, both positive and negative, should be considered to determine
whether, based on the weight of that evidence, a valuation allowance is needed.
In our evaluation process, we give the most weight to historical income or losses. After evaluating all
available positive and negative evidence, although realization is not assured, we determined that it is more likely
than not that the results of future operations will generate sufficient taxable income to realize the deferred tax
assets, with the exception of certain state credits and losses for which a valuation allowance of $6 million exists
at December 31, 2017, and certain foreign loss carryforwards for which a valuation allowance of $19 million
exists at December 31, 2017. Of this amount, $3 million impacted tax expense and the effective tax rate for 2017
(2016 – ($1) million; 2015 – ($1) million).
Our deferred tax assets are mainly composed of temporary differences related to various accruals,
accounting provisions, pension and post-retirement benefit liabilities, net operating loss carryforwards, and
available tax credits. Our deferred tax liabilities are mainly composed of temporary differences pertaining to
property, plant, and equipment, intangible assets, and other items. Estimating the ultimate settlement period
requires judgment. The reversal of timing differences is expected at enacted tax rates, which could change due to
changes in income tax laws or the introduction of tax changes through the presentation of annual budgets by
different governments. As a result, a change in the timing and the income tax rate at which the components will
reverse could materially affect deferred tax expense in our future results of operations.
In addition, U.S. and foreign tax rules and regulations are subject to interpretation and require judgment that
may be challenged by taxation authorities. To the best of our knowledge, we have adequately provided for our
future tax consequences based upon current facts and circumstances and current tax law. In accordance with
Income Taxes Topic of FASB ASC 740, we evaluate new tax positions that result in a tax benefit to us and
determine the amount of tax benefits that can be recognized. The remaining unrecognized tax benefits are
evaluated on a quarterly basis to determine if changes in recognition or classification are necessary. Significant
changes in the amount of unrecognized tax benefits expected within the next 12 months are disclosed quarterly.
Future recognition of unrecognized tax benefits would impact the effective tax rate in the period the benefits are
recognized. At December 31, 2017, we had gross unrecognized tax benefits of $37 million (2016 – $43 million).
These amounts represent the gross amount of exposure in individual jurisdictions and do not reflect any
additional benefits expected to be realized if such positions were sustained, such as federal deduction that could
be realized if an unrecognized state deduction was not sustained. As of December 31, 2017, we believe it is
reasonably possible that up to $8 million of our unrecognized tax benefits may be recognized in 2018, which
could significantly impact the effective tax rate. However, the amount and timing of the recognition of these
benefits is subject to some uncertainty. In addition, a number of countries are actively pursuing changes to their
tax laws applicable to corporation multinationals, such as the recently enacted U.S. Tax Cuts and Jobs Acts
(“U.S. Tax Reform”). Finally, foreign governments may enact tax laws in response to the U.S. Tax Reform that
could result in further changes to global taxation and materially impact our financial results.
We operate in multiple jurisdictions with complex tax policy and regulatory environments. U.S. and foreign
tax rules and regulations are subject to interpretation and require judgment that may be challenged by taxation
54
authorities. The U.S. Tax Reform significantly changes how the U.S. taxes corporations. The U.S. Tax Reform
requires complex computations to be performed that were not previously required in U.S. tax law, significant
judgments to be made in interpretation of the provision of the U.S Tax Reform and significant estimates in
calculations, and the preparation and analysis of information not previously relevant or regularly produced. The
U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how
provisions of the U.S. Tax Reform will be applied or otherwise administered that is different from our
interpretation. As we complete our analysis of the U.S Tax Reform, collect and prepare necessary data, and
interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that
may materially impact our provision for income taxes in the period in which the adjustments are made.
Tax audits by their nature are often complex and can require several years to resolve. We have a number of
audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on
currently available information, we believe that we have adequately provided for our future tax consequences
based upon current facts and circumstances and current tax law and we believe that the ultimate outcomes will
not have a material adverse effect on our financial position, results of operations or cash flows. For further details
refer to Note 10 “Income Taxes”.
Business Combinations
We allocate the total purchase price of the tangible and intangible assets acquired and liabilities assumed
based on their estimated fair values as of the business combination date, with the excess purchase price recorded
as goodwill.
The purchase price allocation process required us to use significant estimates and assumptions, including
fair value estimates, as of the business combination date. Although we believe the assumptions and estimates we
have made are reasonable and appropriate, they are based in part on historical experience and information
obtained from management of the acquired company, in part based on valuation models that incorporate
projections of expected future cash flows and operating plans and are inherently uncertain. Valuations are
performed by management or third party valuation specialists under management’s supervision. In determining
the fair value of assets acquired and liabilities assumed in business combinations, as appropriate, we may use one
of the following recognized valuation methods: the income approach (including discounted cash flows from
relief from royalty and excess earnings model), the market approach and/or the replacement cost approach.
Examples of significant estimates used to value certain intangible assets acquired include but are not limited to:
•
•
•
•
sales volume, pricing and future cash flows of the business overall
future expected cash flows from customer relationships, acquired license rights and other identifiable
intangible assets, including future price levels, rates of increase in revenue and appropriate attrition
rates
the acquired company’s trade names and competitive position, royalty rate quantum, as well as
assumptions about the period of time the acquired trade names will continue to benefit to the combined
company’s product portfolio
discount rates and income tax rates
However, different assumptions regarding projected performance and other factors associated with the
acquired assets may affect the amount recorded under each type of asset and liability, mainly between property
plant and equipment,
intangibles assets, goodwill and deferred income tax liabilities; as well subsequent
assessments could result in future impairment charges. The purchase price allocation process also entails us to
refine these estimates over a measurement period not to exceed one year to reflect new information obtained
surrounding facts and circumstances existing at acquisition date.
For further details, refer to Note 3 “Acquisition of Businesses”.
55
Contingencies related to legal claims
As discussed in Item 1A Risk Factors, under the risk “Failure to comply with applicable laws and
regulations could have a material adverse effect on our business, financial results or condition” and in Note 22
“Commitments and Contingencies”, the Company is subject to various legal proceedings and claims that arise in
the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred
and the amount is reasonably estimable. The most likely cost to be incurred is accrued based on an evaluation of
the then available facts with respect to each matter. When no amount within a range of estimates is more likely,
the minimum is accrued. There is significant judgment required in both the probability determination and as to
whether an exposure can be reasonably estimated. For further details on “Contingencies” and legal claims refer
to Note 22 “Commitments and Contingencies”.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our operating income can be impacted by the following sensitivities:
SENSITIVITY ANALYSIS
(In millions of dollars, unless otherwise noted)
Each $10/unit change in the selling price of the following products1:
Papers
Business Papers
Commercial Print & Publishing Papers
Specialty & Packaging Papers
Pulp—net position
Softwood
Fluff
Hardwood
Foreign exchange, excluding depreciation and amortization
(US $0.01 change in relative value to the Canadian dollar before hedging)
(US $0.01 change in relative value to the EURO before hedging)
Energy 2
Natural gas: $0.25/MMBtu change in price before hedging
$15
9
6
$10
7
1
9
2
6
1
2
Based on estimated 2018 capacity (ST or ADMT).
Based on estimated 2018 consumption levels. The allocation between energy sources may vary during the
year in order to take advantage of market conditions.
Note that we may, from time to time, hedge part of our foreign exchange, and energy positions, which may
therefore impact the above sensitivities.
In the normal course of business, we are exposed to certain financial risks. We do not use derivative
instruments for speculative purposes; although all derivative instruments purchased to minimize risk may not
qualify for hedge accounting.
CREDIT RISK
We are exposed to credit risk on the accounts receivables from our customers. In order to reduce this risk,
we review new customers’ credit history before granting credit and conduct regular reviews of existing
customers’ credit performance. As of December 31, 2017, one of our Pulp and Paper segment customers located
in the United States represented 12% or $83 million (2016 – 12% or $74 million) of our receivables.
We are exposed to credit risk in the event of non-performance by counterparties to our financial
instruments. We attempt to minimize this exposure by entering into contracts with counterparties that are
believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit
risk is usually not obtained. The credit standing of counterparties is regularly monitored.
56
INTEREST RATE RISK
We are exposed to interest rate risk arising from fluctuations in interest rates on our cash and cash
equivalents, bank indebtedness, revolving credit facility, securitization, term loan and long-term debt. Our
objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on
earnings and cash flows and to lower our overall borrowing costs. We may manage this interest rate exposure
through the use of derivative instruments such as interest rate swap contracts, whereby we agree to exchange the
difference between fixed and variable interest amounts calculated by reference to an agreed upon notional
principal amount. In December 2014, we entered into a $100 million notional 2.5 year fixed to floating interest
rate swap. This swap was designated as a fair value hedge for a portion of our 10.75% Notes due June 2017. The
changes in fair value of both the hedging and the hedged item were immediately recognized in interest expense.
In August 2015, we terminated this swap simultaneously with the redemption of $215 million of our 10.75%
Notes, with no significant impact on net earnings.
COST RISK
We are exposed to price volatility for raw materials and energy used in our manufacturing process. We
manage our exposure to cost risk primarily through the use of supplier contracts. We purchase natural gas at the
prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing
volatility, we may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair
value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective,
and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current
contracts are used to hedge a portion of forecasted purchases over the next 54 months.
FOREIGN CURRENCY RISK
Cash flow hedges
We have manufacturing operations in the United States, Canada and Europe. As a result, we are exposed to
movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and liabilities are
denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements.
Accordingly, our earnings are affected by increases or decreases in the value of the Canadian dollar and
European currencies. Our European subsidiaries are also exposed to movements in foreign currency exchange
rates on transactions denominated in a currency other than their Euro functional currency.
Our risk management policy allows us to hedge a significant portion of the exposure to fluctuations in
foreign currency exchange rates for periods up to three years. We may use derivative financial instruments
(currency options and foreign exchange forward contracts) to mitigate our exposure to fluctuations in foreign
currency exchange rates.
Derivatives are used to hedge forecasted purchases in Canadian dollars by our Canadian subsidiary over the
next 18 months and to hedge a portion of forecasted sales by our U.S. subsidiaries in British pounds over the next
3 months. Derivatives are also currently used to hedge a portion of forecasted sales in British pounds and
Norwegian krone and a portion of forecasted purchases in U.S. dollars and Swedish krona by our European
subsidiaries over the next 12 months. Such derivatives are designated as cash flow hedges. The changes in the
fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent
effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects
earnings.
The foreign exchange derivative contracts were fully effective as of December 31, 2017. There were no
amounts reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the
year ended December 31, 2017 resulting from hedge ineffectiveness (2016 and 2015 – nil).
57
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Reports to Shareholders of Domtar Corporation
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Domtar Corporation and its subsidiaries (the
“Company”) were prepared by management. The statements were prepared in accordance with accounting
principles generally accepted in the United States of America and include amounts that are based on
management’s best judgments and estimates. Management is responsible for the completeness, accuracy and
objectivity of the financial statements. The other financial information included in the annual report is consistent
with that in the financial statements.
Management has established and maintains a system of internal accounting and other controls for the Company
and its subsidiaries. This system and its established accounting procedures and related controls are designed to
that the books and records properly reflect all
provide reasonable assurance that assets are safeguarded,
transactions, that policies and procedures are implemented by qualified personnel, and that published financial
statements are properly prepared and fairly presented. The Company’s system of internal control is supported by
written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit
function. Appropriate actions are taken by management to correct deficiencies as they are identified.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for
the Company. In order to evaluate the effectiveness of internal control over financial reporting, management has
conducted an assessment, including testing, using the criteria established in 2013 Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. The Company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and
directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the
financial statements.
limitations,
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based on the assessment, management has concluded that the Company maintained effective internal control
over financial reporting as of December 31, 2017, based on criteria in Internal Control – Integrated Framework
issued in 2013 by the COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report, which is included herein.
58
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Domtar Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Domtar Corporation and its subsidiaries as of
December 31, 2017 and December 31, 2016, and the related consolidated statements of earnings (loss) and
comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2017, including the related notes and financial statement schedule listed in the index appearing
under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the
Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on
the Company’s internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
59
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
limitations,
Because of its inherent
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 23, 2018
We have served as the Company’s auditor since 2007.
60
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
Sales
Operating expenses
Cost of sales, excluding depreciation and amortization
Depreciation and amortization
Selling, general and administrative
Impairment of goodwill and property, plant and equipment
(NOTE 4)
Closure and restructuring costs (NOTE 16)
Other operating (income) loss, net (NOTE 8)
Operating (loss) income
Interest expense, net (NOTE 9)
(Loss) earnings before income taxes
Income tax (benefit) expense (NOTE 10)
Net (loss) earnings
Per common share (in dollars) (NOTE 6)
Net (loss) earnings
Basic
Diluted
Weighted average number of common shares outstanding (millions)
Basic
Diluted
Cash dividends per common share
Net (loss) earnings
Other comprehensive income (loss):
Net derivative gains (losses) on cash flow hedges
Net gains (losses) arising during the period, net of tax $(5)
(2016 – $(15); 2015 – $28)
Less: Reclassification adjustment for (gains) losses included in net
(loss) earnings, net of tax of $5 (2016 – $(10); 2015 – $(18))
Foreign currency translation adjustments
Change in unrecognized gains (losses) and prior service cost related to
pension and post-retirement benefit plans, net of tax of $(5)
(2016 – $12; 2015 – $(2))
Other comprehensive income (loss)
Comprehensive (loss) income
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$
5,157
4,131
321
456
578
2
(14)
$
5,098
4,035
348
427
29
32
4
$
5,264
4,147
359
394
77
4
(5)
5,474
4,875
4,976
(317)
66
(383)
(125)
(258)
(4.11)
(4.11)
62.7
62.7
1.66
(258)
6
(9)
146
20
163
(95)
223
66
157
29
128
2.04
2.04
62.6
62.7
1.63
128
27
14
(7)
(32)
2
130
288
132
156
14
142
2.24
2.24
63.3
63.4
1.58
142
(41)
26
(223)
5
(233)
(91)
The accompanying notes are an integral part of the consolidated financial statements.
61
DOMTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
Assets
Current assets
Cash and cash equivalents
Receivables, less allowances of $7 and $7
Inventories (NOTE 11)
Prepaid expenses
Income and other taxes receivable
Total current assets
Property, plant and equipment, net (NOTE 13)
Goodwill (NOTE 12)
Intangible assets, net (NOTE 14)
Other assets (NOTE 15)
Total assets
Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness
Trade and other payables (NOTE 17)
Income and other taxes payable
Long-term debt due within one year (NOTE 19)
Total current liabilities
Long-term debt (NOTE 19)
Deferred income taxes and other (NOTE 10)
Other liabilities and deferred credits (NOTE 20)
Commitments and contingencies (NOTE 22)
Shareholders’ equity (NOTE 21)
Common stock $0.01 par value; authorized 2,000,000,000 shares; issued
65,001,104 and 65,001,104 shares
Treasury stock $0.01 par value; 2,305,419 and 2,412,267 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
At
December 31,
2017
$
December 31,
2016
$
139
704
757
33
24
1,657
2,765
—
633
157
5,212
—
716
24
1
741
1,129
491
368
1
—
1,969
849
(336)
2,483
5,212
125
613
759
40
31
1,568
2,825
550
608
129
5,680
12
656
22
63
753
1,218
675
358
1
—
1,963
1,211
(499)
2,676
5,680
The accompanying notes are an integral part of the consolidated financial statements.
62
DOMTAR CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
Issued and
outstanding
common
shares
(millions of
shares)
Common
stock, at par
$
Balance at December 31, 2014
Stock-based compensation, net of tax
Net earnings
Net derivative losses on cash flow hedges:
Net losses arising during the period, net
of tax of $28
Less: Reclassification adjustments for
losses included in net earnings, net of
tax of $(18)
Foreign currency translation adjustments
Change in unrecognized gains and prior
service cost related to pension and post-
retirement benefit plans, net of tax of $(2)
Stock repurchase
Cash dividends declared
Balance at December 31, 2015
Stock-based compensation, net of tax
Net earnings
Net derivative gains on cash flow hedges:
Net gains arising during the period, net
of tax of $(15)
Less: Reclassification adjustments for
losses included in net earnings, net of
tax of $(10)
Foreign currency translation adjustments
Change in unrecognized losses and prior
service cost related to pension and post-
retirement benefit plans, net of tax of $12
Stock repurchase
Cash dividends declared
Balance at December 31, 2016
Stock-based compensation, net of tax
Net loss
Net derivative losses on cash flow hedges:
Net gains arising during the period,
net of tax of $(5)
Less: Reclassification adjustments for
gains included in net loss, net of tax
of $5
Foreign currency translation adjustments
Change in unrecognized gains and prior
service cost related to pension and post-
retirement benefit plans, net of tax of
$(5)
Cash dividends declared
Balance at December 31, 2017
64.0
—
—
—
—
—
—
(1.2)
—
62.8
0.1
—
—
—
—
—
(0.3)
—
62.6
0.1
—
—
—
—
—
—
62.7
1
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
Additional
paid-in
capital
$
2,012
4
—
—
—
—
—
(50)
—
1,966
7
—
—
—
—
—
(10)
—
1,963
6
—
—
—
—
—
—
1,969
Accumulated
other
comprehensive
loss
$
(268)
—
—
Total
shareholders’
equity
$
2,890
4
142
Retained
earnings
$
1,145
—
142
—
—
—
—
—
(101)
1,186
—
128
—
—
—
—
—
(103)
1,211
—
(258)
—
—
—
—
(104)
849
(41)
26
(223)
5
—
—
(501)
—
—
27
14
(7)
(32)
—
—
(499)
—
—
6
(9)
146
20
—
(336)
(41)
26
(223)
5
(50)
(101)
2,652
7
128
27
14
(7)
(32)
(10)
(103)
2,676
6
(258)
6
(9)
146
20
(104)
2,483
The accompanying notes are an integral part of the consolidated financial statements
63
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
Operating activities
Net (loss) earnings
Adjustments to reconcile net (loss) earnings to cash flows from operating
activities
Depreciation and amortization
Deferred income taxes and tax uncertainties (NOTE 10)
Impairment of goodwill and property, plant and equipment (NOTE 4)
Net gains on disposals of property, plant and equipment
Stock-based compensation expense
Other
Changes in assets and liabilities, excluding the effect of sale and acquisition of
businesses
Receivables
Inventories
Prepaid expenses
Trade and other payables
Income and other taxes
Difference between employer pension and other post-retirement
contributions and pension and other post-retirement expense
Other assets and other liabilities
Cash flows from operating activities
Investing activities
Additions to property, plant and equipment
Proceeds from disposals of property, plant and equipment and sale of business
Acquisition of businesses, net of cash acquired (NOTE 3)
Other
Cash flows used for investing activities
Financing activities
Dividend payments
Stock repurchase
Net change in bank indebtedness
Change in revolving credit facility
Proceeds from receivables securitization facility
Repayments of receivables securitization facility
Issuance of long-term debt
Repayments of long-term debt
Other
Cash flows used for financing activities
Net increase (decrease) in cash and cash equivalents
Impact of foreign exchange on cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Net cash payments for:
Interest (including $40 million of redemption premiums in 2015)
Income taxes
$
(258)
321
(207)
578
(13)
6
2
(72)
21
5
35
12
(32)
51
449
(182)
19
(8)
—
(171)
(104)
—
(12)
(50)
45
(90)
—
(64)
1
(274)
4
10
125
139
58
33
$
128
348
9
29
—
7
(2)
18
14
5
(51)
(18)
(21)
(1)
465
(347)
1
(46)
1
(391)
(102)
(10)
12
—
140
(70)
—
(40)
(3)
(73)
1
(2)
126
125
64
40
$
142
359
(56)
77
(15)
5
4
(22)
(84)
5
—
38
(1)
1
453
(289)
36
—
9
(244)
(100)
(50)
(11)
50
—
—
300
(439)
1
(249)
(40)
(8)
174
126
133
34
The accompanying notes are an integral part of the consolidated financial statements.
64
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NOTE 2
RECENT ACCOUNTING PRONOUNCEMENTS
NOTE 3
ACQUISITION OF BUSINESSES
NOTE 4
IMPAIRMENT OF GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
NOTE 5
STOCK-BASED COMPENSATION
NOTE 6
EARNINGS (LOSS) PER COMMON SHARE
NOTE 7
PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
NOTE 8
OTHER OPERATING (INCOME) LOSS, NET
NOTE 9
INTEREST EXPENSE, NET
NOTE 10
INCOME TAXES
NOTE 11
INVENTORIES
NOTE 12 GOODWILL
NOTE 13 PROPERTY, PLANT AND EQUIPMENT
NOTE 14
INTANGIBLE ASSETS
NOTE 15 OTHER ASSETS
NOTE 16 CLOSURE AND RESTRUCTURING COSTS AND LIABILITY
NOTE 17 TRADE AND OTHER PAYABLES
NOTE 18 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
NOTE 19 LONG-TERM DEBT
NOTE 20 OTHER LIABILITIES AND DEFERRED CREDITS
NOTE 21 SHAREHOLDERS’ EQUITY
NOTE 22 COMMITMENTS AND CONTINGENCIES
NOTE 23 DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
NOTE 24 SEGMENT DISCLOSURES
NOTE 25 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
66
73
78
79
80
84
85
95
95
96
101
102
102
103
104
104
106
107
109
111
112
114
117
123
126
65
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Domtar designs, manufactures, markets and distributes a wide variety of fiber-based products including
communication papers, specialty and packaging papers and absorbent hygiene products. The foundation of its
business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. The
majority of this pulp production is consumed internally to manufacture paper and other consumer products with
the balance sold as market pulp. Domtar is the largest integrated marketer of uncoated freesheet paper in North
America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers,
converters and end-users. Domtar also designs, manufactures, markets and distributes a broad line of absorbent
hygiene products, as well as infant diapers.
BASIS OF PRESENTATION
The Company’s consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America which requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the year, the reported amounts of
assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. On an ongoing basis, management reviews the estimates and assumptions, including but not
limited to those related to environmental matters and asset retirement obligations, impairment and useful lives of
long-lived assets, closure and restructuring costs, pension and other post-retirement benefit plans, income taxes,
business combinations and contingencies, based on currently available information. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Domtar and its controlled subsidiaries.
Intercompany transactions have been eliminated on consolidation.
TRANSLATION OF FOREIGN CURRENCIES
The Company determines its international subsidiaries’ functional currency by reviewing the currencies in
which their respective operating activities occur. The Company translates assets and liabilities of its non-U.S.
dollar functional currency subsidiaries into U.S. dollars using the rate in effect at the balance sheet date and
revenues and expenses are translated at the average exchange rates during the year. Foreign currency translation
gains and losses are included in Shareholders’ equity as a component of Accumulated other comprehensive loss
in the accompanying Consolidated Balance Sheets.
Monetary assets and liabilities denominated in a currency that is different from a reporting entity’s
functional currency must first be remeasured from the applicable currency to the legal entity’s functional
currency. The effect of this remeasurement process is recognized in the Consolidated Statements of Earnings
(Loss) and Comprehensive Income (Loss) and is partially offset by the Company’s hedging program (refer to
Note 23 “Derivatives and hedging activities and fair value measurement”).
66
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 2017, the accumulated translation adjustment accounts amounted to $(132) million
(2016 – $(278) million).
REVENUE RECOGNITION
Domtar recognizes revenue when pervasive evidence of an arrangement exists, the customer takes title and
assumes the risks and rewards of ownership, the sales price charged is fixed or determinable and when collection
is reasonably assured. Revenue is recorded at the time of shipment for terms designated free on board (“f.o.b.”)
shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is
delivered to the customer’s delivery site, when the title and risk of loss are transferred.
SHIPPING AND HANDLING COSTS
The Company classifies shipping and handling costs as a component of Cost of sales in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss).
CLOSURE AND RESTRUCTURING COSTS
Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are
measured at their fair value. For such recognition to occur, management, with the appropriate level of authority,
must have approved and committed to a firm plan and appropriate communication to those affected must have
occurred. These provisions may require an estimation of costs such as severance and termination benefits,
pension and related curtailments, environmental remediation and may also include expenses related to demolition
and outplacement. Actions taken may also require an evaluation of any remaining assets to determine required
impairments, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation
expense.
Estimates of cash flows and fair value relating to closures and restructurings require judgment. Closure and
restructuring liabilities are based on management’s best estimates of future events at December 31, 2017.
Although the Company does not anticipate significant changes, the actual costs may differ from these estimates
due to subsequent developments such as the results of environmental studies, the ability to find a buyer for assets
set to be dismantled and demolished and other business developments. As such, additional costs and further
working capital adjustments may be required in future periods.
INCOME TAXES
Domtar uses the asset and liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined according to differences between the carrying amounts and tax bases of the
assets and liabilities. The Company records its worldwide tax provision based on the respective tax rules and
regulations for the jurisdictions in which it operates. The change in the net deferred tax asset or liability is
included in Income tax (benefit) expense or in Other comprehensive income (loss) in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss). Deferred tax assets and liabilities are
measured using enacted tax rates and laws expected to apply in the years in which the assets and liabilities are
expected to be recovered or settled. Uncertain tax positions are recorded based upon the Company’s evaluation of
67
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
whether it is “more likely than not” (a probability level of more than 50%) that, based upon its technical merits,
the tax position will be sustained upon examination by the taxing authorities. The Company establishes a
valuation allowance for deferred tax assets when it is more likely than not that they will not be realized. In
general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or
an increase in future taxes refundable from the deferred tax assets. Deferred tax assets and liabilities are
classified as non-current items on the Consolidated Balance Sheets.
The Company recognizes interest and penalties related to income tax matters as a component of Income tax
(benefit) expense in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with original maturities of less than
three months and are presented at cost which approximates fair value.
RECEIVABLES
Receivables are recorded net of a provision for doubtful accounts that is based on expected collectability.
The securitization of receivables is accounted for as secured borrowings. Accordingly, financing expenses related
to the securitization of receivables are recognized in earnings as a component of Interest expense, net in the
Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost includes labor, materials and
production overhead. The last-in, first-out (“LIFO”) method is used to account for certain domestic raw
materials, in process and finished goods inventories. LIFO inventories were $236 million and $268 million at
December 31, 2017 and 2016, respectively. The balance of domestic raw material inventories, all materials and
supplies inventories and all foreign inventories are recorded at either the first-in, first-out (“FIFO”) or average
cost methods. Had the inventories for which the LIFO method is used been valued under the FIFO method, the
amounts at which product inventories are stated would have been $54 million and $63 million greater at
December 31, 2017 and 2016, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation including asset impairments.
Costs for repair and maintenance activities are expensed as incurred under the direct expense method of
accounting. Interest costs are capitalized for significant capital projects. For timberlands, the amortization is
calculated using the unit of production method. For all other assets, depreciation is calculated using the straight-
line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over
periods of 10 to 40 years and machinery and equipment over periods of 3 to 20 years. No depreciation is recorded
on assets under construction.
68
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reviewed for impairment upon the occurrence of events or changes in
circumstances indicating that the carrying value of the assets may not be recoverable, as measured by comparing
the net book value of the asset group to their estimated undiscounted future cash flows expected from their use
and eventual disposition. Impaired assets are recorded at estimated fair value, determined principally by using the
present value of estimated future cash flows expected from their use and eventual disposition (refer to Note 4
“Impairment of goodwill and property, plant and equipment”).
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is not amortized; instead it is evaluated for impairment at the beginning of the fourth quarter of
every year or more frequently whenever indicators of potential impairment exist. A significant amount of
judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include
deterioration in general economic conditions, negative developments in equity and credit markets, adverse
changes in the markets in which an entity operates, increases in input costs that have a negative effect on
earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others.
The Company performs its goodwill impairment test at the reporting unit level.
In reviewing goodwill for impairment, the Company has the option to first assess qualitative factors to
determine whether it is more likely than not (greater than 50%) that the fair value of a reporting unit is less than
its carrying amount including goodwill. In performing the qualitative assessment, the Company may identify the
relevant drivers of fair value of a reporting unit and the relevant events and circumstances that may have an
impact on those drivers of fair value and assesses their impact on the fair value of the reporting unit. To carry out
the qualitative assessment, the Company considers elements such as the results of recent fair value assessments,
macroeconomic conditions, industry and market considerations, cost factors, overall financial performance,
specific events affecting the Company and the business. The identification and impact assessment of events and
circumstances on the fair value involves significant judgment and assumptions. If, a qualitative assessment is
performed and after assessing the totality of events or circumstances, the Company determines that it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, then it
performs the quantitative goodwill impairment test. The Company can also elect to bypass the qualitative
assessment and proceed directly to the quantitative goodwill impairment test.
The quantitative goodwill impairment test is performed by comparing the fair value of the reporting unit
with its carrying value including goodwill and recognizing an impairment charge for the amount by which the
carrying value exceeds the fair value. The impairment charge is limited to the total amount of goodwill allocated
to the reporting unit.
Significant judgment is required to estimate the fair value of a reporting unit. The Company uses an income
approach to determine the fair value of a reporting unit. Under the income approach, the Company estimates the
fair value of a reporting unit based on the present value of estimated future cash flows. Key estimates supporting
the cash flow projections include, but are not limited to, management’s assessment of industry and market
conditions as well as its estimates of revenue growth rates and profit margins, economic indicators, tax rates and
69
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capital expenditures. Assumptions used in the impairment evaluations are consistent with internal projections and
operating plans. Analysis of the sensitivities of the fair value estimate to changes in assumptions are also
performed. Unanticipated market and macroeconomic events and circumstances may occur and could affect the
accuracy and validity of management assumptions and estimates.
Indefinite-lived intangible assets are not amortized and are evaluated for impairment individually at the
beginning of the fourth quarter of every year, or more frequently whenever indicators of potential impairment
exist. The Company has the option to first assess qualitative factors to determine whether it is more likely than
not that the fair value of indefinite-lived intangible assets are less than their carrying amounts. The qualitative
assessment follows the same process as the one performed for goodwill, as described above. If, a qualitative
assessment is performed and after assessing the qualitative factors, the Company determines that it is more likely
than not that the fair value of the indefinite-lived intangible assets are less than their carrying amounts, then a
quantitative impairment test is required. The Company can also elect to proceed directly to the quantitative test.
The quantitative impairment test consists of comparing the fair value of the indefinite lived intangible assets
determined using a variety of methodologies to their carrying amount. If the carrying amounts of the indefinite-
lived intangible assets exceed their fair value, an impairment loss is recognized in an amount equal to that excess.
Indefinite-lived intangible assets include trade names related to Attends®, IncoPack®, Indasec® and
Reassure®, catalog rights related to Laboratorios Indas S.A.U., license rights related to Xerox and water rights.
The Company reviews its indefinite-lived intangible assets each reporting period to determine whether events
and circumstances continue to support indefinite useful lives.
Definite-lived intangible assets are stated at cost less amortization and are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Definite-lived intangible assets include water
technology, non-compete
agreements as well as license rights, which are being amortized using the straight-line method over their
respective estimated useful lives. Any potential impairment for definite-lived intangible assets will be calculated
in the same manner as disclosed under impairment of property, plant and equipment.
rights, customer
relationships,
Amortization is based on the following useful lives:
Water rights
Customer relationships
Technology
Non-Compete agreements
Licence rights
OTHER ASSETS
Other assets are recorded at cost.
70
Useful life
40 years
10 to 40 years
7 to 20 years
9 years
12 years
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEBT ISSUANCE COSTS
Debt issuance costs are presented in the Consolidated Balance Sheets as a direct deduction from the carrying
value of long-term debt. Debt issuance costs associated with revolving credit arrangements are presented in Other
assets in the Consolidated Balance Sheets. Debt issuance costs are amortized using the effective rate method over
the term of the related debt and included in Interest expense, net in the Consolidated Statements of Earnings
(Loss) and Comprehensive Income (Loss).
ENVIRONMENTAL COSTS AND ASSET RETIREMENT OBLIGATIONS
Environmental expenditures for effluent treatment, air emission, silvicultural activities and site remediation
(together referred to as environmental matters) are expensed or capitalized depending on their future economic
benefit. In the normal course of business, Domtar incurs certain operating costs for environmental matters that
are expensed as incurred. Expenditures for property, plant and equipment that prevent future environmental
impacts are capitalized and amortized on a straight-line basis over 10 to 40 years. Provisions for environmental
matters are not discounted, due to uncertainty with respect to timing of expenditures, and are recorded when
remediation efforts are probable and can be reasonably estimated.
Asset retirement obligations are mainly associated with landfill operation and closure, asbestos containment
and removal and bark pile management and are recognized, at fair value, in the period in which Domtar incurs a
legal obligation associated with the retirement of an asset. Conditional asset retirement obligations are
recognized, at fair value, when the fair value of the liability can be reasonably estimated or on a probability-
weighted discounted cash flow estimate. The associated costs are capitalized as part of the carrying value of the
related asset and depreciated over its remaining useful life. The liability is accreted using the credit adjusted risk-
free interest rate used to discount the cash flow.
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Domtar recognizes the cost (net of estimated forfeitures) of employee services received in exchange for
awards of equity instruments over the requisite service period, based on their grant date fair value for awards
accounted for as equity and based on the quoted market value at the end of each reporting period for awards
accounted for as liability. The Company awards are accounted for as compensation expense and presented in
Additional paid-in capital on the Consolidated Balance Sheets for equity type awards and presented in Other
liabilities and deferred credits on the Consolidated Balance Sheets for liability type awards.
The Company’s awards may be subject to market, performance and/or service conditions. Any consideration
paid by plan participants on the exercise of stock options or the purchase of shares is credited to Additional
paid-in capital in the Consolidated Balance Sheets. The par value included in the Additional paid-in capital
component of stock-based compensation is transferred to Common stock upon the issuance of shares of common
stock.
Stock options subject to service conditions vest pro rata on the first three anniversaries of the grant and have
a seven-year term. Service and performance-based awards vest on the third anniversary of the grant. The
performance-based awards have an additional feature where the ultimate number of units that vest will be
71
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
determined by the Company’s performance results or shareholder return in relation to a predetermined target
over the vesting period. Deferred Share Units vest immediately at the grant date and are remeasured at the end of
each reporting period, until settlement, using the quoted market value.
Under the amended and restated Domtar Corporation 2007 Omnibus Incentive Plan (“Omnibus Plan”), a
maximum of 1,541,838 shares are reserved for issuance in connection with awards to be granted.
DERIVATIVE INSTRUMENTS
Derivative instruments are utilized by Domtar as part of the overall strategy to manage exposure to
fluctuations in foreign currency, interest rate and commodity price on certain purchases. As a matter of policy,
derivatives are not used for trading or speculative purposes. All derivatives are recorded at fair value either as
assets or liabilities. When derivative instruments have been designated within a hedge relationship and are highly
effective in offsetting the identified risk characteristics of specific financial assets and liabilities or group of
financial assets and liabilities, hedge accounting is applied. In a fair value hedge, changes in fair value of
derivatives are recognized in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).
The change in fair value of the hedged item attributable to the hedged risk is also recorded in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss) by way of a corresponding adjustment of the
carrying amount of the hedged item recognized in the Consolidated Balance Sheets. In a cash flow hedge,
changes in fair value of derivative instruments are recorded in Other comprehensive income (loss). These
amounts are reclassified in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) in
the periods in which results are affected by the cash flows of the hedged item within the same line item. Any
hedge ineffectiveness is recorded in the Consolidated Statements of Earnings (Loss) and Comprehensive Income
(Loss) when incurred.
PENSION PLANS
Domtar’s plans include funded and unfunded defined benefit and defined contribution pension plans.
Domtar recognizes the overfunded or underfunded status of defined benefit and underfunded defined contribution
pension plans as an asset or liability in the Consolidated Balance Sheets. The net periodic benefit cost includes
the following:
• The cost of pension benefits provided in exchange for employees’ services rendered during the period,
• The interest cost of pension obligations,
• The expected long-term return on pension fund assets based on a market value of pension fund assets,
• Gains or losses on settlements and curtailments,
• The straight-line amortization of past service costs and plan amendments over the average remaining
service period of approximately nine years of the active employee group covered by the plans, and
• The amortization of cumulative net actuarial gains and losses in excess of 10% of the greater of the
accrued benefit obligation or market value of plan assets at the beginning of the year over the average
remaining service period of approximately nine years of the active employee group covered by the
plans.
72
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The defined benefit plan obligations are determined in accordance with the projected unit credit actuarial
cost method.
OTHER POST-RETIREMENT BENEFIT PLANS
The Company recognizes the unfunded status of other post-retirement benefit plans (other
than
multiemployer plans) as a liability in the Consolidated Balance Sheets. These benefits, which are funded by
Domtar as they become due, include life insurance programs, medical and dental benefits and short-term and
long-term disability programs. The Company amortizes the cumulative net actuarial gains and losses in excess of
10% of the accrued benefit obligation at the beginning of the year over the average remaining service period of
approximately 10 years of the active employee group covered by the plans.
BUSINESS COMBINATION
The Company applies the acquisition method of accounting in a business combination. This methodology
requires companies to record assets acquired and liabilities assumed at their respective fair market values at the
date of acquisition. The value is determined from the viewpoint of market participants. Any amount of the
purchase price paid that is in excess of the estimated fair values of net assets acquired is recorded as Goodwill in
the Consolidated Balance Sheets. Management’s judgment is used to determine the estimated fair values
assigned to assets acquired and liabilities assumed, as well as asset useful lives for property, plant and equipment
and intangible assets, and can materially affect the Company’s results of operations. Transaction costs, as well as
costs to reorganize acquired companies, are expensed as incurred in the Company’s Consolidated Statements of
Earnings (Loss) and Comprehensive Income (Loss).
GUARANTEES
A guarantee is a contract or an indemnification agreement that contingently requires Domtar to make
payments to the other party of the contract or agreement, based on changes in an underlying item that is related to
an asset, a liability or an equity security of the other party or on a third party’s failure to perform under an
obligating agreement. It could also be an indirect guarantee of the indebtedness of another party, even though the
payment to the other party may not be based on changes in an underlying item that is related to an asset, a
liability or an equity security of the other party. Guarantees, when applicable, are accounted for at fair value.
NOTE 2.
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING CHANGES IMPLEMENTED
INVENTORY
In July 2015,
the FASB issued Accounting Standard Update (“ASU”) 2015-11, “ Simplifying the
Measurement of Inventory,” which simplifies the measurement of inventories valued under FIFO – first-in,
first-out – and moving average methods. Under this new guidance, inventories valued under these methods would
73
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
be valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling costs
less reasonable costs to sell the inventory. This ASU does not change the measurement principles for inventories
valued under the LIFO – last-in, first-out – method.
The Company adopted the new guidance on January 1, 2017 with no impact on the consolidated financial
statements.
SHARE-BASED PAYMENTS
In March 2016, the FASB issued ASU 2016-09, “ Improvements to Employee Share-Based Payment
Accounting,” which simplifies several aspects of the accounting for employee share-based payment transactions,
including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows.
The Company adopted the new guidance on January 1, 2017 with no significant impact on the consolidated
financial statements.
GOODWILL IMPAIRMENT
In January 2017, the FASB issued ASU 2017-04, “ Simplifying the Test for Goodwill Impairment,” which
removes the requirement for an entity to calculate the implied fair value of goodwill in measuring a goodwill
impairment loss, referred to as the Step II test. As a result, an entity should perform its annual, or interim,
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should
recognize an impairment charge for the amount for which the carrying value exceeds the reporting unit’s fair
value. The impairment loss recognized should be recorded against goodwill and should not exceed the total
amount of goodwill allocated to that reporting unit.
The Company adopted this ASU in the fourth quarter of 2017 on a prospective basis and applied the new
guidance to the annual goodwill impairment tests performed in the fourth quarter of 2017. Refer to Note 4
“Impairment of goodwill and property, plant and equipment” for additional information on annual goodwill
impairment test performed.
FUTURE ACCOUNTING CHANGES
REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The core
principal of this guidance is that an entity should recognize revenue, to depict the transfer of promised goods or
services to customers, in an amount that reflects the consideration for which the entity is entitled to, in exchange
for those goods and services. This new guidance will supersede the revenue recognition requirements found in
topic 605.
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 including
interim periods within that reporting period. Early adoption is permitted only for annual and interim periods
beginning after December 15, 2016.
74
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Entities are permitted to adopt the new revenue standard by restating all prior periods under the full
retrospective approach following ASC 250 “Accounting Changes and Error Corrections” or entities can elect to
use a modified retrospective approach. Under the modified retrospective approach, entities will recognize the
cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings
in the period of initial application and comparative prior year periods would not be adjusted.
The Company has completed its assessment of the impact of implementing the new accounting standard.
The Company will adopt the new revenue standard in the first quarter of 2018 using the full retrospective
transition method which will result in certain immaterial payments made to customers being reclassified in the
Company’s Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) of prior periods.
Historically, these payments were classified as Selling, general and administrative expenses while they will be
presented as a deduction of sales under the new standard. These adjustments will have no impact on retained
earnings or other components of equity or net assets in the Company’s Consolidated Balance Sheets.
The Company has redrafted its accounting policies affected by this standard and determined the extent of
the expanded disclosure requirements. The Company does not expect significant changes in its control
environment and business processes due to the adoption of the new standard.
The Company will elect to apply the following accounting policies:
•
•
For shipping and handling activities performed after customers obtain control of the goods, the
to account for these activities as fulfillment activities rather than separate
Company will elect
performance obligations.
Sales taxes (and other similar taxes) collected from customers will be excluded from revenue. This is
consistent with the Company’s current practice.
FINANCIAL INSTRUMENTS
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and
Financial Liabilities,” which amends the guidance on the classification and measurement of financial
instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting
related to the classification and measurement of investments in equity securities and the presentation of certain
fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure
requirements associated with the fair value of financial instruments.
The amendments in this update are effective for fiscal years and interim periods within those fiscal years
beginning after December 15, 2017. Companies will be required to make a cumulative-effect adjustment to
beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective. Early
adoption is permitted.
The Company does not expect this new guidance to have a material impact on the consolidated financial
statements.
75
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
LEASES
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires lessees to recognize a
right-of-use asset and a lease liability for all of their leases with a lease term greater than 12 months while
continuing to recognize expenses in the statement of earnings in a manner similar to current accounting
standards. For lessors, the new standard modifies the classification criteria and the accounting for sales-type and
direct financing leases.
As a lessee, Domtar’s various leases under existing guidance are classified as operating leases that are not
recorded on the balance sheet but are recorded in the statement of earnings as expense is incurred. Upon adoption
of the new guidance, the Company will be required to record substantially all leases on the Consolidated Balance
Sheets as a right-of-use asset and a lease liability. The timing of expense recognition and classification in the
Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) could change based on the
classification of leases as either operating or financing.
This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years, with early adoption permitted as of the beginning of an interim or annual reporting period.
The Company will adopt the ASU on January 1, 2019 using the modified retrospective approach required by
the guidance.
The Company has begun its impact assessment, including taking an inventory of its outstanding leases and
analyzing all contracts that contain a lease. While the Company’s evaluation of this guidance is in the early
stages,
impact on the
Consolidated Balance Sheets.
the Company currently expects the adoption of this guidance to have a material
DERIVATIVES AND HEDGING
In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge
Accounting Relationships,” which clarifies that a change in the counterparty to a derivative instrument that has
been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be
considered a termination of the derivative instrument or a change in a critical term of the hedging relationship.
As long as all other hedge accounting criteria in ASC 815 are met, a hedging relationship in which the hedging
derivative instrument is novated would not be discontinued or require redesignation. This clarification applies to
both cash flow and fair value hedging relationships. This ASU is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years, with early adoption permitted as of the
beginning of an interim or annual reporting period.
The Company does not expect this new guidance to have a material impact on the consolidated financial
statements.
CLASSIFICATION OF CASH FLOWS
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows,” which amends ASC 230 to add
or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The
76
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement
of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The guidance must be applied retrospectively to all periods presented but it may
be applied prospectively if retrospective application would be impracticable.
The Company does not expect this new guidance to have a material impact on the consolidated financial
statements.
RETIREMENT BENEFITS
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost,” which requires an entity to present the service cost component of
the net periodic benefit cost with other employee compensation costs in operating income. Only the service cost
components will be eligible for capitalization in assets. The other components of the net periodic benefit cost
(i.e., interest expense, expected return on plan assets, amortization of actuarial gains or losses and amortization of
prior year service costs) will be presented outside of any subtotal of operating income. An appropriate disclosure
of the line(s) used to present other components of net periodic benefit costs is required if the components are not
presented separately in the statement of earnings. This ASU is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the
beginning of an annual period for which financial statements have not been issued or made available for
issuance.
The Company will adopt the ASU on January 1, 2018 using a retrospective approach for the presentation of
the service cost component and the other components of net periodic benefit costs in the Consolidated Statement
of Earnings (Loss) and Comprehensive Income (Loss) and prospectively for the capitalization of the service cost
component of net periodic benefit costs in assets. The guidance includes a practical expedient that permits an
entity to estimate amounts for comparative periods using the information previously disclosed in its pension
plans and other post-retirement benefit plans footnote.
The Company does not expect this new guidance to have a material impact on the consolidated earnings.
DERIVATIVES AND HEDGING
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging
Activities”, which amends the hedge accounting recognition and presentation requirements in ASC 815. The
objectives of the ASU are to (1) improve the transparency and understandability of information conveyed to
financial statement users about an entity’s risk management activities by better aligning the entity’s financial
reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and
simplify the application of hedge accounting by preparers.
This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods therein.
Entities are permitted to early adopt the new guidance in any interim or annual period after issuance of the ASU.
If an entity early adopts the updated guidance in an interim period, any transition adjustments should be reflected
as of the beginning of the fiscal year.
While the Company is still evaluating the impact of adopting this new guidance, it does not expect this new
guidance to have a material impact on the consolidated financial statements.
77
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 3.
ACQUISITION OF BUSINESSES
Acquisition of Home Delivery Incontinent Supplies Co.
On October 1, 2016, Domtar completed the acquisition of 100% of the outstanding shares of Home Delivery
Incontinent Supplies Co. (“HDIS”). HDIS is a leading national direct-to-consumer provider of adult incontinence
and related products. Based in Olivette, Missouri, HDIS provides customers with high-quality products and a
personalized service for all of their incontinence needs. HDIS operates a distribution center in Olivette, Missouri,
as well as two retail locations, in Texarkana, Arkansas and Daytona Beach, Florida and has approximately 240
employees. The results of HDIS’s operations are included in the Personal Care reportable segment starting on
October 1, 2016. The purchase price was $52 million, net of cash acquired of $3 million and included a potential
earn-out payment of up to $10 million to be settled after the first anniversary of the acquisition. The final amount
of the earn-out was $8 million and was paid in the last quarter of 2017.
The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed
based on the Company’s estimates of their fair value, which were based on information available at that time.
The table below illustrates the purchase price allocation:
Fair value of net assets acquired at the date of acquisition
Receivables
Inventory
Property, plant and equipment
Intangible assets
Customer relationships (1)
Trade names (2)
Goodwill
Deferred income tax assets
Total assets
Less: Liabilities
Trade and other payables
Total liabilities
Fair value of net assets acquired at the date of acquisition
21
13
$ 4
4
1
34
17
2
62
10
10
52
(1) The useful life of the Customer relationships acquired is estimated at 10 years (as of the date of acquisition).
(2)
Indefinite useful life.
78
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 4.
IMPAIRMENT OF GOODWILL AND PROPERTY, PLANT AND EQUIPMENT
IMPAIRMENT OF GOODWILL
Goodwill is subject to an annual goodwill impairment test or more frequently whenever indicators of
potential goodwill impairment exist. Goodwill impairment exists when the carrying amount of a reporting unit
exceeds its fair value. An impairment loss is then recorded and may not exceed the total amount of goodwill
allocated to the reporting unit. The Company performed its annual goodwill impairment testing at October 1,
2017. At that date, total goodwill amounting to $578 million resided in the Personal Care reporting unit.
During the 2017 annual review of goodwill, management proceeded directly to the quantitative impairment
test for the Personal Care reporting unit. The estimated fair value, determined by the present value of estimated
future cash flows was lower than the reporting unit’s carrying value and as such the Company recognized a non-
cash impairment charge of $578 million, representing the entire amount of goodwill related to the Personal Care
reporting unit.
Growing competitive market pressures in the healthcare and retail markets over the last year, including the
entry of new competitors in the private label category, excess industry capacity and the pressure to limit
healthcare spending by governmental agencies, are expected to result in lower than previously anticipated sales
and operating margin. In light of this weakened market outlook, the Company’s current business forecast was not
sufficient to derive a fair value able to support the carrying value of the goodwill associated with the Personal
Care reporting unit, leading to the impairment of goodwill.
In prior years, the Company performed its annual goodwill impairment tests at October 1, 2016 and 2015
and determined that the estimated fair value of the Personal Care reporting unit exceeded its carrying value. As a
result, no impairment charges were recorded during 2016 and 2015.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
The Company reviews property, plant and equipment for impairment upon the occurrence of events or
changes in circumstances indicating that, at the lowest level of determinable cash flows, the carrying value of the
asset group may not be recoverable.
Estimates of undiscounted future cash flows used to test the recoverability of the asset group includes key
inflation-adjusted cost projections, forecasted exchange rates when
assumptions related to selling prices,
applicable and the estimated useful life of the asset group.
Ashdown, Arkansas pulp and paper mill—Conversion of a paper machine
In the fourth quarter of 2014, the Company announced the conversion of a paper machine at Ashdown,
Arkansas pulp and paper mill to a high quality fluff pulp line. As a result, in 2016 the Company recognized
$29 million of accelerated depreciation in Impairment of goodwill and property, plant and equipment on the
Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) (2015 – $77 million).
79
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5.
STOCK-BASED COMPENSATION
OMNIBUS PLAN
Under the Omnibus Plan, the Company may award to key employees and non-employee directors, at the
discretion of the Human Resources Committee of the Board of Directors, non-qualified stock options, incentive
stock options, stock appreciation rights, restricted stock units, performance-conditioned restricted stock units,
performance share units, deferred share units (“DSUs”) and other stock-based awards. The non-employee
directors only receive DSUs. The Company generally grants awards annually and uses, when available, treasury
stock to fulfill awards settled in common stock and option exercises.
PERFORMANCE SHARE UNITS (“PSUs”)
PSUs are granted to Management Committee and non-Management Committee members. These awards will
be settled in shares for Management Committee members and in cash for non-Management Committee members,
based on market conditions and/or performance and service conditions. These awards have an additional feature
where the ultimate number of units that vest will be determined by the Company’s performance results or
shareholder return in relation to a predetermined target over the vesting period. No awards vest when the
minimum thresholds are not achieved. The performance measurement date will vary depending on the specific
award. These awards will cliff vest at various dates up to February 21, 2020.
PSUs
Vested and non-vested at December 31, 2014
Granted
Forfeited
Cancelled
Vested and settled
Vested and non-vested at December 31, 2015
Granted
Forfeited
Cancelled
Vested and settled
Vested and non-vested at December 31, 2016
Granted
Forfeited
Cancelled
Vested and settled
Vested and non-vested at December 31, 2017
80
Number of units
Weighted average
grant date fair value
310,303
219,453
(21,918)
(60,768)
(20,991)
426,079
295,504
(28,523)
(101,124)
(74,655)
517,281
256,078
(24,581)
(75,710)
(50,600)
622,468
$
45.52
44.22
45.52
35.40
51.48
46.00
32.38
39.81
51.27
35.97
38.98
39.04
37.59
38.78
54.95
37.78
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
The fair value of PSUs granted in 2017, 2016 and 2015 was estimated at the grant date using the Monte
Carlo simulation methodology. The Monte Carlo simulation creates artificial futures by generating numerous
sample paths of potential outcomes. The following assumptions were used in calculating the fair value of the
units granted:
2017
2016
2015
Dividend yield
Expected volatility 1 year
Expected volatility 3 years
Risk-free interest rate December 31, 2015
Risk-free interest rate December 31, 2016
Risk-free interest rate December 31, 2017
Risk-free interest rate December 31, 2018
Risk-free interest rate December 31, 2019
28%
28%
—
—
4.130% 4.740%
24%
30%
—
1.057%
1.614% 0.860%
1.606% 0.900%
1.751%
—
3.220%
34%
30%
0.732%
0.893%
1.200%
—
—
At December 31, 2017, of the total vested and non-vested PSUs, 288,332 are expected to be settled in shares
and 334,136 will be settled in cash.
RESTRICTED STOCK UNITS (“RSUs”)
RSUs are granted to Management Committee and non-Management Committee members. These awards
will be settled in shares for Management Committee members and in cash for non-Management Committee
members, upon completing service conditions. The awards cliff vest after a service period of approximately three
years. Additionally, the RSUs are credited with dividend equivalents in the form of additional RSUs when cash
dividends are paid on the Company’s stock. The grant date fair value of RSUs is equal to the market value of the
Company’s stock on the date the awards are granted.
RSUs
Non-vested at December 31, 2014
Granted/issued
Forfeited
Vested and settled
Non-vested at December 31, 2015
Granted/issued
Forfeited
Vested and settled
Non-vested at December 31, 2016
Granted/issued
Forfeited
Vested and settled
Non-vested at December 31, 2017
81
Number of units
Weighted average
grant date fair value
314,220
164,879
(12,464)
(119,669)
346,966
196,786
(17,884)
(107,198)
418,670
182,937
(19,194)
(121,750)
460,663
$
44.80
43.21
44.78
44.31
44.21
34.04
39.69
39.12
40.90
39.83
37.97
48.72
38.56
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
At December 31, 2017, of the total non-vested RSUs, 177,414 are expected to be settled in shares and
283,249 will be settled in cash.
DEFERRED SHARE UNITS
DSUs are granted to the Company’s Directors. The DSUs granted to the Directors vest immediately on the
grant date. The DSUs are credited with dividend equivalents in the form of additional DSUs when cash dividends
are paid on the Company’s stock. For Directors’ DSUs, the Company will deliver at the option of the holder
either one share of common stock or the cash equivalent of the fair market value on settlement of each
outstanding DSU (including dividend equivalents accumulated) upon termination of service. Directors who
attained the share ownership requirements may elect to receive the equity component of their annual retainer in
DSUs that may be settled in either cash or stock one year after the grant date. The grant date fair value of DSU
awards is equal to the market value of the Company’s stock on the date the awards are granted.
Management Committee members may elect to defer awards earned under another program into DSUs. In
2017, no vested awards were deferred to DSUs (2016 – nil; 2015 – nil).
DSUs
Vested at December 31, 2014
Granted/issued
Settled
Vested at December 31, 2015
Granted/issued
Settled
Vested at December 31, 2016
Granted/issued
Settled
Vested at December 31, 2017
Number of units
Weighted average
grant date fair value
262,721
40,494
(13,755)
289,460
46,737
(15,123)
321,074
36,215
(85,055)
272,234
$
27.11
39.92
41.88
28.20
37.43
39.60
29.01
40.68
32.27
29.55
NON-QUALIFIED & PERFORMANCE STOCK OPTIONS
Stock options are granted to Management Committee and non-Management Committee members. The stock
options vest at various dates up to February 21, 2020 subject to service conditions for non-qualified stock
options. The options expire at various dates no later than seven years from the date of grant.
82
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
The fair value of the stock options granted in 2017, 2016 and 2015 was estimated at the grant date using a
Black-Scholes based option pricing model or an option pricing model that incorporated the market conditions
when applicable. The following assumptions were used in calculating the fair value of the options granted:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Strike price
2017
2016
2015
3.48%
28%
1.86%
4.5 years
$
39.81 $
3.78%
30%
1.17%
4.5 years
33.78 $
3.22%
32%
1.47%
4.5 years
43.42
The grant date fair value of the non-qualified options granted in 2017 was $7.05 (2016 – $5.95; 2015 –
$8.96).
OPTIONS (including Performance options)
Outstanding at December 31, 2014
Granted
Exercised
Forfeited/expired
Outstanding at December 31, 2015
Options exercisable at December 31, 2015
Outstanding at December 31, 2015
Granted
Exercised
Forfeited/expired
Outstanding at December 31, 2016
Options exercisable at December 31, 2016
Outstanding at December 31, 2016
Granted
Exercised
Outstanding at December 31, 2017
Options exercisable at December 31, 2017
Number
of
options
Weighted
average
exercise
price
Weighted
average
remaining life
(in years)
Aggregate
intrinsic
value
(in millions)
418,123
82,885
(35,924)
(13,782)
451,302
$
46.39
43.42
43.13
34.08
46.48
176,315
44.56
451,302
114,723
(37,296)
(6,502)
522,227
46.48
33.78
41.11
20.89
44.39
286,011
46.50
522,227
106,268
(65,430)
563,065
44.39
39.81
36.33
44.46
359,960
48.02
4.6
6.2
—
—
4.8
3.9
4.8
6.2
—
—
4.5
3.9
4.5
6.2
—
4.1
3.2
$
0.5
—
—
—
0.1
0.1
0.1
—
—
—
0.7
0.1
0.7
—
—
3.6
1.3
The total intrinsic value of options exercised in 2017 was nil (2016 – nil; 2015 – nil). Based on the
Company’s closing year-end stock price of $49.52 (2016 – $39.03; 2015 – $36.95), the aggregate intrinsic value
of options outstanding and options exercisable is $5 million.
83
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
For the year ended December 31, 2017, stock-based compensation expense recognized in the Company’s
results of operations was $20 million (2016 – $16 million; 2015 – $10 million) for all of the outstanding awards.
Compensation costs not yet recognized amounted to $20 million (2016 – $17 million; 2015 – $16 million) and
will be recognized over the remaining service period of approximately 26 months. The aggregate value of
liability awards settled in 2017 was $7 million (2016 – $4 million; 2015 – $4 million). The total fair value of
equity awards settled in 2017 was $3 million (2016 – $2 million), representing the fair value at the time of
settlement. The fair value at the grant date for these settled equity awards was $4 million (2016 – $3 million).
Compensation costs for performance awards are based on management’s best estimate of the final performance
measurement.
CLAWBACK FOR FINANCIAL REPORTING MISCONDUCT
If a participant in the Omnibus Plan knowingly or grossly negligently engages in financial reporting
misconduct, then all awards and gains from the exercise of options in the 12 months prior to the date the
misleading financial statements were issued as well as any awards that vested based on the misleading financial
statements will be disgorged to the Company. In addition, the Company may cancel or reduce, or require a
participant to forfeit and disgorge to the Company or reimburse the Company for, any awards granted or vested,
and bonus granted or paid, and any gains earned or accrued, due to the exercise, vesting or settlement of awards
or sale of any common stock, to the extent permitted or required by, or pursuant to any Company policy
implemented as required by applicable law, regulation or stock exchange rule as may from time to time be in
effect.
NOTE 6.
EARNINGS (LOSS) PER COMMON SHARE
The calculation of basic earnings (loss) per common share is based on the weighted average number of
Domtar common shares outstanding during the year. The calculation for diluted earnings (loss) per common
share recognizes the effect of all potential dilutive common securities.
The following table provides the reconciliation between basic and diluted earnings (loss) per common share:
Net (loss) earnings
Weighted average number of common shares outstanding (millions)
Effect of dilutive securities (millions)
Weighted average number of diluted common shares outstanding
(millions)
Basic net (loss) earnings per common share (in dollars)
Diluted net (loss) earnings per common share (in dollars)
84
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$ (258)
62.7
—
62.7
$(4.11)
$(4.11)
$ 128
62.6
0.1
62.7
$2.04
$2.04
$ 142
63.3
0.1
63.4
$2.24
$2.24
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 6. EARNINGS (LOSS) PER COMMON SHARE (CONTINUED)
The following table provides the securities that could potentially dilute basic earnings (loss) per common
share in the future, but were not included in the computation of diluted earnings (loss) per common share because
to do so would have been anti-dilutive:
Options
December 31,
2017
December 31,
2016
December 31,
2015
312,893
410,978
343,581
NOTE 7.
PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company has several defined contribution plans and multiemployer plans. The pension expense under
these plans is equal to the Company’s contribution. For the year ended December 31, 2017, the related pension
expense was $36 million (2016 – $37 million; 2015 – $32 million).
DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension
plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined
contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate
in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. that are not
grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan
for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S.
and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental
benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental
unfunded defined contribution pension plans to certain senior management employees.
Related pension and other post-retirement plan expenses and the corresponding obligations are actuarially
determined using management’s most probable assumptions.
The Company’s pension plan funding policy is to contribute annually the amount required to provide for
benefits earned in the year, and to fund solvency deficiencies, funding shortfalls and past service obligations over
periods not exceeding those permitted by the applicable regulatory authorities. Past service obligations primarily
arise from improvements to plan benefits. The other post-retirement benefit plans are not funded and
contributions are made annually to cover benefit payments.
The Company expects to contribute a minimum total amount of $14 million in 2018 compared to
$47 million in 2017 (2016 – $31 million; 2015 – $13 million) to the pension plans. The Company expects to
contribute a minimum total amount of $5 million in 2018 compared to $3 million in 2017 to the other post-
retirement benefit plans (2016 – $5 million; 2015 – $5 million).
85
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
CHANGE IN ACCRUED BENEFIT OBLIGATION
The following table represents the change in the accrued benefit obligation as of December 31, 2017 and
December 31, 2016, the measurement date for each year:
Accrued benefit obligation at beginning of year
Service cost for the year
Interest expense
Plan participants’ contributions
Actuarial loss (gain)
Plan amendments
Benefits paid
Direct benefit payments
Settlement
Effect of foreign currency exchange rate change
Accrued benefit obligation at end of year
CHANGE IN FAIR VALUE OF ASSETS
December 31, 2017
Other
post-retirement
benefit plans
Pension
plans
$
1,584
30
52
6
95
1
(85)
(3)
(2)
86
1,764
$
90
2
4
—
(17)
(5)
—
(3)
—
5
76
December 31, 2016
Pension
plans
$
1,509
31
51
6
46
—
(83)
(4)
(6)
34
1,584
Other
post-retirement
benefit plans
$
86
2
4
—
1
—
—
(5)
—
2
90
The following table represents the change in the fair value of assets, as of December 31, 2017 and
December 31, 2016, reflecting the actual return on plan assets, the contributions and the benefits paid for each
year:
December 31, 2017 December 31, 2016
Pension plans
Fair value of assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Settlement
Effect of foreign currency exchange rate change
Fair value of assets at end of year
$
1,546
166
47
6
(88)
(2)
90
1,765
Pension plans
$
1,493
73
31
6
(87)
(6)
36
1,546
INVESTMENT POLICIES AND STRATEGIES OF THE PLAN ASSETS
The assets of the pension plans are held by a number of independent trustees and are accounted for
separately in the Company’s pension funds. The investment strategy for the assets in the pension plans is to
maintain a diversified portfolio of assets, invested in a prudent manner to maintain the security of funds while
86
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
maximizing returns within the guidelines provided in the investment policy. Diversification of the pension plans’
holdings is maintained in order to reduce the pension plans’ annual return variability, reduce market and credit
exposure to any single asset and to any single component of the capital markets, reduce exposure to unexpected
inflation, enhance the long-term risk-adjusted return potential of the pension plans and reduce funding risk.
Over the long-term, the performance of the pension plans is primarily determined by the long-term asset
mix decisions. To manage the long-term risk of not having sufficient funds to match the obligations of the
pension plans, the Company conducts asset/liability studies. These studies lead to the recommendation and
adoption of a long-term asset mix target that sets the expected rate of return and reduces the risk of adverse
consequences to the plans from increases in liabilities and decreases in assets. In identifying the asset mix target
that would best meet the investment objectives, consideration is given to various factors, including (a) each
plan’s characteristics, (b) the duration of each plan’s liabilities, (c) the solvency and going concern financial
position of each plan and their sensitivity to changes in interest rates and inflation, and (d) the long-term return
and risk expectations for key asset classes.
The investments of each plan can be done directly through cash investments in equities or bonds or
indirectly through derivatives or pooled funds. The use of derivatives must be in accordance with an approved
mandate and cannot be used for speculative purposes.
The Company’s pension funds are not permitted to directly own any of the Company’s shares or debt
instruments.
The following table shows the allocation of the plan assets, based on the fair value of the assets held and the
target allocation for 2017:
Fixed income
Cash and cash equivalents
Bonds
Insurance contracts
Equity
Canadian Equity
U.S. Equity
International Equity
Total (1)
Percentage of
plan assets at
December 31,
2017
Percentage of
plan assets at
December 31,
2016
Target allocation
0% - 9%
47% - 57%
5%
3% - 10%
8% - 18%
17% - 27%
2%
52%
5%
6%
13%
22%
100%
3%
51%
5%
6%
13%
22%
100%
(1) Approximately 79% of the pension plans’ assets relate to Canadian plans and 21% relate to U.S. plans.
87
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
RECONCILIATION OF FUNDED STATUS TO AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
The following table presents the difference between the fair value of assets and the actuarially determined
accrued benefit obligation. This difference is also referred to as either the deficit or surplus, as the case may be,
or the funded status of the plans. The table further reconciles the amount of the surplus or deficit (funded status)
to the net amount recognized in the Consolidated Balance Sheets.
Accrued benefit obligation at end of year
Fair value of assets at end of year
Funded status
December 31, 2017
Other
post-retirement
benefit plans
Pension
plans
$
(1,764)
1,765
1
$
(76)
—
(76)
December 31, 2016
Pension
plans
$
(1,584)
1,546
(38)
Other
post-retirement
benefit plans
$
(90)
—
(90)
The funded status includes $54 million of accrued benefit obligation ($48 million at December 31, 2016)
related to supplemental unfunded defined benefit and defined contribution plans.
Trade and other payables (Note 17)
Other liabilities and deferred credits (Note 20)
Other assets (Note 15)
Net amount recognized in the Consolidated Balance Sheets
December 31, 2017
December 31, 2016
Pension
plans
$
—
(130)
131
1
Other
post-retirement
benefit plans
$
(5)
(71)
—
(76)
Pension
plans
$
—
(141)
103
(38)
Other
post-retirement
benefit plans
$
(4)
(86)
—
(90)
The following table presents the pre-tax amounts included in Other comprehensive income (loss):
Year ended
December 31, 2017
Year ended
December 31, 2016
Year ended
December 31, 2015
Prior service (cost) credit
Amortization of prior year service cost
Net (loss) gain
Amortization of net actuarial loss
Pension
plans
$
(1)
5
(10)
9
Net amount recognized in other comprehensive
income (loss) (pre-tax)
3
Other
post-retirement
benefit plans
$
5
—
17
—
22
Pension
plans
$
—
5
(53)
6
Other
post-retirement
benefit plans
$
—
—
(2)
—
Pension
plans
$
(10)
3
2
7
(42)
(2)
2
Other
post-retirement
benefit plans
$
—
—
4
1
5
An estimated loss of $13 million for pension plans and gain of $2 million for other post-retirement benefit
plans will be amortized from Accumulated other comprehensive loss into net periodic benefit cost in 2018.
88
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
At December 31, 2017, the accrued benefit obligation and the fair value of defined benefit plan assets with
an accrued benefit obligation in excess of fair value of plan assets were $811 million and $680 million,
respectively (2016 – $765 million and $624 million, respectively).
Components of net periodic benefit cost for pension plans
Service cost for the year
Interest expense
Expected return on plan assets
Amortization of net actuarial loss
Settlement loss
Amortization of prior year service cost
Net periodic benefit cost
Components of net periodic benefit cost for other post-retirement benefit plans
Service cost for the year
Interest expense
Net periodic benefit cost
Year ended
December 31,
2017
$
30
52
(81)
9
—
5
15
Year ended
December 31,
2017
$
2
4
6
Year ended
December 31,
2016
$
31
51
(80)
5
1
5
13
Year ended
December 31,
2015
$
34
60
(86)
7
—
3
18
Year ended
December 31,
2016
$
2
4
Year ended
December 31,
2015
$
2
4
6
6
WEIGHTED-AVERAGE ASSUMPTIONS
The Company used the following key assumptions to measure the accrued benefit obligation and the net
periodic benefit cost. These assumptions are long-term, which is consistent with the nature of employee future
benefits.
Pension plans
Accrued benefit obligation
Discount rate
Rate of compensation increase
Net periodic benefit cost
Discount rate
Rate of compensation increase
Expected long-term rate of return on plan assets
December 31,
2017
December 31,
2016
December 31,
2015
3.5%
2.7%
3.9%
2.8%
5.3%
3.8%
2.7%
4.1%
2.8%
5.3%
4.0%
2.7%
3.9%
2.8%
5.6%
The Company used a full yield curve approach to estimate the current service and interest cost components
of net periodic benefit cost for Canadian pension plans and U.S. funded pension plans. The estimate of these
components is made by applying the specific spot rates along the yield curve used in the determination of the
benefit obligation to the relevant projected cash flows.
89
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
For the U.S. unfunded pension plan and other post-retirement benefits, given materiality, the current service
and interest cost components were estimated using a single weighted-average discount rate derived from the
yield curve for each unfunded pension plan or based on each post-retirement plans’ projected cash flows. The
discount rate for U.S. unfunded plans of 3.6% is obtained by incorporating the plans’ expected cash flows in the
Mercer Yield Curve.
For Canadian plans, short-term yields to maturity are derived from actual AA rated corporate bond yield
data. For longer terms, extrapolated data is used. The extrapolated data are created by adding a term-based spread
over long provincial bond yields. For U.S. funded plans, the rates are taken from the Mercer Yield Curve which
is based on bonds rated AA by Moody’s or Standard & Poor’s, excluding callable bonds, bonds of less than a
minimum issue size, and certain other bonds. The universe of bonds also includes private placement (traded in
reliance on Rule 144A and which are at least two years from issuance), make whole, and foreign corporation
(denominated in U.S. dollars) bonds.
Effective January 1, 2018, the Company will use 5.2% (2017 – 5.3%; 2016 – 5.3%) as the expected return
on plan assets, which reflects the current view of long-term investment returns. The overall expected long-term
rate of return on plan assets is based on management’s best estimate of the long-term returns of the major asset
classes (cash and cash equivalents, equities, and bonds) weighted by the actual allocation of assets at the
measurement date, net of expenses. This rate includes an equity risk premium over government bond returns for
equity investments and a value-added premium for the contribution to returns from active management. The
sources used to determine management’s best estimate of long-term returns are numerous and include country
specific bond yields, which may be derived from the market using local bond indices or by analysis of the local
bond market, and country-specific inflation and investment market expectations derived from market data and
analysts’ or governments’ expectations as applicable.
Other post-retirement benefit plans
Accrued benefit obligation
Discount rate
Rate of compensation increase
Net periodic benefit cost
Discount rate
Rate of compensation increase
December 31,
2017
December 31,
2016
December 31,
2015
3.5%
2.8%
3.8%
2.8%
3.9%
2.8%
4.1%
2.8%
4.1%
2.8%
3.9%
2.8%
For measurement purposes, a 4.9% weighted average annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2017. The rate was assumed to decrease gradually to 4.1% by 2033
and remain at that level thereafter. An increase or decrease of 1% of this rate would have the following impact:
Impact on net periodic benefit cost for other post-retirement benefit plans
Impact on accrued benefit obligation
Increase of 1% Decrease of 1%
$
1
4
$
(1)
(4)
90
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
FAIR VALUE MEASUREMENT
Fair Value Measurements and Disclosures Topic of FASB ASC 820 establishes a fair value hierarchy,
which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial
instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available
and significant to the fair value measurement.
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs other than quoted prices in active markets for identical assets and liabilities,
quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that
are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
Level 3
Inputs that are generally unobservable and typically reflect management’s estimates of
assumptions that market participants would use in pricing the assets or liabilities.
The following table presents the fair value of the plan assets at December 31, 2017, by asset category:
Fair Value Measurements at
December 31, 2017
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Asset Category
Cash and short-term investments
Asset backed notes (1)
Canadian provincial government bonds
Canadian corporate debt securities
U.S. corporate debt securities
International corporate debt securities
Bond index fund (2 & 3)
Canadian equities (4)
U.S. equities (5)
International equities (6)
U.S. stock index funds (3 & 7)
Insurance contracts (8)
Derivative contracts (9)
Total
$
79
1
566
139
43
2
152
111
103
252
224
94
(1)
$
79
—
565
117
43
2
—
111
103
252
—
—
—
Total
1,765
1,272
$
—
—
1
22
—
—
152
—
—
—
224
—
(1)
398
$
—
1
—
—
—
—
—
—
—
—
—
94
—
95
(1) This category is described in the section “Asset Backed Notes”.
(2) This category represents a U.S. actively managed bond fund that is benchmarked to the Barclays Capital
Long-term Government/Credit index.
(3) The fair value of these plan assets are classified as Level 2 (inputs that are observable, directly or indirectly)
as they are measured based on quoted prices in active markets and can be redeemed at the measurement date
or in the near term.
91
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
(4) This category represents an active segregated large capitalization Canadian equity portfolio with the ability
to purchase small and medium capitalized companies and the Canadian equity portion of an active
segregated global equity portfolio.
(5) This category represents U.S. equities held within an active segregated global equity portfolio and an active
international equity portfolio.
(6) This category represents an active segregated non-North American multi-capitalization equity portfolio and
the non-North American portion of an active segregated global equity portfolio.
(7) This category represents two equity index funds, not actively managed, that track the Russell 3000 index.
(8) This category includes: 1) two group annuity contracts totaling $85 million purchased through an insurance
company that are held in the pension plans’ name as an asset within the pension plans. These insurance
contracts cover pension entitlements associated with specific groups of retired members of the pension plans
and 2) $9 million of insurance contracts with a minimum guarantee rate.
(9) The fair value of the derivative contracts are classified as Level 2 (inputs that are observable, directly or
indirectly) as they are measured using long-term bond indices.
The following table presents the fair value of the plan assets at December 31, 2016, by asset category:
Asset Category
Cash and short-term investments
Asset backed notes (1)
Canadian provincial government bonds
Canadian corporate debt securities
Bond index funds (2 & 3)
Canadian equities (4)
U.S. equities (5)
International equities (6)
U.S. stock index funds (3 & 7)
Insurance contracts (8)
Derivative contracts (9)
Total
Fair Value Measurements at
December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
80
—
81
2
—
100
98
205
—
—
—
566
$
—
115
—
1
585
—
—
—
193
—
(1)
893
$
—
3
—
—
—
—
—
—
—
84
—
87
Total
$
80
118
81
3
585
100
98
205
193
84
(1)
1,546
(1) This category is described in the section “Asset Backed Notes”.
(2) This category represents two Canadian bond index fund not actively managed that track the FTSE TMX
Long-term bond index, and the FTSE TMX Universe bond index and a U.S. actively managed bond fund
that is benchmarked to the Barclays Capital Long-term Government/Credit index.
92
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
(3) The fair value of these plan assets are classified as Level 2 (inputs that are observable, directly or indirectly)
as they are measured based on quoted prices in active markets and can be redeemed at the measurement date
or in the near term.
(4) This category represents active segregated large capitalization Canadian equity portfolios with the ability to
purchase small and medium capitalized companies.
(5) This category represents U.S. equities held within an active segregated global equity portfolio and an active
international equity portfolio.
(6) This category represents an active segregated non-North American multi-capitalization equity portfolio and
the non-North American portion of an active segregated global equity portfolio.
(7) This category represents equity two equity index funds, not actively managed, that track the Russell 3000
index.
(8) This category includes: 1) two group annuity contracts totaling $76 million purchased through an insurance
company that are held in the pension plans’ name as an asset within the pension plans. These insurance
contracts cover pension entitlements associated with specific groups of retired members of the pension plans
and 2) $8 million of insurance contracts with a minimum guarantee rate.
(9) The fair value of the derivative contracts are classified as Level 2 (inputs that are observable, directly or
indirectly) as they are measured using long-term bond indices.
ASSET BACKED NOTES
At December 31, 2017, Domtar’s Canadian defined benefit pension funds held restructured asset backed
notes (“ABN”) valued at $1 million (CDN $1 million). At December 31, 2016, the plans held ABN valued at
$118 million (CDN $158 million). These ABN were subject to a restructuring agreement, governing the Montreal
Accord, finalized in 2009. During 2017, the total value of the ABN was reduced by repayments totaling
$117 million (CDN $157 million).
93
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
The following table presents changes during the period for Level 3 fair value measurements of plan assets:
Balance at December 31, 2015
Settlements
Return on plan assets
Effect of foreign currency exchange rate change
Balance at December 31, 2016
Settlements
Return on plan assets
Effect of foreign currency exchange rate change
Balance at December 31, 2017
Fair Value Measurements
Using Significant
Unobservable Inputs (Level 3)
Insurance
contracts
$
86
(5)
1
2
TOTAL
$
96
(12)
1
2
ABN(1)
$
10
(7)
—
—
3
(2)
—
—
1
84
(5)
9
6
94
87
(7)
9
6
95
(1)
Includes $1 million of Montreal Accord in 2017 (2016 – $3 million)
ESTIMATED FUTURE BENEFIT PAYMENTS FROM THE PLANS
Estimated future benefit payments from the plans for the next 10 years at December 31, 2017 are as follows:
2018
2019
2020
2021
2022
2023 – 2027
Pension
plans
Other
post-retirement
benefit plans
$
112
112
111
112
111
554
$
5
5
5
5
5
25
94
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 8.
OTHER OPERATING (INCOME) LOSS, NET
Other operating (income) loss, net is an aggregate of both recurring and occasional loss or income items
and, as a result, can fluctuate from year to year. The Company’s other operating (income) loss, net includes the
following:
Net gain on sale of property, plant and equipment
Reversal of contingent consideration provision
Bad debt expense
Environmental provision
Foreign exchange loss (gain)
Other
Other operating (income) loss, net
NOTE 9.
INTEREST EXPENSE, NET
The following table presents the components of interest expense, net:
Interest on long-term debt (1)
Premium paid on repurchase of long-term debt
Reversal of fair value increment on long-term debt
Interest on receivables securitization
Interest on withdrawal liabilities for multiemployer plans
Amortization of debt issuance costs and other
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$
(13)
(2)
1
3
1
(4)
(14)
$
—
—
—
2
6
(4)
4
$
(15)
—
5
4
(3)
4
(5)
Year ended
December 31,
2017
$
59
—
—
2
3
2
66
Year ended
December 31,
2016
Year ended
December 31,
2015
$
59
—
—
2
3
2
66
$
82
40
(1)
1
4
6
132
(1) The Company capitalized $1 million of interest expense in 2017 (2016 – $5 million; 2015 – $3 million).
95
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10.
INCOME TAXES
The Company’s (loss) earnings before income taxes by taxing jurisdiction were:
U.S. (loss) earnings
Foreign (loss) earnings
(Loss) earnings before income taxes
Provisions for income taxes include the following:
U.S. Federal and State:
Current
Deferred
Foreign:
Current
Deferred
Income tax (benefit) expense
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$
(209)
(174)
(383)
$
69
88
157
$
26
130
156
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$
73
(208)
9
1
(125)
$
10
1
10
8
29
$
61
(78)
9
22
14
96
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10. INCOME TAXES (CONTINUED)
The Company’s provision for income taxes differs from the amounts computed by applying the statutory
income tax rate of 35% to (loss) earnings before income taxes due to the following:
U.S. federal statutory income tax
Reconciling Items:
State and local income taxes, net of federal
income tax benefit
Foreign income tax rate differential
Tax credits and special deductions
Goodwill impairment
Tax rate changes
Deemed mandatory repatriation tax
Uncertain tax positions
U.S. manufacturing deduction
Functional currency differences
Valuation allowance on deferred tax assets
Other
Income tax (benefit) expense
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$
(134)
2
(16)
(24)
200
(188)
46
(6)
(4)
—
3
(4)
(125)
$
55
3
(14)
(18)
—
—
—
2
(2)
—
(1)
4
29
$
55
1
(16)
(16)
—
(5)
—
1
(6)
1
(1)
—
14
During 2017, the Company recorded a goodwill impairment of $578 million with minimal tax benefit which
impacted the effective tax rate by $200 million. The effective tax rate for 2017 was also significantly impacted
by the Company’s foreign operations being taxed at lower statutory tax rates and by the Company recording
$24 million of current tax credits, mainly research and experimentation credits.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “U.S. Tax Reform”) was signed into law. The
U.S. Tax Reform significantly changes U.S. tax law for businesses by, among other things, lowering the
maximum federal corporate income tax rate from 35% to 21% effective January 1, 2018, implementing a
territorial tax system, and imposing a one-time deemed repatriation tax on accumulated foreign earnings. As a
result of the corporate tax rate reduction, the Company revalued its ending net deferred tax liabilities, and
recognized a provisional tax benefit of $186 million in the Company’s Consolidated Statement of Earnings
(Loss) and Comprehensive Income (Loss) for the year ended December 31, 2017. This, combined with a
$2 million tax benefit from other changes in law in certain U.S. states earlier in the year, had a significant impact
on the effective tax rate for 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the
application in situations when a registrant does not have the necessary information available, prepared, or
analyzed in reasonable detail to complete the accounting for certain income tax effects of the U.S. Tax Reform.
SAB 118 provides guidance which allows companies to use a measurement period, similar to that used in
business combinations, to account for the impacts of the U.S. Tax Reform. The U.S. Tax Reform provides for a
mandatory one-time deemed repatriation tax on the Company’s undistributed foreign earnings and profits. The
97
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10. INCOME TAXES (CONTINUED)
Company has recorded a provisional repatriation tax amount of $46 million, which it will elect to pay over eight
years, and which impacted the 2017 tax rate. The current portion of $4 million is included on the Company’s
Consolidated Balance Sheet in Income and other taxes receivable and the remaining $42 million is included in
Other liabilities and deferred credits. While the Company has made a reasonable estimate of the repatriation tax
amount, it continues to analyze various factors, including the impact of foreign tax credits available to offset the
tax. The Company continues to gather additional information and monitor for further interpretive guidance in
order to finalize its calculations and complete its accounting for the repatriation tax liability.
Additionally, the Company continues to assess the impact of the U.S. Tax Reform with respect to its current
strategy of reinvesting profits of foreign subsidiaries back into those foreign operations. The Company has not
completed its analysis of the impacts of the U.S. Tax Reform and how these changes will impact operational
decisions around the utilization of cash residing in the foreign subsidiaries. If, after analysis, the Company’s
management determines that it will no longer reinvest all earnings of its foreign subsidiaries, then the Company
would need to determine if a provision for the undistributed foreign earnings is required. As such, the Company
has not recorded a tax liability amount for this item. It is possible that such a tax liability, if recorded in the
future, could have a significant impact on the effective tax rate in the period that it is recorded.
During 2016, the Company recorded $18 million of tax credits, mainly research and experimentation credits,
which significantly impacted the effective tax rate. The effective tax rate for 2016 was also significantly
impacted by the Company’s foreign operations being taxed at lower statutory tax rates.
During 2015, the Company recorded $16 million of tax credits, mainly research and experimentation credits,
which significantly impacted the effective tax rate. The effective tax rate for 2015 was also impacted by the
manufacturing deduction in the U.S., enacted law changes in various U.S. states, and the impact of the
Company’s foreign operations being taxed at lower statutory tax rates.
Deferred tax assets and liabilities are based on tax rates that are expected to be in effect in future periods
when deferred items are expected to reverse. Changes in tax rates or tax laws affect the expected future benefit or
expense. The effect of such changes that occurred during each of the last three fiscal years is included in “Tax
rate changes” disclosed under the effective income tax rate reconciliation shown above.
98
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10. INCOME TAXES (CONTINUED)
DEFERRED TAX ASSETS AND LIABILITIES
The tax effects of significant temporary differences representing deferred tax assets and liabilities at
December 31, 2017 and December 31, 2016 are comprised of the following:
Accounting provisions
Net operating loss carryforwards and other deductions
Pension and other employee future benefit plans
Inventory
Tax credits
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Property, plant and equipment
Impact of foreign exchange on long-term debt
and investments
Intangible assets
Other
Total deferred tax liabilities
Net deferred tax liabilities
Included in:
Other assets (Note 15)
Deferred income taxes and other
Total
December 31,
2017
December 31,
2016
$
36
43
31
10
36
156
(25)
131
(436)
—
(131)
(16)
(583)
(452)
2
(454)
(452)
$
62
43
65
15
25
210
(22)
188
(648)
(8)
(152)
(10)
(818)
(630)
2
(632)
(630)
At December 31, 2017, the Company had less than $1 million of federal net operating loss carryforwards
remaining which expire in 2032. These U.S. federal net operating losses are subject to annual limitations under
Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), that can vary from year to year.
The Company also has other foreign net operating losses and deduction limitations of $150 million, which may
be carried forward indefinitely.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during periods in which temporary differences
become deductible.
The Company evaluates the realization of deferred tax assets on a quarterly basis. Evaluating the need for an
amount of a valuation allowance for deferred tax assets often requires significant judgment. All available
evidence, both positive and negative, is considered when determining whether, based on the weight of that
evidence, a valuation allowance is needed. Specifically, the Company evaluated the following items:
• Historical income / (losses) – particularly the most recent three-year period
• Reversals of future taxable temporary differences
99
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10. INCOME TAXES (CONTINUED)
•
Projected future income / (losses)
• Tax planning strategies
• Divestitures
Management believes that it is more likely than not that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets, with the exception of certain state credits for which a
valuation allowance of $6 million exists at December 31, 2017, and certain foreign loss carryforwards for which
a valuation allowance of $19 million exists at December 31, 2017. Of this amount, $3 million impacted tax
expense and the effective tax rate for 2017 (2016 – $(1) million; 2015 – $(1) million).
The Company historically has not provided for a U.S. income tax liability on undistributed earnings of its
foreign subsidiaries. The earnings of the foreign subsidiaries, which reflect full provision for income taxes, are
currently indefinitely reinvested in foreign operations. The Company is still analyzing the impact of the U.S. Tax
Reform on its cash repatriation strategies and a change could result in the need for the Company to record a tax
liability on the undistributed earnings of some or all of its foreign operations.
The U.S. Tax Reform also includes a base erosion provision for Global Intangible Low-Taxed Income
(“GILTI”). Beginning in 2018, the GILTI provisions require the Company to include in its U.S. income tax
return earnings of foreign subsidiaries that are in excess of an allowable return on the tangible assets of the
foreign subsidiaries. The Company is required to make an accounting policy election to either (1) treat taxes due
related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factor such
amounts into the measurement of deferred taxes (the “deferred method”). The Company is continuing to evaluate
the GILTI tax rules and has not yet adopted a policy to account for the related impacts.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
At December 31, 2017, the Company had gross unrecognized tax benefits of approximately $37 million
($43 million and $41 million for 2016 and 2015, respectively). If recognized in 2018, these tax benefits would
impact the effective tax rate. These amounts represent the gross amount of exposure in individual jurisdictions
and do not reflect any additional benefits expected to be realized if such positions were sustained, such as federal
deduction that could be realized if an unrecognized state deduction was not sustained.
Balance at beginning of year
Additions based on tax positions related to current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Reductions related to settlements with taxing authorities
Expirations of statutes of limitations
Interest
Foreign exchange impact
Balance at end of year
100
December 31,
2017
$
43
3
4
—
(1)
(13)
1
—
37
December 31,
2016
$
41
3
3
(2)
—
(3)
1
—
43
December 31,
2015
$
48
3
2
(1)
(4)
(7)
1
(1)
41
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10. INCOME TAXES (CONTINUED)
The Company recorded $1 million of accrued interest associated with unrecognized tax benefits for the
period ending December 31, 2017 ($1 million and $1 million for 2016 and 2015, respectively). The Company
recognizes accrued interest and penalties, if any, related to unrecognized tax benefits as a component of tax
expense. The Company believes it is reasonably possible that up to $8 million of its unrecognized tax benefits
may be recognized by December 31, 2018, which could significantly impact the effective tax rate. However, the
amount and timing of the recognition of these benefits is subject to some uncertainty.
The major jurisdictions where the Company and its subsidiaries will file tax returns for 2017, in addition to
filing one consolidated U.S. federal income tax return, are Canada, Sweden and Spain. The Company and its
subsidiaries will also file returns in various other countries in Europe and Asia as well as various U.S. states and
Canadian provinces. At December 31, 2017, the Company’s subsidiaries are subject to foreign federal income tax
examinations for the tax years 2007 through 2016, with federal years prior to 2014 being closed from a cash tax
liability standpoint in the U.S., but the loss carryforwards can be adjusted in any open year where the loss has
been utilized. The Company does not anticipate that adjustments stemming from these audits would result in a
significant change to the results of its operations and financial condition.
NOTE 11.
INVENTORIES
The following table presents the components of inventories:
Work in process and finished goods
Raw materials
Operating and maintenance supplies
December 31,
2017
December 31,
2016
$
399
135
223
757
$
413
132
214
759
101
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 12.
GOODWILL
Changes in the carrying value of goodwill are as follows:
Balance at beginning of year
Effect of foreign currency exchange rate change
Impairment of goodwill (Note 4)
Acquisition of HDIS (Note 3)
Balance at end of year
NOTE 13.
PROPERTY, PLANT AND EQUIPMENT
The following table presents the components of property, plant and equipment:
December 31,
2017
$
550
28
(578)
—
—
December 31,
2016
$
539
(6)
—
17
550
Machinery and equipment
Buildings and improvements
Timberlands
Assets under construction
Less: Accumulated depreciation
Range of
useful lives
(in years)
3 – 20
10 – 40
(1)
—
December 31,
2017
December 31,
2016
$
7,674
1,059
207
104
9,044
(6,279)
2,765
$
7,408
1,007
200
94
8,709
(5,884)
2,825
(1) Amortization is calculated using the unit of production method.
Depreciation expense related to property, plant and equipment for the year ended December 31, 2017 was
$302 million (2016 – $329 million; 2015 – $340 million).
102
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 14.
INTANGIBLE ASSETS
The following table presents the components of intangible assets:
Estimated useful lives
(in years)
December 31, 2017
December 31, 2016
Definite-lived intangible
assets
subject to amortization
Water rights
Customer relationships
Technology
Non-Compete
License rights
40
10 – 40
7 – 20
9
12
Indefinite-lived
intangible assets
not subject to
amortization
Water rights
Trade names
License rights
Catalog rights
Total
Gross carrying
amount
Accumulated
amortization
$
$
3
392
8
1
29
433
4
245
6
41
729
(1)
(79)
(4)
(1)
(11)
(96)
—
—
—
—
(96)
Net
$
2
313
4
—
18
337
4
245
6
41
633
Gross carrying
amount
Accumulated
amortization
$
$
3
369
8
1
28
409
4
225
6
36
680
(1)
(60)
(3)
—
(8)
(72)
—
—
—
—
(72)
Net
$
2
309
5
1
20
337
4
225
6
36
608
Amortization expense related to intangible assets for the year ended December 31, 2017 was $19 million
(2016 – $19 million; 2015 – $19 million).
Amortization expense for the next five years related to intangible assets is expected to be as follows:
Amortization expense related to intangible assets
2018
$
22
2019
$
21
2020
$
21
2021
$
21
2022
$
21
The Company performed its annual impairment test on its indefinite-lived intangible assets at October 1,
2017, 2016 and 2015, using a quantitative approach, except for the license rights and water rights, where the
Company used a qualitative approach, and determined that the estimated fair values of its indefinite-lived
intangible assets exceeded their carrying amounts. No impairment charge was recorded for indefinite-lived
intangible assets during 2017, 2016 or 2015.
103
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 15.
OTHER ASSETS
The following table presents the components of other assets:
Pension asset—defined benefit pension plans (Note 7)
Investment tax credits receivable
Unamortized debt issuance costs
Deferred income tax assets (Note 10)
Derivative financial instruments (Note 23)
Other
NOTE 16.
December 31,
2017
December 31,
2016
$
131
7
4
2
5
8
157
$
103
4
5
2
8
7
129
CLOSURE AND RESTRUCTURING COSTS AND LIABILITY
In the fourth quarter of 2016, as a result of a revision in the Company’s estimated withdrawal liability for
U.S. multiemployer plans, the Company recorded a credit of $4 million in Closure and restructuring costs on the
Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). At December 31, 2017, the total
provision for the withdrawal liabilities was $49 million.
Plymouth, North Carolina mill
On September 23, 2016, the Company announced a plan to optimize fluff pulp manufacturing at the
Plymouth, North Carolina mill. The restructuring, which is expected to be completed in 2018, includes the
permanent closure of a pulp dryer and idling of assets, in addition to a workforce reduction of approximately 100
to an annualized production target of
positions. The streamlining process will also right-size the mill
approximately 380,000 metric tons of fluff pulp. The Company recorded $5 million of severance and termination
costs under Closure and restructuring costs during the third quarter of 2016.
Ashdown, Arkansas mill
On December 10, 2014, the Company announced a project to convert a paper machine at its Ashdown,
Arkansas mill to a high quality fluff pulp line used in absorbent applications such as baby diapers, feminine
hygiene and adult incontinence products. The Company also invested in a pulp bale line that will provide
flexibility to manufacture papergrade softwood pulp, contingent on market conditions. The conversion work
commenced during the second quarter of 2016 and the production of bale softwood pulp began in the third
104
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 16. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)
quarter of 2016. The fluff pulp line will allow for the production of up to 516,000 metric tons of fluff pulp per
year once the machine is in full operation. The project resulted in the permanent reduction of 364,000 short tons
of annual uncoated freesheet production capacity on March 31, 2016.
The Company recorded $29 million for the year ended December 31, 2016, of accelerated depreciation
under Impairment of property, plant and equipment on the Consolidated Statement of Earnings (Loss) and
Comprehensive Income (Loss). During 2016, the Company also recorded $26 million of costs related to the fluff
pulp conversion outage and $1 million of severance and termination costs under Closure and restructuring costs.
The Company recorded $77 million for the year ended December 31, 2015, of accelerated depreciation
under Impairment of goodwill and property, plant and equipment on the Consolidated Statement of Earnings
(Loss) and Comprehensive Income (Loss). During 2015, the Company also recorded $3 million of severance and
termination costs under Closure and restructuring costs.
Other costs
During 2017, other costs related to previous and ongoing closures and restructuring included $2 million of
severance and termination costs (2016 – $3 million; 2015 – $1 million) and pension settlement costs of nil
(2016 – $1 million; 2015 – nil).
The following tables provide the components of closure and restructuring costs by segment:
Severance and termination costs
Closure and restructuring costs
Severance and termination costs
Pension settlement and withdrawal liability
Fluff pulp conversion outage
Closure and restructuring costs
Severance and termination costs
Closure and restructuring costs
105
Year ended
December 31, 2017
Pulp and Paper
Personal Care Total
$
—
—
$
2
2
Year ended
December 31, 2016
Pulp and Paper
$
8
(3)
26
31
Personal Care
$
1
—
—
1
$
2
2
Total
$
9
(3)
26
32
Year Ended
December 31, 2015
Pulp and Paper
Personal Care
Total
$
3
3
$
1
1
$
4
4
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 16. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)
The following table provides the activity in the closure and restructuring liability:
Balance at beginning of year
Additions
Payments
Balance at end of year
December 31,
2017
December 31,
2016
$
7
2
(2)
7
$
3
9
(5)
7
The $7 million provision is comprised of severance and termination costs of $6 million and $1 million in the
Pulp and Paper segment and Personal Care segment, respectively.
Closure and restructuring costs are based on management’s best estimates at December 31, 2017. Actual
costs may differ from these estimates due to subsequent developments such as the results of environmental
studies,
to be dismantled and demolished and other business
developments. As such, additional costs and further impairment charges may be required in future periods.
the ability to find a buyer for assets set
NOTE 17.
TRADE AND OTHER PAYABLES
The following table presents the components of trade and other payables:
Trade payables
Payroll-related accruals
Accrued interest
Payables on capital projects
Rebate accruals
Liability—pension and other post-retirement benefit plans (Note 7)
Liability—multiemployer plan withdrawal
Provision for environment and other asset retirement obligations (Note 22)
Closure and restructuring costs liability (Note 16)
Derivative financial instruments (Note 23)
Dividends payable (Note 21)
Stock-based compensation—liability awards
Other
106
December 31,
2017
December 31,
2016
$
382
164
16
11
72
5
2
13
7
7
26
6
5
716
$
332
160
16
13
62
4
2
15
7
11
26
2
6
656
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 18.
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
The following table presents the changes in Accumulated other comprehensive loss by component(1) for the
period ended December 31, 2017 and 2016.
Net derivative
(losses)
gains on cash flow
hedges
Pension
items(2)
Post-retirement
benefit items (2)
Foreign currency
items
Balance at December 31, 2015
Natural gas swap contracts
Net investment hedge
Currency options
Foreign exchange forward contracts
Net gain
Foreign currency items
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from Accumulated
other comprehensive loss
Net current period other comprehensive
income (loss)
Balance at December 31, 2016
Natural gas swap contracts
Currency options
Net (gain) loss
Foreign currency items
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from Accumulated
other comprehensive loss
Net current period other comprehensive (loss)
income
Balance at December 31, 2017
$
(30)
4
(1)
8
16
N/A
N/A
27
14
41
11
(5)
11
N/A
N/A
6
(9)
(3)
8
$
(190)
N/A
N/A
N/A
N/A
(38)
N/A
(38)
$
(10)
N/A
N/A
N/A
N/A
(1)
N/A
(1)
7
—
(31)
(221)
N/A
N/A
(6)
N/A
(6)
9
3
(218)
(1)
(11)
N/A
N/A
17
N/A
17
—
17
6
$
(271)
N/A
N/A
N/A
N/A
N/A
(7)
(7)
—
(7)
(278)
N/A
N/A
N/A
146
146
—
146
(132)
(1) All amounts are after tax. Amounts in parenthesis indicate losses.
(2) The accrued benefit obligation is actuarially determined on an annual basis as of December 31.
Total
$
(501)
4
(1)
8
16
(39)
(7)
(19)
21
2
(499)
(5)
11
11
146
163
—
163
(336)
107
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 18. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY
COMPONENT (CONTINUED)
The following table presents reclassifications out of Accumulated other comprehensive loss:
Details about Accumulated other comprehensive loss components
Net derivative (losses) gains on cash flow hedge
Natural gas swap contracts
Currency options and forwards
Total before tax
Tax benefit (expense)
Net of tax
Amortization of defined benefit pension items
Amortization of prior year service cost
Amortization of net actuarial loss
Total before tax
Tax expense
Net of tax
Amount reclassified from
Accumulated other
comprehensive loss (1)
Year ended
December 31,
2017
$
—
(14)
(14)
5
(9)
5
9
14
(5)
9
Year ended
December 31,
2016
$
Year ended
December 31,
2015
$
12
12
24
(10)
14
5
6
11
(4)
7
16 (2)
28 (2)
44
(18)
26
3 (3)
7 (3)
10
(3)
7
(1) Amounts in parentheses indicate losses.
(2) These amounts are included in Cost of sales in the Consolidated Statements of Earnings (Loss) and
Comprehensive Income (Loss).
(3) These amounts are included in the computation of net periodic benefit cost (see Note 7 “Pension Plans and
Other Post-Retirement Benefit Plans” for more details).
108
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 19.
LONG-TERM DEBT
Unsecured notes
10.75% Notes
4.4% Notes
6.25% Notes
6.75% Notes
Revolving Credit Facility
Term Loan
Securitization
Capital lease obligations and other
Less: Unamortized debt issuance costs
Less: Due within one year
Maturity
Amount Currency
Par
$
2017
63
2022
300
2042
250
2044
250
2021 —
300
2025
25
2019
2017 – 2032
US
US
US
US
US
US
US
December 31,
2017
$
December 31,
2016
$
—
300
249
249
—
300
25
14
1,137
7
1
1,129
63
300
249
249
50
300
70
8
1,289
8
63
1,218
Principal long-term debt repayments, including capital lease obligations, in each of the next five years will
amount to:
2018
2019
2020
2021
2022
Thereafter
Less: Amounts representing interest
Total payments
UNSECURED NOTES
Long-term debt
Capital leases
and other
$
—
25
—
—
300
800
1,125
—
1,125
$
2
2
2
2
2
9
19
5
14
The Company’s 10.75% Notes, in the aggregate principal amount of $63 million, matured on June 1, 2017.
The Company’s 9.5% Notes, in the aggregate principal amount of $39 million, matured on August 1, 2016.
The Company redeemed on August 20, 2015 (the redemption date), $55 million in aggregate principal
amount of its 9.5% Notes due 2016, representing approximately 59% of the outstanding notes, and $215 million
in aggregate principal amount of its 10.75% Notes due 2017, representing approximately 77% of the outstanding
notes. The redemption price for the notes was equal to 100% of the principal amount of such notes, plus accrued
and unpaid interest, plus a make-whole premium of $42 million that was incurred in the third quarter of 2015.
109
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 19. LONG-TERM DEBT (CONTINUED)
REVOLVING CREDIT FACILITY
In August 2016, the Company amended and restated its unsecured revolving credit facility (the “Credit
Agreement”) with certain domestic and foreign banks, increasing the amount available from $600 million to
$700 million. The amendment also extended the Credit Agreement’s maturity date from October 3, 2019 to
August 18, 2021. The amendment also allows certain foreign subsidiaries to be borrowers under the facility. The
maturity date of the facility may be extended by one year and the lender commitments may be increased by up to
$400 million, subject to lender approval and customary requirements.
Borrowings by the Company under the Credit Agreement are guaranteed by its significant domestic
subsidiaries. Borrowings by foreign borrowers under the Credit Agreement are guaranteed by the Company, the
Company’s significant domestic subsidiaries and certain of the Company’s significant foreign subsidiaries.
Borrowings under the Credit Agreement bear interest at LIBOR, EURIBOR, Canadian bankers’ acceptance
or prime rate, as applicable, plus a margin linked to the Company’s credit rating. In addition, the Company pays
facility fees quarterly at rates dependent on the Company’s credit ratings.
The Credit Agreement contains customary covenants and events of default for transactions of this type,
including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be
maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must
be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying
material acquisitions). At December 31, 2017, the Company was in compliance with these financial covenants,
and there were no borrowings (December 31, 2016 – $50 million was borrowed).
TERM LOAN
In the third quarter of 2015, a wholly owned subsidiary of Domtar borrowed $300 million under an
unsecured 10 year Term Loan Agreement with certain domestic banks.
The Company and certain significant domestic subsidiaries of the Company unconditionally guarantee any
obligations from time to time arising under the Term Loan Agreement.
Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 1.875%.
The Term Loan Agreement contains customary covenants, including two financial covenants: (i) an interest
coverage ratio, as defined in the Term Loan Agreement, that must be maintained at a level of not less than 3 to 1
and (ii) a leverage ratio, as defined in the Term Loan Agreement, that must be maintained at a level not greater
than 3.75 to 1. At December 31, 2017, the Company was in compliance with these financial covenants.
RECEIVABLES SECURITIZATION
The Company has a $150 million receivables securitization facility that matures in March 2019. This facility
provides additional liquidity to the Company to fund its operations or issue letters of credit. The costs under the
program vary based on changes in interest rates and amounts utilized.
Sales of receivables under this program are accounted for as secured borrowings. The program consists of
the ongoing sale of most of the receivables of its domestic subsidiaries to a bankruptcy remote consolidated
110
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 19. LONG-TERM DEBT (CONTINUED)
subsidiary which, in turn, transfers a senior beneficial interest in them to a special purpose entity managed by a
financial institution for multiple sellers of receivables to support borrowings or the issue of letters of credit by the
Company.
The program contains certain termination events, which include, but are not limited to, matters related to
receivable performance, certain defaults occurring under the 2016 Credit Agreement, or the failure by Domtar to
satisfy material obligations.
At December 31, 2017, $25 million was borrowed and $50 million of letters of credit were outstanding
under this facility (2016 – $70 million and $48 million, respectively).
In 2017, a net charge of $2 million (2016 – $2 million; 2015 – $1 million) resulted from the program
described above and was included in Interest expense, net in the Consolidated Statements of Earnings (Loss) and
Comprehensive Income (Loss).
NOTE 20.
OTHER LIABILITIES AND DEFERRED CREDITS
The following table presents the components of other liabilities and deferred credits:
.
December 31,
2017
December 31,
2016
Liability—other post-retirement benefit plans (Note 7)
Pension liability—defined benefit pension plans (Note 7)
Pension liability—multiemployer plan withdrawal
Long-term income taxes payable
Provision for environmental and asset retirement obligations (Note 22)
Stock-based compensation—liability awards
Derivative financial instruments (Note 23)
Other
$
71
130
47
42
31
20
5
22
368
$
86
141
48
—
35
17
10
21
358
ASSET RETIREMENT OBLIGATIONS
The asset retirement obligations are principally linked to landfill capping obligations and demolition of
certain abandoned buildings. At December 31, 2017, Domtar estimated the net present value of its asset
retirement obligations to be $15 million (2016 – $14 million); the present value is based on probability weighted
undiscounted cash outflows of $58 million (2016 – $58 million). The majority of the asset retirement obligations
are estimated to be settled prior to December 31, 2057. Domtar’s credit adjusted risk-free rates were used to
calculate the net present value of the asset retirement obligations. The rates used vary between 5.5% and 12.0%,
based on the prevailing rate at the moment of recognition of the liability and on its settlement period.
111
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 20. OTHER LIABILITIES AND DEFERRED CREDITS (CONTINUED)
The following table reconciles Domtar’s asset retirement obligations:
Asset retirement obligations, beginning of year
Asset retirement obligation payments
Accretion expense
Asset retirement obligations, end of year
December 31,
2017
December 31,
2016
$
14
—
1
15
$
14
(1)
1
14
NOTE 21.
SHAREHOLDERS’ EQUITY
During 2017, the Company declared four quarterly dividends of $0.415 per share, to holders of the
Company’s common stock. Dividends of $26 million were paid on April 17, 2017, July 17, 2017, October 16,
2017 and January 15, 2018, respectively, to shareholders of record as of April 3, 2017, July 3, 2017, October 2,
2017 and January 2, 2018, respectively.
During 2016, the Company declared one quarterly dividend of $0.40 per share and three quarterly dividends
of $0.415 per share, to holders of the Company’s common stock. The total dividends of approximately
$25 million, $26 million, $26 million and $26 million were paid on April 15, 2016, July 15, 2016, October 17,
2016 and January 17, 2017, respectively, to shareholders of record as of April 4, 2016, July 5, 2016, October 3,
2016 and January 3, 2017, respectively.
On January 29, 2018, the Company’s Board of Directors approved a quarterly dividend of $0.435 per share,
an increase of $0.02 or 4.8%, to be paid to holders of the Company’s common stock. This dividend is to be paid
on April 16, 2018 to shareholders of record on April 2, 2018.
STOCK REPURCHASE PROGRAM
The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to
$1.3 billion. Under the Program, the Company is authorized to repurchase, from time to time, shares of its
outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of
stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and
regulatory considerations. The Program may be suspended, modified or discontinued at any time, and the
Company has no obligation to repurchase any amount of its common stock under the Program. The Program has
no set expiration date. The Company repurchases its common stock in part to reduce the dilutive effects of stock
options and awards, and to improve shareholders’ returns.
The Company makes open market purchases of its common stock using general corporate funds.
the Company may enter into structured stock repurchase agreements with large financial
Additionally,
institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements
112
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 21. SHAREHOLDERS’ EQUITY (CONTINUED)
would require the Company to make up-front payments to the counterparty financial institutions, which would
result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment
at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements,
depending upon the price of the stock.
During 2017, there were no shares repurchased under the Program.
During 2016, the Company repurchased 304,915 shares (2015 – 1,210,932) at an average price of $32.21
(2015 – $41.40) for a total cost of $10 million (2015 – $50 million).
Since the inception of the Program, the Company repurchased 24,853,827 shares at an average price of
$39.33 for a total cost of $977 million. All shares repurchased are recorded as Treasury stock on the
Consolidated Balance Sheets under the par value method at $0.01 per share.
The authorized stated capital consists of the following:
PREFERRED SHARES
The Company is authorized to issue 20 million preferred shares, par value $0.01 per share. The Board of
Directors of the Company will determine the voting powers (if any) of the shares, and the preferences and
relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions
thereof, of the shares at the time of issuance. No preferred shares were outstanding at December 31, 2017 or
December 31, 2016.
COMMON STOCK
The Company is authorized to issue two billion shares of common stock, par value $0.01 per share. Holders
of the Company’s common stock are entitled to one vote per share.
The changes in the number of outstanding common stock and their aggregate stated value during the years
ended December 31, 2017 and December 31, 2016, were as follows:
Common stock
Balance at beginning of year
Shares issued
Treasury stock(1)
Balance at end of year
December 31, 2017
December 31, 2016
Number
of shares
$
Number
of shares
62,588,837
1 62,849,936
$
1
106,848 —
(261,099) —
62,695,685
1 62,588,837
1
(1) During 2017, the Company repurchased no shares through the Program (2016 – 304,915) and issued
106,848 shares (2016 – 43,816) out of Treasury stock in conjunction with the exercise of stock-based
compensation awards.
113
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22.
COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations enacted by federal, provincial, state and
local authorities.
In 2017,
the Company’s operating expenses for environmental matters amounted to $67 million
(2016 – $65 million; 2015 – $70 million).
The Company made
capital
expenditures
for
environmental matters of $2 million in 2017
(2016 – $4 million; 2015 – $7 million).
In connection with alleged contamination of a site bordering Burrard Inlet in North Vancouver, on
February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan International
Ltd. and the Company, in order to define and implement an action plan to address soil, sediment and groundwater
issues. Construction began in January 2017 and is expected to be completed in 2019. The Company previously
recorded an environmental reserve to address its estimated exposure. The possible cost in excess of the reserve is
not considered to be material for this matter.
The following table reflects changes in the reserve for environmental remediation and asset retirement
obligations:
Balance at beginning of year
Additions
Environmental spending
Effect of foreign currency exchange rate change
Balance at end of year(1)
December 31,
2017
December 31,
2016
$
50
4
(12)
2
44
$
52
2
(5)
1
50
(1) At December 31, 2017, $13 million is shown in Trade and other payables (see Note 17) and $31 million is
shown in Other liabilities and deferred credits (see Note 20).
At December 31, 2017, anticipated undiscounted payments in each of the next five years are as follows:
Environmental provision and asset retirement
obligations
2018
2019
2020
2021
2022
Thereafter
Total
$
14
$
3
$
2
$
2
$
1
$
65
$
87
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
114
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Compensation and Liability Act, commonly known as “Superfund,” and similar state laws with respect to other
hazardous waste sites as to which no proceedings have been instituted against the Company. The Company
continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a
number of operating sites due to possible soil, sediment or groundwater contamination.
Climate change regulation
Various national and local laws and regulations relating to climate change have been established or are
emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or
investments. The Company does not expect to be disproportionately affected by these measures compared with
other pulp and paper producers located in these jurisdictions.
The United States EPA Clean Power Plan regulation is being litigated and has been stayed. The EPA is also
proposing to repeal the Clean Power Plan in accordance with President Trump’s Executive Order issued on
March 28, 2017, and the EPA has separately requested comment on whether to replace the Clean Power Plan
with another rule consistent with the new Administration’s interpretation of the Clean Air Act. The EPA has filed
a motion with the D.C. Circuit to hold the case in abeyance while it reconsiders the rule, which the D.C. Circuit
granted in part to allow time for additional briefing on how and whether the litigation should proceed. Regardless
of the outcome for the Clean Power Plan, 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 Government of Canada is reviewing national policies to further reduce greenhouse gases (“GHG”) and
has announced its intent to impose a cost on carbon emissions. The Company does not expect its facilities to be
disproportionately affected by these measures compared with other pulp and paper producers in Canada.
The provinces of Quebec and Ontario have GHG cap-and-trade systems 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
to be disproportionately affected compared with other pulp and paper producers located in these
provinces.
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 December 31, 2017, 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.
Spanish Competition Investigation
On October 15, 2015, the Competition Directorate of Spain’s National Commission of Markets and
Competition (“CNMC”) filed a Statement of Objections against a number of industry participants alleging the
existence of a series of agreements between manufacturers, distributors and pharmacists to fix prices and to
allocate margins for heavy adult incontinence products within the pharmacy channel in Spain during the period
from December 1996 through January 2014. Among the parties named in the Statement of Objections was Indas,
which the Company acquired in January 2014, and two of its affiliates.
115
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 4, 2016, the Competition Directorate issued a proposed decision confirming the allegations of
the Statement of Objections. The proposed decision recommended the imposition of fines on the parties without
recommending the amount of any fines. The Company recorded a €0.2 million ($0.2 million) provision in the
fourth quarter of 2015 in Other operating (income) loss, net.
On May 26, 2016, the CNMC rendered its final decision, which declared that a number of manufacturers of
heavy adult incontinence products, the sector association and certain individuals participated in price fixing
during the period from December 1996 through January 2014. Indas and one of its subsidiaries were fined a total
of €13.5 million ($14.9 million) for their participation. A provision was recorded in the second quarter of 2016 in
the amount of €13.3 million ($14.7 million) in Other operating (income) loss, net.
The sellers of Indas made representations and warranties to the Company in the purchase agreement
regarding, among other things, Indas’ and its subsidiary’s compliance with competition laws. The liability
retained by the sellers was backed by a retained purchase price of €3 million ($3.3 million) and bank guarantees
of €9 million ($9.9 million).
On June 27, 2016, in light of the CNMC decision, the sellers, in terms of their indemnity obligations, agreed
to the appropriation by the Company of the retained purchase price and the release of the bank guarantees.
Accordingly, a recovery of €12 million ($13.2 million) was recorded in the second quarter of 2016 and included
in Other operating (income) loss, net.
In July 2016, the fines were paid and Indas and two of its affiliates named in the final decision appealed the
decision to the Spanish courts.
The Company purchased limited insurance coverage with respect to the purchase agreement, and is seeking
to recover the remaining €1.5 million ($1.7 million) under the insurance policy. Any recovery from the insurers
would be recorded in the period when the proceeds are received.
LEASE AND OTHER COMMERCIAL COMMITMENTS
The Company has entered into operating leases for property, plant and equipment. The Company also has
commitments to purchase property, plant and equipment, roundwood, wood chips, gas and certain chemicals.
Purchase orders in the normal course of business are excluded from the table below. Any amounts for which the
Company is liable under purchase orders are reflected in the Consolidated Balance Sheets as Trade and other
payables. Minimum future payments under these operating leases and other commercial commitments,
determined at December 31, 2017, were as follows:
Operating leases
Other commercial commitments
2018
$
27
68
2019
$
23
14
2020
$
19
2
2021
$
$
15
12
1 —
$
29
1
Total
$
125
86
2022 Thereafter
Total operating lease expense amounted to $31 million in 2017 (2016 – $28 million; 2015 – $28 million).
116
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)
INDEMNIFICATIONS
In the normal course of business, the Company offers indemnifications relating to the sale of its businesses
and real estate. In general, these indemnifications may relate to claims from past business operations, the failure
to abide by covenants and the breach of representations and warranties included in the sales agreements.
Typically, such representations and warranties relate to taxation, environmental, product and employee matters.
The terms of these indemnification agreements are generally for an unlimited period of time. At December 31,
2017, 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
time. Accordingly, no provision has been recorded. These
cannot be reasonably estimated at
indemnifications have not yielded a significant expense in the past.
this
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 December 31, 2017 the Company has not
recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining
to these indemnifications.
NOTE 23.
DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
HEDGING PROGRAMS
The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices and
interest rates. To the extent the Company decides to manage the volatility related to these exposures, the
Company may enter into various financial derivatives that are accounted for under the derivatives and hedging
guidance. These transactions are governed by the Company’s hedging policies which provide direction on
acceptable hedging activities, including instrument type and acceptable counterparty exposure.
Upon inception, the Company formally documents the relationship between hedging instruments and
hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial
instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair
value of the underlying exposures. The ineffective portion of the qualifying instrument
is immediately
recognized to earnings. The amount of ineffectiveness recognized was immaterial for all years presented. The
Company does not hold derivative financial instruments for trading purposes.
117
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
CREDIT RISK
The Company is exposed to credit risk on accounts receivables from its customers. In order to reduce this
risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of
existing customers’ credit performance. As of December 31, 2017, one of Domtar’s Pulp and Paper segment
customers located in the U.S. represented 12% or $83 million (2016 – 12% or $74 million) of the Company’s
receivables.
The Company is exposed to credit risk in the event of non-performance by counterparties to its financial
instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that
are believed to be of high credit quality. Collateral or other security to support financial instruments subject to
credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.
INTEREST RATE RISK
The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash
equivalents, bank indebtedness, revolving credit facility and securitization, term loan and long-term debt. The
Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this
interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it
agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an
agreed upon notional principal amount. In December 2014, the Company entered into a $100 million notional 2.5
year fixed to floating interest rate swap. This swap was designated as a fair value hedge for a portion of its
10.75% Notes due June 2017. The changes in fair value of both the hedging and the hedged item were
immediately recognized in interest expense. In August 2015, the Company terminated this swap simultaneously
with the redemption of $215 million of its 10.75% Notes, with no significant impact on net earnings.
COST RISK
Cash flow hedges:
The Company is exposed to price volatility for raw materials and energy used in its manufacturing process.
The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company
purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow
and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural
gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other
comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the
hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over
the next 54 months.
118
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
The following table presents the volumes under derivative financial instruments for natural gas contracts
outstanding as of December 31, 2017 to hedge forecasted purchases:
Commodity
Natural gas
2018
2019
2020
2021
2022
Notional contractual
quantity under derivative
contracts MMBTU (1)
Notional contractual value
under derivative contracts
(in millions of dollars)
Percentage of forecasted
purchases under
derivative contracts
12,695,000
11,430,000
8,880,000
3,920,000
2,070,000
$38
$34
$27
$12
$ 6
51%
45%
35%
16%
8%
(1) MMBTU: Millions of British thermal units
The natural gas derivative contracts were fully effective as of December 31, 2017. There were no amounts
reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the year
ended December 31, 2017 resulting from hedge ineffectiveness (2016 and 2015 – nil).
FOREIGN CURRENCY RISK
Cash flow hedges:
The Company has manufacturing operations in the United States, Canada and Europe. As a result, it is
exposed to movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and
liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency
movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the
Canadian dollar and European currencies. The Company’s European subsidiaries are also exposed to movements
in foreign currency exchange rates on transactions denominated in a currency other than their Euro functional
currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to
fluctuations in foreign currency exchange rates for periods up to 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 18 months and to hedge a portion of forecasted sales by its U.S. subsidiaries in British
pounds over the next 3 months. Derivatives are also currently used to hedge a portion of forecasted sales in
British pounds and Norwegian krone and a portion of forecasted purchases in U.S. dollars and Swedish krona by
its European subsidiaries over the next 12 months. Such derivatives are designated as cash flow hedges. The
changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the
extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction
affects earnings.
119
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
The following table presents the currency values under significant currency positions pursuant to currency
derivatives outstanding as of December 31, 2017 to hedge forecasted purchases and sales:
Currency exposure
hedged
Business Segment
CDN/USD
USD/Euro
Pulp and Paper
Personal Care
Year of
maturity
2018
2019
Notional
contractual
value
Percentage of
forecasted net
exposures under
contracts
Average
Protection rate
Average
Obligation rate
482 CDN
63 USD
60%
89%
1 USD = 1.2864 1 USD = 1.3395
1 Euro = 1.1776
1 Euro = 1.1593
CDN/USD
Pulp and Paper
109 CDN
14%
1 USD = 1.2875 1 USD = 1.3451
The foreign exchange derivative contracts were fully effective as of December 31, 2017. There were no
amounts reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the
year ended December 31, 2017 resulting from hedge ineffectiveness (2016 and 2015 – nil).
FAIR VALUE MEASUREMENT
The accounting standards for fair value measurements and disclosures, establishes a fair value hierarchy,
which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial
instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available
and significant to the fair value measurement.
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices in active markets for identical assets and
liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or
other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 Inputs that are generally unobservable and typically reflect management’s estimates of
assumptions that market participants would use in pricing the asset or liability.
120
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. 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) below) at December 31, 2017 and
December 31, 2016, 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:
Derivatives designated as hedging
instruments:
Asset derivatives
Currency derivatives
Natural gas swap contracts
Currency derivatives
Natural gas swap contracts
Total Assets
Liabilities derivatives
Currency derivatives
Natural gas swap contracts
Currency derivatives
Natural gas swap contracts
Total Liabilities
Other Instruments:
Stock-based compensation—
liability awards
Stock-based compensation—
liability awards
Long-term debt
December 31,
2017
Quoted prices in
active markets for
identical assets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
$
$
Balance sheet classification
16
—
4
1
21
5
2
—
5
12
6
20
—
—
—
—
—
—
—
—
—
—
6
20
16
—
4
1
21
5
2
5
—
12
—
—
1,216
—
1,216
—
—
—
—
—
—
—
—
—
—
—
—
—
(a) Prepaid expenses
(a) Prepaid expenses
(a) Other assets
(a) Other assets
(a) Trade and other
payables
(a) Trade and other
payables
(a) Other liabilities and
deferred credits
(a) Other liabilities and
deferred credits
Trade and other
payables
Other liabilities and
deferred credits
(b) Long-term debt
The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts
is $6 million at December 31, 2017, of which a loss of $2 million will be recognized in Cost of sales upon
maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from
those at December 31, 2017.
121
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and
forwards hedging forecasted purchases is $15 million at December 31, 2017, of which a gain of $11 million will
be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then
prevailing values, which may be different from those at December 31, 2017.
December 31,
2016
$
Quoted prices in
active markets for
identical assets
(Level 1)
$
Significant
observable
inputs
(Level 2)
$
Significant
unobservable
inputs
(Level 3)
$
Balance sheet classification
Fair Value of financial instruments at:
Derivatives designated as hedging
instruments:
Asset derivatives
Currency derivatives
Natural gas swap contracts
Currency derivatives
Natural gas swap contracts
Total Assets
Liabilities derivatives
Currency derivatives
Natural gas swap contracts
Currency derivatives
Natural gas swap contracts
Total Liabilities
Other Instruments:
Stock-based
compensation—liability awards
Stock-based
18
6
6
2
32
10
1
6
4
21
2
compensation—liability awards
Long-term debt
17
1,313
—
—
—
—
—
—
—
—
—
—
2
17
—
18
6
6
2
32
10
1
6
4
21
—
—
1,313
—
—
—
—
—
—
—
—
—
—
—
—
—
(a) Prepaid expenses
(a) Prepaid expenses
(a) Other assets
(a) Other assets
(a) Trade and other
payables
(a) Trade and other
payables
(a) Other liabilities and
deferred credits
(a) Other liabilities and
deferred credits
Trade and other
payables
Other liabilities and
deferred credits
(b) Long-term debt
(a) Fair value of the Company’s derivatives is classified under Level 2 (inputs that are observable; directly or
indirectly) as it is measured as follows:
•
•
For currency derivatives: Fair value is measured using techniques derived from the Black-Scholes
pricing model. Interest rates, forward market rates and volatility are used as inputs for such valuation
techniques.
For natural gas contracts: Fair value is measured using the discounted difference between contractual
rates and quoted market future rates.
(b) Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The
Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at December 31,
122
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
2017 and December 31, 2016. However, fair value disclosure is required. The carrying value of the
Company’s long-term debt is $1,130 million and $1,281 million at December 31, 2017 and December 31,
2016, 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.
NOTE 24.
SEGMENT DISCLOSURES
The Company’s two reportable segments described below also represent its two operating segments. Each
reportable segment offers different products and services and requires different manufacturing processes,
technology and/or marketing strategies. The following summary briefly describes the operations included in each
of the Company’s reportable segments:
• Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication,
specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.
• Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent
hygiene products.
The accounting policies of the reportable segments are the same as those described in Note 1. The Company
evaluates segment performance based on operating income. Transfer prices between segments are based on
market prices. Certain Corporate general and administrative costs are allocated to the segments. Corporate costs
that are not related to segment activities, as well as the mark-to-market impact on stock based compensation
awards, are presented on the Corporate line. The Company does not allocate interest expense and income taxes to
the segments. Segment assets are those directly used in segment operations.
The Company attributes sales to customers in different geographical areas on the basis of the location of the
customer.
Long-lived assets consist of property, plant and equipment, intangible assets and goodwill used in the
generation of sales in the different geographical areas.
123
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SEGMENT DISCLOSURES (CONTINUED)
An analysis and reconciliation of
the Company’s business segment
information to the respective
information in the financial statements is as follows:
Year ended
December 31,
2017
$
Year ended
December 31,
2016
$
Year ended
December 31,
2015
$
4,216
1,005
5,221
(64)
5,157
2,382
651
1,119
1,005
5,157
254
67
321
578
—
899
250
(527)
(40)
(317)
66
(383)
(125)
(258)
4,239
917
5,156
(58)
5,098
2,571
680
930
917
5,098
284
64
348
—
29
377
217
57
(51)
223
66
157
29
128
4,458
869
5,327
(63)
5,264
2,736
718
941
869
5,264
297
62
359
—
77
436
270
61
(43)
288
132
156
14
142
SEGMENT DATA
Sales
Pulp and Paper
Personal Care
Total for reportable segments
Intersegment sales
Consolidated sales(1)
Sales by product group
Communication papers
Specialty and packaging papers
Market pulp
Absorbent hygiene products
Consolidated sales(1)
Depreciation and amortization
Pulp and Paper
Personal Care
Total for reportable segments
Impairment of goodwill—Personal Care
Impairment of property, plant and equipment—Pulp and
Paper
Consolidated depreciation and amortization and impairment of
goodwill and property, plant and equipment
Operating income (loss)
Pulp and Paper
Personal Care
Corporate
Consolidated operating (loss) income
Interest expense, net
(Loss) earnings before income taxes
Income tax (benefit) expense
Net (loss) earnings
124
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SEGMENT DISCLOSURES (CONTINUED)
(1)
In 2017 and 2016, Staples, one of the Company’s largest customers in the Pulp and Paper segment,
represented approximately 10% (2016 – 11%) of the total sales.
December 31,
2017
December 31,
2016
$
$
3,649
1,406
5,055
157
5,212
3,637
1,884
5,521
159
5,680
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$
128
48
176
4
180
2
182
$
287
55
342
4
346
1
347
$
221
57
278
6
284
5
289
Year ended
December 31,
2017
$
Year ended
December 31,
2016
$
Year ended
December 31,
2015
$
3,486
474
619
444
134
5,157
3,571
493
605
351
78
5,098
3,776
492
561
302
133
5,264
Segment assets
Pulp and Paper
Personal Care
Total for reportable segments
Corporate
Consolidated assets
Additions to property, plant and equipment
Pulp and Paper
Personal Care
Total for reportable segments
Corporate
Consolidated additions to property, plant and equipment
Add: Change in payables on capital projects
Consolidated additions to property, plant and equipment per
Consolidated Statements of Cash Flows
Geographic information
Sales
United States
Canada
Europe
Asia
Other foreign countries
125
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SEGMENT DISCLOSURES (CONTINUED)
Long-lived assets
United States
Canada
Europe
December 31,
2017
$
December 31,
2016
$
2,136
677
585
3,398
2,589
642
752
3,983
NOTE 25.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with
the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar Paper
Company, LLC, a 100% owned subsidiary of the Company, Domtar Industries LLC (and subsidiaries, excluding
Domtar Funding LLC), Domtar A.W. LLC, Attends Healthcare Products Inc., EAM Corporation, Associated
Hygienic Products LLC and Home Delivery Incontinent Supplies Co., all 100% owned subsidiaries of the
Company (“Guarantor Subsidiaries”), on a joint and several basis. Pursuant to the amendment and restatement of
the 2016 Credit Agreement on August 18, 2016, the Guaranteed Debt will not be guaranteed by certain of
Domtar’s 100% owned subsidiaries; including Domtar Delaware Holdings Inc. and its foreign subsidiaries,
including Attends Healthcare Limited, Domtar Inc. and Laboratorios Indas, S.A.U.. Also excluded are Ariva
Distribution Inc., Domtar Delaware Investments Inc., Domtar Delaware Holdings, LLC, Domtar AI Inc., Domtar
Personal Care Absorbent Hygiene Inc., Domtar Wisconsin Dam Corp. and Palmetto Enterprises LLC,
(collectively the “Non-Guarantor Subsidiaries”). The subsidiary’s guarantee may be released in certain
customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of
the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the
indenture have been satisfied.
126
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
The following supplemental condensed consolidating financial information sets forth, on an unconsolidated
basis,
the Balance Sheets at December 31, 2017 and 2016 and the Statements of Earnings (Loss) and
Comprehensive Income (Loss) and Cash Flows for the years ended December 31, 2017, 2016 and 2015 for
Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined
basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects
the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor
Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method.
Year ended December 31, 2017
Non-
Guarantor
Subsidiaries
$
2,062
Consolidating
Adjustments
Consolidated
$
(1,148)
$
5,157
1,590
88
305
265
—
(15)
2,233
(171)
(83)
(88)
45
—
(133)
170
37
(1,148)
—
—
—
—
—
(1,148)
—
—
—
—
310
310
(345)
(35)
4,131
321
456
578
2
(14)
5,474
(317)
66
(383)
(125)
—
(258)
163
(95)
CONDENSED CONSOLIDATING STATEMENT
OF LOSS AND COMPREHENSIVE INCOME (LOSS)
Parent
Guarantor
Subsidiaries
Sales
Operating expenses
Cost of sales, excluding depreciation and
amortization
Depreciation and amortization
Selling, general and administrative
Impairment of goodwill
Closure and restructuring costs
Other operating loss (income), net
Operating loss
Interest expense (income), net
Loss before income taxes
Income tax expense (benefit)
Share in earnings of equity accounted investees
Net loss
Other comprehensive income
Comprehensive (loss) income
$
4,243
3,689
233
142
313
2
1
4,380
(137)
86
(223)
(179)
(133)
(177)
175
(2)
$
—
—
—
9
—
—
—
9
(9)
63
(72)
9
(177)
(258)
163
(95)
127
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2016
CONDENSED CONSOLIDATING STATEMENT
OF EARNINGS AND COMPREHENSIVE INCOME
Parent
Guarantor
Subsidiaries
Sales
Operating expenses
Cost of sales, excluding depreciation and
amortization
Depreciation and amortization
Selling, general and administrative
Impairment of property, plant and equipment
Closure and restructuring costs
Other operating loss (income), net
Operating (loss) income
Interest expense (income), net
(Loss) earnings before income taxes
Income tax (benefit) expense
Share in earnings of equity accounted investees
Net earnings
Other comprehensive income (loss)
Comprehensive income
$
—
$
4,203
—
—
17
—
—
1
18
(18)
65
(83)
(43)
168
128
2
130
3,638
256
93
29
31
(1)
4,046
157
50
107
36
97
168
(12)
156
Non-
Guarantor
Subsidiaries
$
2,040
1,542
92
317
—
1
4
1,956
84
(49)
133
36
—
97
(35)
62
Consolidating
Adjustments
Consolidated
$
(1,145)
(1,145)
—
—
—
—
—
(1,145)
—
—
—
—
(265)
(265)
47
(218)
$
5,098
4,035
348
427
29
32
4
4,875
223
66
157
29
—
128
2
130
128
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2015
CONDENSED CONSOLIDATING STATEMENT
OF EARNINGS AND COMPREHENSIVE LOSS
Parent
Guarantor
Subsidiaries
Sales
Operating expenses
Cost of sales, excluding depreciation and
amortization
Depreciation and amortization
Selling, general and administrative
Impairment of property, plant and equipment
Closure and restructuring costs
Other operating loss (income), net
Operating (loss) income
Interest expense (income), net
(Loss) earnings before income taxes
Income tax (benefit) expense
Share in earnings of equity accounted investees
Net earnings
Other comprehensive loss
Comprehensive loss
$
—
—
—
11
—
—
5
16
(16)
131
(147)
(63)
226
142
(233)
(91)
$
4,346
3,726
256
105
77
3
(3)
4,164
182
30
152
38
112
226
(235)
(9)
Non-
Guarantor
Subsidiaries
$
2,070
Consolidating
Adjustments
Consolidated
$
(1,152)
$
5,264
1,573
103
278
—
1
(7)
1,948
122
(29)
151
39
—
112
(215)
(103)
(1,152)
—
—
—
—
—
(1,152)
—
—
—
—
(338)
(338)
450
112
4,147
359
394
77
4
(5)
4,976
288
132
156
14
—
142
(233)
(91)
129
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
Parent
December 31, 2017
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
$
$
$
$
$
Assets
Current assets
Cash and cash equivalents
Receivables
Inventories
Prepaid expenses
Income and other taxes receivable
Intercompany accounts
Total current assets
Property, plant and equipment, net
Intangible assets, net
Investments in affiliates
Intercompany long-term advances
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Trade and other payables
Intercompany accounts
Income and other taxes payable
Long-term debt due within one year
Total current liabilities
Long-term debt
Intercompany long-term loans
Deferred income taxes and other
Other liabilities and deferred credits
Shareholders’ equity
3
—
—
5
7
380
395
—
—
3,892
6
22
4,315
55
244
1
—
300
792
674
—
66
2,483
14
402
522
22
1
314
1,275
1,870
268
2,609
81
24
6,127
424
63
14
—
501
300
925
356
153
3,892
122
302
235
6
16
45
726
895
365
—
1,513
129
3,628
237
432
9
1
679
37
1
153
149
2,609
—
—
—
—
—
(739)
(739)
—
—
(6,501)
(1,600)
(18)
(8,858)
—
(739)
—
—
(739)
—
(1,600)
(18)
—
(6,501)
139
704
757
33
24
—
1,657
2,765
633
—
—
157
5,212
716
—
24
1
741
1,129
—
491
368
2,483
Total liabilities and shareholders’
equity
4,315
6,127
3,628
(8,858)
5,212
130
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
Parent
December 31, 2016
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
$
$
$
$
$
Assets
Current assets
Cash and cash equivalents
Receivables
Inventories
Prepaid expenses
Income and other taxes receivable
Intercompany accounts
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Investments in affiliates
Intercompany long-term advances
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness
Trade and other payables
Intercompany accounts
Income and other taxes payable
Long-term debt due within one year
Total current liabilities
Long-term debt
Intercompany long-term loans
Deferred income taxes and other
Other liabilities and deferred credits
Shareholders’ equity
17
—
—
15
—
331
363
—
—
—
3,976
6
15
4,360
—
48
136
16
63
263
841
560
—
20
2,676
14
305
548
19
16
184
1,086
2,000
313
279
2,678
80
18
6,454
12
391
115
—
—
518
299
937
556
168
3,976
94
308
211
6
15
47
681
825
237
329
—
1,411
103
3,586
—
217
311
6
—
534
78
—
126
170
2,678
—
—
—
—
—
(562)
(562)
—
—
—
(6,654)
(1,497)
(7)
(8,720)
—
—
(562)
—
—
(562)
—
(1,497)
(7)
—
(6,654)
125
613
759
40
31
—
1,568
2,825
550
608
—
—
129
5,680
12
656
—
22
63
753
1,218
—
675
358
2,676
Total liabilities and shareholders’
equity
4,360
6,454
3,586
(8,720)
5,680
131
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2017
471
338
(83)
19
(8)
(72)
—
—
—
45
(90)
(1)
(202)
—
—
Consolidating
Adjustments Consolidated
$
310
(310)
—
—
—
—
—
—
—
—
—
—
—
202
(202)
—
—
—
—
—
—
$
(258)
707
449
(182)
19
(8)
(171)
(104)
(12)
(50)
45
(90)
(64)
—
—
1
(274)
4
10
125
139
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
$
$
Parent
$
(258)
(177)
(133)
CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS
Operating activities
Net loss
Changes in operating and intercompany assets and
liabilities and non-cash items, included in net loss
Cash flows from operating activities
287
29
259
82
(99)
—
—
(99)
Investing activities
—
Additions to property, plant and equipment
Proceeds from disposals of property, plant and equipment —
—
Acquisition of business, net of cash acquired
Cash flows used for investing activities
—
Financing activities
Dividend payments
Net change in bank indebtedness
Change in revolving credit facility
Proceeds from receivables securitization facilities
Repayments of receivables securitization facilities
Repayments of long-term debt
Increase in long-term advances to related parties
Decrease in long-term advances to related parties
Other
(12)
(104) —
—
(50) —
—
—
—
—
(63) —
—
—
173
29
—
1
Cash flows (used for) provided from financing
activities
Net (decrease) increase in cash and cash equivalents
Impact of foreign exchange on cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(43)
17
(248)
(14) —
—
—
14
17
3
14
18
10
94
122
132
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS
Parent
$
$
Operating activities
Net earnings
Changes in operating and intercompany assets and
128
168
liabilities and non-cash items, included in net earnings (4,280)
4,149
Cash flows (used for) provided from operating
activities
(4,152)
4,317
Year ended December 31, 2016
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments Consolidated
$
97
203
300
(82)
1
(45)
1
(265)
—
(1)
—
—
—
—
—
—
(266)
(125)
(102) —
(10) —
12
—
—
—
—
—
(38)
(1)
— (4,050)
4,273
—
(3) —
—
—
—
140
(70)
(1)
(223)
—
—
4,120
(4,039)
(154)
(32)
—
49
17
12
—
2
14
21
(2)
75
94
$
(265)
265
—
—
—
—
—
—
—
—
—
—
—
—
4,273
(4,273)
—
—
—
—
—
—
$
128
337
465
(347)
1
(46)
1
(391)
(102)
(10)
12
140
(70)
(40)
—
—
(3)
(73)
1
(2)
126
125
Investing activities
Additions to property, plant and equipment
Proceeds from disposals of property, plant and equipment
and sale of business
Acquisition of businesses, net of cash acquired
Other
Cash flows used for investing activities
Financing activities
Dividend payments
Stock repurchase
Net change in bank indebtedness
Proceeds from receivables securitization facilities
Repayments of receivables securitization facilities
Repayments of long-term debt
Increase in long-term advances to related parties
Decrease in long-term advances to related parties
Other
Cash flows provided from (used for) financing
activities
Net (decrease) increase in cash and cash equivalents
Impact of foreign exchange on cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
133
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2015
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS
Operating activities
Net earnings
Changes in operating and intercompany assets and
liabilities and non-cash items, included in net
earnings
Cash flows provided from (used for) operating
activities
Investing activities
Additions to property, plant and equipment
Proceeds from disposals of property, plant and
equipment
Other
Cash flows provided from (used for) investing
activities
Financing activities
Dividend payments
Stock repurchase
Net change in bank indebtedness
Change of revolving credit facility
Issuance of long-term debt
Repayments of long-term debt
Increase in long-term advances to related parties
Decrease in long-term advances to related parties
Other
Parent
$
Guarantor
Subsidiaries
$
142
226
134
(250)
276
(24)
$
112
89
201
—
(210)
(79)
—
1
1
(100)
(50)
—
50
—
(436)
—
227
2
7
—
28
9
(203)
(42)
—
—
(11)
—
300
(2)
(75)
—
(1)
—
—
—
—
—
(1)
(152)
—
—
Cash flows (used for) provided from financing
activities
(307)
211
(153)
Net (decrease) increase in cash and cash
equivalents
Impact of foreign exchange on cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(30)
—
79
49
(16)
—
18
2
6
(8)
77
75
134
$
(338)
338
—
—
—
—
—
—
—
—
—
—
—
227
(227)
—
—
—
—
—
—
$
142
311
453
(289)
36
9
(244)
(100)
(50)
(11)
50
300
(439)
—
—
1
(249)
(40)
(8)
174
126
Domtar Corporation
Interim Financial Results (Unaudited)
(in millions of dollars, unless otherwise noted)
2017
Sales
Operating income (loss)
Earnings (loss) before income taxes
Net earnings (loss)
Basic net earnings (loss) per common share
Diluted net earnings (loss) per common share
2016
Sales
Operating income
Earnings before income taxes
Net earnings
Basic net earnings per common share
Diluted net earnings per common share
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
$1,304
42
25
20
0.32
0.32
$1,224
64
47
38
0.61
0.61
$1,292
$1,337
$5,157
(317)
(383)
(258)
(4.11)
(4.11)
(512) (b)
(528)
(386) (g)
(6.16)
(6.16)
89 (a)
73
70
1.12
1.11
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$1,287
$1,267
$1,270
$1,274
18 (c)
1
4
0.06
0.06
39 (d)
24
18
0.29
0.29
92 (e)
75
59
0.94
0.94
74 (f)
57
47
0.75
0.75
Year
$5,098
223
157
128
2.04
2.04
(a) The operating income for the third Quarter of 2017 included the partial reversal of contingent consideration
provision of $2 million related to our Corporate segment.
The Company also recorded a gain on disposal of property, plant and equipment of $4 million related to our
Pulp and Paper segment.
(b) The operating loss for the fourth Quarter of 2017 included a goodwill impairment charge of $578 million
and closure and restructuring costs of $2 million, both associated with our Personal Care segment.
The Company also recorded a gain on disposal of property, plant and equipment of $9 million related to our
Corporate segment.
(c) The operating income for the first Quarter of 2016 included closure and restructuring costs of $2 million
related to our Pulp and Paper segment.
The Company also incurred an additional $21 million of accelerated depreciation at its Ashdown, Arkansas
mill, as part of the conversion to the fluff pulp line.
(d) The operating income for the second Quarter of 2016 included closure and restructuring costs of $21 million
and an additional $3 million of accelerated depreciation at its Ashdown, Arkansas mill, as part of the
conversion to the fluff pulp line.
(e) The operating income for the third Quarter of 2016 included closure and restructuring costs of $5 million
related to our Pulp and Paper segment.
The Company also incurred $5 million of closure and restructuring costs and an additional $5 million of
accelerated depreciation at its Ashdown, Arkansas mill, as part of the conversion to the fluff pulp line.
(f) The operating income for the fourth Quarter of 2016 included closure and restructuring costs of $1 million
related to our Personal Care segment and $(2) million related to our Pulp and Paper segment.
(g) The net loss for the fourth Quarter of 2017 included a net tax benefit of $140 million related to the U.S. Tax
Reform, which is composed of a benefit of $186 million for the remeasurement of deferred tax assets and
liabilities and a charge of $46 million for the repatriation tax.
135
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has nothing to report under this item.
ITEM 9A. 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 December 31, 2017, 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 at December 31, 2017, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting,
management has conducted an assessment, including testing, using the criteria established in the 2013 Internal
Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. The Company’s internal
control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States of America,
and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company maintained effective internal control
over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control –
Integrated Framework issued by the COSO.
The effectiveness of the Company’s internal control over financial reporting as at December 31, 2017 has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in
their report, which is included under Item 8, Financial Statements and Supplementary Data.
136
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 fourth quarter ended
December 31, 2017.
ITEM 9B. OTHER INFORMATION
The Company has nothing to report under this item.
137
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information included under the captions “Governance of the Corporation”, “Election of Directors” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for the 2018 Annual
Meeting of Stockholders, to be filed on or about March 31, 2018, is incorporated herein by reference.
Information regarding our executive officers is presented in Item 1, Business, under the caption “Our
Executive Officers”.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption “Compensation Discussion and Analysis”, “Executive
Compensation” and “Director Compensation” in our Proxy Statement for the 2018 Annual Meeting of
Stockholders, to be filed on or about March 31, 2018, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information appearing under the caption “Security Ownership of Certain Beneficial Owners, Directors
and Officers” in our Proxy Statement for the 2018 Annual Meeting of Stockholders, to be filed on or about
March 31, 2018, is incorporated herein by reference.
The following table sets forth the number of shares of our stock reserved for issuance under our equity
compensation plans as of December 31, 2017:
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights (#)
Weighted average exercise
price of outstanding
options, warrants and
rights ($)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a) (#)
(a)
(b)
(c)
1,670,374(1)
$44.46(2)
1,541,838(3)
N/A
1,670,374
N/A
$44.46
N/A
1,541,838
(1) Represents the total number of shares associated with options,
restricted stock units (“RSUs”),
performance share units (“PSUs”), deferred share units (“DSUs”) and dividends equivalent units (“DEUs”)
outstanding as of December 31, 2017 that may or will be settled in equity. This number assumes that PSUs
will vest at the “maximum” performance level, and that any performance requirements applicable to
options will be satisfied.
(2) Represents the weighted average exercise price of options disclosed in column (a).
(3) Represents the number of shares remaining available for issuance in settlement of future awards under the
Omnibus Incentive Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information appearing under the captions “Governance of the Corporation – Board Independence and
Other Determinations” in our Proxy Statement for the 2018 Annual Meeting of Stockholders is incorporated
herein by reference.
138
ITEM 14. PRINCIPLE ACCOUNTANT FEES AND SERVICES
The information appearing under the caption “Ratification of Appointment of Independent Registered
Public Accounting Firm” and “Independent Registered Public Accounting Firm Fees” in our Proxy Statement for
the 2018 Annual Meeting of Stockholders is incorporated herein by reference.
139
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements—See Item 8, Financial Statements and Supplementary Data.
2. Schedule II—Valuation and Qualifying Accounts
All other schedules are omitted as the information required is either included elsewhere in the consolidated
financial statements in Item 8, Financial Statements and Supplementary Data—or is not applicable.
3. Exhibits:
Exhibit
Number
Exhibit Description
Form
Exhibit
Filing Date
Incorporated by reference to:
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Amended and Restated Certificate of Incorporation
Certificate of Amendment of the Amended and Restated Certificate
of Incorporation
Amended and Restated By-Laws
Form of Indenture between Domtar Corp. and the Bank of New
York, as trustee, relating to Domtar Corp.’s (i) 7.125% Notes due
2015, (ii) 5.375% Notes due 2013, (iii) 7.875% Notes due 2011,
(iv) 9.5% Notes due 2016 to be issued as part of a debt exchange
Supplemental Indenture, dated February 15, 2008, among Domtar
Corp., Domtar Paper Company LLC, The Bank of New York, as
Trustee, and the new subsidiary guarantors as parties thereto,
relating to the guarantee by the new subsidiary guarantors of the
obligations under the Indenture
Supplemental Indenture, dated September 7, 2011, among Domtar
Corporation, Attends Healthcare Products Inc., and The Bank of
New York Mellon (formerly the Bank of New York), as trustee,
relating to the guarantee by Attends Healthcare Products Inc. of the
obligations under the Indenture
Supplemental Indenture, dated as of March 16, 2012, among
Domtar Corporation, the subsidiary guarantors party thereto, and
The Bank of New York Mellon (formerly known as The Bank of
New York), as trustee, providing for Domtar Corporation’s 4.40%
Notes due 2022
Supplemental Indenture, dated May 21, 2012, among Domtar
Corporation, EAM Corporation, and The Bank of New York
Mellon, as trustee, relating to EAM Corporation’s guarantee of the
obligations under the Indenture
Supplemental Indenture, dated as of August 23, 2012, among
Domtar Corporation, the subsidiary guarantors party thereto, and
The Bank of New York Mellon (formerly the Bank of New York),
as trustee, providing for Domtar Corporation’s 6.25% Notes due
2042
Supplemental Indenture, dated as of July 31, 2013, among Domtar
Corporation, Associated Hygienic Products LLC, and The Bank of
New York Mellon (formerly the Bank of New York), as trustee,
relating to the guarantee by Associated Hygienic Products LLC of
the obligations under the Indenture
140
10-Q
8-K
8-K
S-4
3.1
3.1
3.1
4.1
08/08/2008
06/08/2009
02/24/2016
10/16/2007
8-K
4.1
02/21/2008
10-Q
4.1
11/04/2011
8-K
4.1
03/16/2012
S-3
4.8
08/20/2012
8-K
4.1
08/23/2012
S-3ASR 4.10
10/01/2013
Exhibit
Number
4.8
4.9
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11
10.12
10.13
Exhibit Description
Supplemental Indenture, dated as of November 26, 2013, among
Domtar Corporation, the subsidiary guarantors party thereto, and
The Bank of New York Mellon (formerly the Bank of New York),
as trustee, providing for Domtar Corporation’s 6.75% Notes due
2044
Supplemental Indenture, dated as of January 23, 2017, among
Home Delivery Incontinent Supplies Co, Domtar Corporation and
The Bank of New York Mellon, as trustee, relating to Home
Delivery Incontinent Supplies Co’s guarantee of the obligations
under the Indenture
Domtar Corporation Executive Deferred Share Unit Plan
(applicable to members of the Management Committee of Domtar
Inc. prior to March 7, 2007)
Incorporated by reference to:
Form
Exhibit
Filing Date
8-K
4.1
11/26/2013
10-Q
4.1
05/05/2017
10-K
10.29
02/27/2009
Domtar Corporation Deferred Share Unit Plan for Outside
Directors (for former directors of Domtar Inc.)
10-K
10.30
02/27/2009
Director Deferred Stock Unit Agreement
8-K
10.1
05/24/2007
Non-Qualified Stock Option Agreement
Restricted Stock Unit Agreement
Performance Share Unit Agreement
Severance Program for Management Committee Members
Amended and Restated DB SERP for Management Committee
Members of Domtar
Amended and Restated DC SERP for Designated Executives of
Domtar
Form of Indemnification Agreement for members of Pension
Administration Committee of Domtar Corporation
Stock Purchase Agreement by and among Attends Healthcare
Holdings, LLC, Attends Healthcare, Inc. and Domtar Corporation
dated as of August 12, 2011
Amended and Restated Domtar Corporation 2007 Omnibus
Incentive Plan
Domtar Corporation Annual Incentive Plan for members of the
Management Committee
10.14*
Employment agreement of Mr. Michael Fagan
10.15*
10.16*
10.17*
Amended and Restated Supplementary Pension Plan for
Designated Managers of Domtar Inc.
Amended and Restated Employment Agreement of Mr. John D.
Williams
Amended and Restated DC SERP for Designated Executives of
Domtar Personal Care
141
10-K
10-Q
10.7
10.1
02/24/2017
08/04/2017
10-Q
10.2
08/04/2017
10-K
10.50
02/27/2009
10-Q
2.1
11/04/2011
DEF
14A
DEF
14A
Annex
B
Annex
A
03/31/2017
03/31/2017
10-K
10.48
02/28/2013
10-Q
10.3
08/04/2017
10-Q
10.1
08/02/2013
10-Q
10.4
08/04/2017
Incorporated by reference to:
Form
Exhibit
Filing Date
10-Q
10-Q
10.1
10.1
08/01/2014
08/06/2015
10-Q
10.1
11/03/2016
Exhibit
Number
10.18*
10.19
10.20
12.1
21
23
24.1
31.1
31.2
32.1
32.2
Employment agreement of Mr. Michael D. Garcia
Exhibit Description
Term Loan Credit Agreement, dated as of July 20, 2015, among
Domtar Paper Company, LLC, Domtar Corporation, the lenders
from time to time parties to this agreement, and Cobank, ACB, as
Administrative Agent
Second Amended and Restated Credit Agreement dated as of
August 18, 2016, among the Company, Domtar Inc, Domtar Pulp
and Paper General Partnership, Laboratorios Indas, S.A.U., and
Attends Healthcare AB, Bank of Montreal, Goldman Sachs Bank
USA, Royal Bank of Canada and Wells Fargo Bank, N.A., as
co-documentation agents, The Bank of Nova Scotia and Bank of
America, N.A., as syndication agents and JP Morgan Chase
Bank, N.A., as administrative agent.
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of Domtar Corporation
Consent of Independent Registered Public Accounting Firm
Powers of Attorney (included in signature page)
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Extension Presentation Linkbase
*
Indicates management contract or compensatory arrangement
142
FINANCIAL STATEMENT SCHEDULE
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
For the three years ended:
Allowances deducted from related asset accounts:
Doubtful accounts—Accounts receivable
2017
2016
2015
Valuation Allowance on Deferred Tax Assets
2017
2016
2015
Balance at
beginnings of year
Charged to
income
(Deductions) from
/ Additions to
reserve
Balance at end
of year
$
7
6
6
$
—
1
5
$
(1)
1
(5)
$
7
7
6
Balance at
beginnings of year
Charged to
income
Deductions from
reserve
Balance at end
of year
$
22
23
25
$
3
(1)
(1)
$
—
—
(1)
$
25
22
23
143
ITEM 16. FORM 10-K SUMMARY
None.
144
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Fort
Mill, South Carolina, United States, on February 23, 2018
DOMTAR CORPORATION
/s/ John D. Williams
by
Name:John D. Williams
Title: President and Chief Executive Officer
We, the undersigned directors and officers of Domtar Corporation, hereby severally constitute Zygmunt
Jablonski and Razvan L. Theodoru, and each of them singly, our true and lawful attorneys with full power to
them and each of them to sign for us, in our names in the capacities indicated below, any and all amendments to
this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John D. Williams
John D. Williams
/s/ Daniel Buron
Daniel Buron
/s/ Giannella Alvarez
Giannella Alvarez
/s/ Robert E. Apple
Robert E. Apple
/s/ David J. Illingworth
David J. Illingworth
/s/ Brian M. Levitt
Brian M. Levitt
/s/ David G. Maffucci
David G. Maffucci
/s/ Pamela B. Strobel
Pamela B. Strobel
/s/ Denis Turcotte
Denis Turcotte
/s/ Mary A. Winston
Mary A. Winston
President and Chief Executive Officer
(Principal Executive Officer) and
Director
February 23, 2018
Senior Vice-President and Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
February 23, 2018
Director
Director
Director
Director
Director
Director
Director
Director
145
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
Exhibit 12.1
Domtar Corporation
Computation of ratio of earnings to fixed charges
(In millions of dollars, unless otherwise noted)
Available earnings:
Earnings (loss) before income taxes
and equity earnings
Add fixed charges:
Interest expense incurred
Amortization of debt expense
and discount
Interest portion of rental
expense (1)
Total earnings (loss) as defined
Fixed charges:
Interest expense incurred
Amortization of debt expense and
discount
Interest portion of rental expense (1)
Total fixed charges
Ratio of earnings to fixed charges
Deficiency in the coverage of earnings to
fixed charges
Year ended
December 31,
2013
$
Year ended
December 31,
2014
$
Year ended
December 31,
2015
$
Year ended
December 31,
2016
$
Year ended
December 31,
2017
$
72
83
4
11
170
83
4
11
98
1.7
261
99
4
11
375
99
4
11
114
3.3
156
87
6
9
258
87
6
9
102
2.5
157
64
2
9
(383)
63
2
10
232
(308)
64
2
9
75
3.1
63
2
10
75
383
(1)
Interest portion of rental expense is calculated based on the proportion deemed representation of the interest
component (i.e. 1/3 of rental expense).
Exhibit 31.1
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John D. Williams, certify that:
1.
I have reviewed this annual report on Form 10-K of Domtar Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision,
to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 23, 2018
/S/ JOHN D. WILLIAMS
John D. Williams
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel Buron, certify that:
1.
I have reviewed this annual report on Form 10-K of Domtar Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared; and
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision,
to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as the end of
the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 23, 2018
/S/ DANIEL BURON
Daniel Buron
Senior Vice-President and Chief Financial Officer
CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
The undersigned hereby certifies that to his knowledge, the Company’s Annual Report on Form 10-K for
the period ended December 31, 2017 (the “Form 10-K”) fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of the Company.
Date: February 23, 2018
/S/ JOHN D. WILLIAMS
John D. Williams
President and Chief Executive Officer
CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
The undersigned hereby certifies that to his knowledge, the Company’s Annual Report on Form 10-K for
the period ended December 31, 2017 (the “Form 10-K”) fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of the Company.
Date: February 23, 2018
/S/ DANIEL BURON
Daniel Buron
Senior Vice-President and Chief Financial Officer
[THIS PAGE INTENTIONALLY LEFT BLANK]
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(This page intentionally left blank)
SHAREHOLDER
INFORMATION
DIVIDENDS DECLARED IN 2017
Declared
Record Date
Payable Date
Amount
February 21, 2017
April 3, 2017
May 3, 2017
July 3, 2017
April 17, 2017
July 17, 2017
August 1, 2017
October 2, 2017
October 16, 2017
October 31, 2017
January 2, 2018
January 15, 2018
$0.415
$0.415
$0.415
$0.415
EXCHANGE LISTINGS
INVESTOR RELATIONS
NYSE: UFS
TSX: UFS
DIVIDEND POLICY
Subject to approval by its Board of
Directors, Domtar pays a quarterly
dividend on its common stock.
TRANSFER AGENT
AND REGISTRAR
Computershare
P.O. BOX 30170
College Station, TX 77845-3170
North American Toll Free Number:
1-877-282-1168
Tel.: 1-781-575-2879
computershare.com/investor
TENTATIVE EARNINGS
RELEASE SCHEDULE
Investor Relations Department
Domtar Corporation
395 de Maisonneuve Blvd. West
Montreal, QC Canada H3A 1L6
Tel.: 514-848-5049
Email: ir@domtar.com
Electronic versions of this report, SEC
filings and other publications are
available at domtar.com
ANNUAL MEETING
May 8, 2018, 7:45 a.m. ET
Domtar Corporate Office
234 Kingsley Park Drive
Fort Mill, SC 29715
First Quarter 2018: Tuesday, May 1, 2018
Second Quarter 2018: Wednesday, August 1, 2018
Third Quarter 2018: Thursday, November 1, 2018
Fourth Quarter 2018: Thursday, February 7, 2019
RECONCILIATION OF NON-GAAP
FINANCIAL MEASURES
(In millions of dollars, unless otherwise noted)
The following table sets forth certain non-U.S. generally accepted accounting principles (“GAAP”) financial metrics identified in bold as “Earnings before items”,
“Earnings before items per diluted share”, “EBITDA”, “EBITDA margin”, “EBITDA before items”, “EBITDA margin before items”, “Free cash flow”, “Net debt” and “Net debt-
to-total capitalization”. Management believes that the financial metrics are useful to understand our operating performance and benchmark with peers within the
industry. The Company calculates “Earnings before items” and “EBITDA before items” by excluding the after-tax (pre-tax) effect of specified items. These metrics are
presented as a complement to enhance the understanding of operating results but not in substitution for GAAP results.
2015
2016
2017
Reconciliation of “Earnings before items” to Net earnings (loss)
Net earnings (loss)
(+) Impairment of goodwill and property, plant and equipment
(+) Closure and restructuring costs
(+) Litigation settlement
(-) Net gains on disposals of property, plant and equipment
(-) Reversal of contingent consideration
(+) Impact of purchase accounting
(-) U.S. Tax Reform
(+) Debt refinancing costs
(=) Earnings before items
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
(/) Weighted avg. number of common shares outstanding (diluted)
(=) Earnings before items per diluted share
(millions)
($)
Reconciliation of “EBITDA” and “EBITDA before items” to Net earnings (loss)
Net earnings (loss)
(+) Income tax expense (benefit)
(+) Interest expense, net
(=) Operating income (loss)
(+) Depreciation and amortization
(+) Impairment of goodwill and property, plant and equipment
(-) Net gains on disposals of property, plant and equipment
(=) EBITDA
(/) Sales
(=) EBITDA margin
EBITDA
(+) Closure and restructuring costs
(+) Litigation settlement
(-) Reversal of contingent consideration
(+) Impact of purchase accounting
(=) EBITDA before items
(/) Sales
(=) EBITDA margin before items
Reconciliation of “Free cash flow” to Cash flow from operating activities
Cash flow from operating activities
(-) Additions to property, plant and equipment
(=) Free cash flow
($)
($)
($)
($)
($)
($)
($)
($)
($)
(%)
($)
($)
($)
($)
($)
($)
($)
(%)
($)
($)
($)
142
47
4
–
(12)
–
–
–
30
211
63.4
3.33
142
14
132
288
359
77
(15)
709
5,264
13%
709
4
–
–
–
713
5,264
14%
453
(289)
164
128
22
25
2
–
–
1
–
–
178
62.7
2.84
128
29
66
223
348
29
–
600
5,098
12%
600
32
2
–
1
635
5,098
12%
465
(347)
118
(258)
573
1
–
(11)
(2)
–
(140)
–
163
62.7
2.60
(258)
(125)
66
(317)
321
578
(13)
569
5,157
11%
569
2
–
(2)
–
569
5,157
11%
449
(182)
267
(Continued)
“Net debt-to-total capitalization” computation
Bank indebtedness
(+) Long-term debt due within one year
(+) Long-term debt
(=) Debt
(-) Cash and cash equivalents
(=) Net debt
(+) Shareholders’ equity
(=) Total capitalization
Net debt
(/) Total capitalization
(=) Net debt-to-total capitalization
2015
2016
2017
–
41
1,210
1,251
(126)
1,125
2,652
3,777
1,125
3,777
12
63
1,218
1,293
(125)
1,168
2,676
3,844
1,168
3,844
–
1
1,129
1,130
(139)
991
2,483
3,474
991
3,474
30%
30%
29%
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
(%)
“Earnings before items”, “Earnings before items per diluted share”, “EBITDA”, “EBITDA margin”, “EBITDA before items”, “EBITDA margin before items”, “Free cash flow”, “Net
debt” and “Net debt-to-total capitalization” have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented
by other companies and therefore should not be considered in isolation or as a substitute for Net earnings (loss), Operating income (loss) or any other earnings
statement, cash flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for readers to understand that certain items
may be presented in different lines by different companies on their financial statements, thereby leading to different measures for different companies.
RECONCILIATION OF NON-GAAP
FINANCIAL MEASURES BY SEGMENT
(In millions of dollars, unless otherwise noted)
The following table sets forth certain non-U.S. generally accepted accounting principles (“GAAP”) financial metrics identified in bold as “Operating income (loss) before
items”, “EBITDA before items” and “EBITDA margin before items” by reportable segment. Management believes that the financial metrics are useful to understand our
operating performance and benchmark with peers within the industry. The Company calculates the segmented “Operating income (loss) before items” by excluding
the pre-tax effect of specified items. These metrics are presented as a complement to enhance the understanding of operating results but not in substitution for
GAAP results.
Reconciliation of Operating income (loss) to
“Operating income (loss) before items”
Operating income (loss)
(+) Impairment of goodwill and property, plant and equipment
(-) Net gains on disposals of property,
plant and equipment
(-) Reversal of contingent consideration
(+) Closure and restructuring costs
(+) Litigation settlement
(+) Impact of purchase accounting
(=) Operating income (loss) before items
Reconciliation of “Operating income (loss)
before items” to “EBITDA before items”
Operating income (loss) before items
(+) Depreciation and amortization
(=) EBITDA before items
(/) Sales
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
Pulp and Paper
Personal Care1
Corporate
2015
2016
2017
2015
2016
2017
2015
2016
2017
270
77
(14)
–
3
–
–
217
29
250
–
–
–
31
–
–
(4)
–
–
–
–
61
–
–
–
1
–
–
57
–
(527)
578
–
–
1
–
1
–
–
2
–
–
(43)
–
(1)
–
–
–
–
(51)
(40)
–
–
–
–
2
–
–
(9)
(2)
–
–
–
336
277
246
62
59
53
(44)
(49)
(51)
336
297
633
277
284
561
246
254
500
4,458
4,239 4,216
62
62
124
869
59
64
53
67
123
120
917 1,005
(44)
–
(44)
–
–
(49)
(51)
–
–
(49)
(51)
–
–
–
–
(=) EBITDA margin before items
(%)
14%
13%
12%
14%
13%
12%
“Operating income (loss) before items”, “EBITDA before items” and “EBITDA margin before items” have no standardized meaning prescribed by GAAP and are not
necessarily comparable to similar measures presented by other companies and therefore should not be considered in isolation or as a substitute for Operating
income (loss) or any other earnings statement, cash flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for
readers to understand that certain items may be presented in different lines by different companies on their financial statements, thereby leading to different
measures for different companies.
(1) On October 1, 2016, the Company acquired 100% of the shares of Home Delivery Incontinent Supplies Co. in the United States.
Cougar® paper contains
10% post-consumer fiber
Learn the environmental, social and economic impacts
of Domtar products at domtarpapertrail.com.
PrintingCover and insert printed with UV inks on a Heidelberg Speedmaster CD 102 press 6-color units with in-line coater and full inter-deck and end-of-press extended delivery UV drying systems.PaperCover printed on 80 lb. Cougar® Cover, Smooth Finish Insert printed on 70 lb. Cougar® Text, Smooth Finish Form 10-K printed on 40 lb. Lynx® Opaque Ultra Text, Smooth Finish.PRODUCTION NOTES FIBER INNOVATIONFIBER INNOVATIONSOLIDFOUNDATIONSOLIDFOUNDATIONFLEXIBLE ASSETSFLEXIBLE ASSETSFLEXIBLE ASSETSCASH GENERATIONCASH GENERATIONCASH GENERATION DOMTAR.COM