READY
FOR THE
FUTURE
2018
ANNUAL
REPORT
D
O
M
T
A
R
C
O
R
P
O
R
A
T
I
O
N
2
0
1
8
A
n
n
u
a
l
R
e
p
o
r
t
o
n
F
o
r
m
1
0
-
K
SELECTED FINANCIAL
FIGURES
Years ended December 31
2016
2017
2018
(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)
4,239
(58)
909
5,090
201
57
(50)
208
128
465
347
118
5,680
1,281
30%
2,676
62.7
4,216
(64)
996
5,148
237
(527)
(38)
(328)
(258)
449
182
267
5,212
1,130
29%
2,483
62.7
4,523
(68)
1,000
5,455
438
(5)
(47)
386
283
554
195
359
4,925
854
23%
2,538
63.1
1 Non-GAAP financial measure. Please see “Reconciliation of non-GAAP Financial Measures”
at the end of this document.
2 As at December 31, 2018
SALES
(In millions of dollars)
5,090
5,148
5,455
EBITDA
BEFORE ITEMS1
(In millions of dollars)
725
635
569
2016
2017
2018
2016
2017
2018
CASH FLOWS FROM
OPERATING ACTIVITIES
(In millions of dollars)
359
554
465
449
FREE
CASH FLOW1
(In millions of dollars)
267
118
2016
2017
2018
2016
2017
2018
+4.8%
QUARTERLY DIVIDEND
INCREASE TO
$0.435 PER
COMMON SHARE
$1.6B
RETURNED TO
SHAREHOLDERS
SINCE 2011
23%
NET DEBT TO TOTAL
CAPITALIZATION
RATIO1,2
DOMTAR 2018 ANNUAL REPORT 1
2 DOMTAR 2018 ANNUAL REPORT
DOMTAR ACHIEVED SOLID
EARNINGS AND CASH FLOW
IN 2018 WHILE SIGNIFICANTLY
DE-RISKING ITS BUSINESS
WITH THE UNVEILING OF A
FLEXIBLE, LONG-TERM ASSET
CONVERSION ROADMAP
DOMTAR 2018 ANNUAL REPORT 3
MESSAGE TO SHAREHOLDERS
$554M
CASH FLOWS
FROM OPERATING
ACTIVITIES
$725M
EBITDA BEFORE
ITEMS1
1 Non-GAAP financial measure. Please see “Reconciliation of non-GAAP
Financial Measures” at the end of this document.
4 DOMTAR 2018 ANNUAL REPORT
With a legacy of 170 years, Domtar is ready for the future. Our confidence stems from our clear strategy to create value by remaining the supplier of choice to our paper customers, while building new businesses in growing markets.Domtar generated $725 million of EBITDA before items1 and cash flows from operating activities of $554 million in 2018. We returned $108 million to shareholders in the form of dividends, re-invested $195 million in our business, and repaid $276 million of debt. Our net debt-to-total capitalization ratio1 at year-end stood at a comfortable 23%.Our strong financial performance was driven by our papers business, complemented by one of our strongest performances in market pulp. We closed the year with a robust fourth quarter, strong momentum in pulp and paper, and greater visibility on our path forward.The results and progress achieved in 2018 demonstrate that we are well-positioned to create value in the years ahead.EXECUTING OUR PAPER STRATEGYThe North American paper market reached a positive inflection point in 2018 driven by improved demand and permanent supply curtailments in the industry. Through a combination of market share gains, price increases and higher productivity across our mill system, we achieved a strong performance in this business. We were able to capitalize on the favorable market dynamics because of our long-standing commitment to be the leading North American supplier of uncoated freesheet. In this regard, the significant cash flows we derive annually from this business are evidence of its resilience.THE RECENT DECISION BY A MAJOR SUPPLIER TO EXIT THE UNCOATED FREESHEET MARKET IS STRENGTHENING DOMTAR’S POSITION. IN LINE WITH OUR LONG-TERM STRATEGY, WE WILL CONTINUE TO FOCUS ON EXTENDING THE CASH FLOW RUNWAY IN PAPER BY LEVERAGING OUR LOW-COST POSITION, FLEXIBLE SERVICE MODEL AND CUSTOMER RELATIONSHIPS. GENERATING HIGH RETURNS IN PULPIn market pulp, we benefited from strong global demand for tissue, absorbent hygiene products and packaging, as well as rising prices to more than double our EBITDA1 in 2018 compared to the prior year. In so doing, we confirmed the potential of market pulp as a major source of cash flow for Domtar.MESSAGE TO SHAREHOLDERS DOMTAR 2018 ANNUAL REPORT 5
As a result of investments in mill conversions, we now have the capacity to produce 1.8 million air-dry metric tons of market pulp – mostly in softwood, fluff and specialty grades – for a global customer base.Now that we have achieved scale, our focus is on driving growth and enhancing our customer value proposition. We are also investing in high-return initiatives to optimize production and increase efficiencies across our mills with the objective of driving cost performance. As one of the leaders in the global softwood and fluff markets, we are looking at pulp as a long-term generator of earnings growth for Domtar.LEVERAGING OUR ASSET BASEWhile generating steady cash flows, we have been actively finding new uses for our paper mills and repurposing these assets to manufacture products in growing markets. Over the past several years, we have reduced paper capacity by 1.5 million short tons to balance our supply with our customer demand. Today, these repurposed mills produce market pulp and/or specialty papers, thereby maximizing the value of these assets and maintaining the thousands of jobs they support in our communities.WE ADDED AN IMPORTANT NEW DIMENSION TO OUR STRATEGY IN 2018 BY DETAILING A LONG-TERM CONVERSION ROADMAP FOR FOUR OF OUR LARGEST PAPER MILLS. Our studies have confirmed that Domtar can be a significant and competitive supplier to the containerboard market in addition to increasing our pulp production. The optionality embedded in our paper assets provides a path for their future. Our conversion roadmap significantly de-risks our business for the benefit of Domtar’s many stakeholders – shareholders, employees and communities among them. We are taking a long-term view, with the timing and sequence of potential mill conversions to be determined by market and economic conditions affecting our paper business.IMPROVING MARGINS IN PERSONAL CAREOver several years, we have established a billion-dollar business in the personal care market. Although this business is currently not providing the returns we expected, its long-term value is underpinned by attractive demographic and market trends, as well as an efficient manufacturing platform.Stiff headwinds in the form of escalating raw materials prices and intense price competition have led to disappointing results. Faced with margin erosion, we initiated actions across the division in 2018 to improve our financial performance.These actions include division-wide cost reductions, product rationalization, and manufacturing optimization with the closure of one North American facility and equipment relocation to sister plants. The objective is to realize annual margin improvement of approximately $25 million to $30 million, with full run-rate effect by the end of 2020.Global demand for adult incontinence products is growing at a rate of 3-5% annually due to an aging population and increased product adoption rates. The sizeable infant diaper category continues to see a shift to store-brand products in North America and Europe, creating a significant opportunity for market penetration. By executing its margin improvement plan, our personal care division will be a more agile competitor in a growing market.
PULP AND PAPER
TOTAL INJURY
FREQUENCY RATES
0.86
0.84
0.79
PERSONAL CARE
TOTAL INJURY
FREQUENCY RATES
0.68
0.73
0.64
2016
2016
2017
2017
2018
2018
2016
2017
2018
6 DOMTAR 2018 ANNUAL REPORT
OPTIMIZING CAPITAL DEPLOYMENTOur businesses have remained highly cash-generative throughout the years, and we have been very disciplined in our capital deployment decisions to strike an optimal balance between shareholder returns and the execution of our business strategy. Since 2011, Domtar has returned $1.6 billion to shareholders in the form of dividends and share repurchases. Our annual dividend payout for 2018 was $108 million and the yield for our shareholders is among the highest in our industry. In the years ahead, we will remain true to our commitment of returning the majority of our free cash flow to shareholders while continuing to invest in the future of our businesses.OPERATING RESPONSIBLYOur long-standing pursuit of sustainable business practices remains an integral part of our DNA and of our long-term strategy. Our track record in environmental and social responsibility differentiates us in the eyes of our customers and contributes to our financial results. Over the past decade, we have made progress in key areas such as forest certification, environmental performance, and the beneficial reuse of manufacturing byproducts. Our workplaces are inclusive, welcoming people from diverse backgrounds. We treat our employees with respect and prioritize their health and safety.I am also proud to highlight Domtar’s award-winning disclosure in environmental and social reporting. We will publish our next Sustainability Report in 2019, outlining our targets, challenges and achievements. READY FOR THE FUTUREWe ended 2018 feeling confident about our short-term prospects and our positioning for the long term. We have some of the best paper assets in North America, a world-class pulp business, great asset optionality, and flexibility in the timing of future conversions.I THANK OUR EMPLOYEES FOR THEIR EFFORTS, OUR SHAREHOLDERS FOR THEIR CONTINUED CONFIDENCE, AND THE MEMBERS OF OUR BOARD OF DIRECTORS FOR THEIR VALUED COUNSEL AND SUPPORT.Our strategy as a leading fiber-based technology company is delivering value and we are keenly focused on seizing market opportunities. Domtar is ready for the future. John D. WilliamsPresident and Chief Executive OfficerMESSAGE TO SHAREHOLDERS OUR LEADERSHIP TEAM
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 are the basis for 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
Kingston, Ontario
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 2018 ANNUAL REPORT 7
MANAGEMENT COMMITTEE ANDBOARD OF DIRECTORS
3 MILLION
SHORT TONS
OF UNCOATED
FREESHEET PAPER
1.5 MILLION
AIR-DRY METRIC
TONS OF MARKET
PULP
13
PULP AND PAPER
MILLS IN NORTH
AMERICA
8 DOMTAR 2018 ANNUAL REPORT
BUSINESS OVERVIEWPULP AND PAPER SEGMENT 13
CONVERTING
FACILITIES
CUSTOMERS IN
40+
COUNTRIES
AROUND THE
WORLD
7,100
PULP AND PAPER
EMPLOYEES
READY
FOR THE
FUTURE
DOMTAR 2018 ANNUAL REPORT 9
PULP AND PAPER
Favorable market conditions and higher productivity
across the mill system are highlights of a successful year for
Domtar’s pulp and paper segment in 2018. We increased
paper shipments, solidifying our position as the supplier of
choice for communication papers in North America, while
continuing to grow our market pulp business globally.
Sales of our specialty paper grades were also higher
than in the prior year.
10 DOMTAR 2018 ANNUAL REPORT
STRONG PAPER PERFORMANCEDomtar’s sales of uncoated freesheet papers increased 7% in 2018, while shipments were up 3% to approximately 3 million short tons. Already North America’s largest manufacturer of communication papers, we gained new business as some competitors announced permanent uncoated freesheet capacity reductions.North American production of uncoated freesheet paper declined 3.4% in 2018 to 7.1 million short tons. Demand was approximately 7.5 million short tons, a 0.5% decrease compared to 2017. Global demand for uncoated freesheet was estimated at 44.4 million short tons in 2018, similar to the previous year. Several of Domtar’s communication paper mills achieved records in slush pulp and paper production in 2018. Paper productivity and daily production of slush pulp – wood fiber that is ready for making paper or market pulp – both exceeded our annual targets. Paper production was 3% higher than in the prior year.We entered 2019 with high operating rates and improved paper prices. In addition, permanent capacity closures have been announced by competitors effective during the first half of 2019 and into 2020.CATEGORY DOMTAR PAPER PRODUCTS AND APPLICATIONSGRADEAPPLICATION• Copy• Premium imaging• Technology papers• Photocopies• Office documents• Presentations• Presentations• Reports• Offset• Colors• Index• Tag• Bristol• Opaques• Premium opaques• Lightweight• Tradebook• Commercial printing• Direct mail• Pamphlets• Brochures• Cards• Posters• Food and candy packaging• Fast food takeout bag stock• Check and security papers• Surgical gowns• Thermal papers• Food packaging• Bag stock• Security papers• Imaging papers• Label papers• Medical disposables• Stationery• Brochures• Annual reports• Books• Catalogs• Forms and EnvelopesCommunication PapersBusiness PapersCommercial Printing and Publishing PapersSpecialty and Packaging PapersBUSINESS OVERVIEWPULP AND PAPER SEGMENT NORTH AMERICAN
UNCOATED FREESHEET
CAPACITY1
Domtar Market Share vs. Next Four Competitors
35%
24%
11%
7%
Domtar
A
B
C
3%
D
Source: RISI
1 Reflects the decision by a major supplier to curtail its
uncoated freesheet capacity in 2019.
DOMTAR 2018 ANNUAL REPORT 11
RELIABLE LONG-TERM PAPER SUPPLIERDomtar has been steadfast in its strategy to remain North America’s largest uncoated freesheet producer and reliable long-term supplier to its customers. This strategy has served us well and continues to be our path.We are keeping our promise to customers by investing annually in our paper mills to increase operational reliability and efficiency, as well as in ongoing product development and innovation to meet their needs.We offer a broad selection of high-quality uncoated papers – from office, printing, publishing, digital and inkjet papers, to innovative converting and specialty papers – and responsive, world-class service.A strong culture of sustainability is embedded throughout our operations. Our commitment to sustainable forest management, responsible use of resources, and safe and healthy workplaces help our customers achieve their own social responsibility goals.At the same time, Domtar is taking a deliberate approach to finding new uses for its paper assets in growing markets. But we are not going to repurpose our mills prematurely, simply because we can.Making and selling uncoated freesheet in the current market environment is highly attractive, and Domtar is committed to remain the supplier of choice to its customers in 2019 – and for the long term.
12 DOMTAR 2018 ANNUAL REPORT
BUSINESS OVERVIEWPULP AND PAPER SEGMENTREPURPOSING FOR A PURPOSEFor Domtar, asset quality and flexibility, access to abundant wood fiber, and a skilled and experienced workforce offer strategic optionality. Our “steel in the ground” has long-term value and, when needed, we can repurpose some of our mills to the next best use, creating new cash flow sources and sustaining the economic life of our communities.Over the past decade, we have successfully removed and converted 1.5 million short tons of paper capacity to manufacture products in growing markets while balancing our paper supply with customer demand.Long-term conversion potentialIn 2018, we completed a feasibility study with internal and external resources to determine the next best use for several of our largest paper mills. The outcome was a confirmation that we have the right fiber basket, assets and core competencies at several mills to make an impactful entry into the global containerboard market while also expanding our position in market pulp. Specifically, we hold the keys to successfully produce up to 2.5 million tons of containerboard and/or 570,000 air-dry metric tons of additional market softwood and fluff pulp.Containerboard is a highly attractive market with strong long-term fundamentals. The domestic U.S. containerboard market exceeds 30 million tons annually, with a historical growth rate of 1.9%. On a global basis, containerboard is the largest category in the paper industry and growing. Global demand for market pulp is also growing, and certain mills are well suited for this purpose when the paper they currently produce is no longer needed to meet customer demand. B
C
D
A
A
B
C
D
UFS: Uncoated freesheet paper
ADMT: Air-dry metric tons
DOMTAR 2018 ANNUAL REPORT 13
The exact timing and sequence of any conversion will be determined by the profitability trends in our paper business, market conditions, and the supply requirements of our paper customers.Ready for the futureWhile our first conversion is not imminent, we have a long-term conversion roadmap. Our shareholders, employees and communities will take comfort in knowing that Domtar has attractive opportunities in growth markets. Our repurposing roadmap significantly de-risks our business and allows all our stakeholders to look ahead with confidence.At the right time, our communication paper mills and our employees are ready to execute. Domtar is ready for the future!ASHDOWN ARHAWESVILLE KYKINGSPORTTNMARLBOROSC265,000 short tons596,000 short tons426,000 short tons274,000 short tons• 400,000 tons of kraft linerboard• 75,000 ADMT of fluff pulpOR• 255,000 ADMT of fluff pulp and southern bleached softwood kraft• 580,000 tons of kraft linerboard• 320,000 tons of recycled medium• 600,000 tons of recycled linerboard• 600,000 tons of kraft linerboardOR• 315,000 ADMT of fluff pulpAnnual UFS Production CapacityMillConversion Potential (Approximate)ASSET CONVERSION ROADMAP
14 DOMTAR 2018 ANNUAL REPORT
HIGH RETURNS IN PULPDomtar’s market pulp shipments totalled 1.5 million air-dry metric tons in 2018, with strong demand in the markets we serve and higher prices across all product categories. We are one of the world’s largest producers of market pulp, selling our products to customers in over 40 countries.Global demand for chemical market pulp was approximately 61.5 million tons in 2018, similar to the prior year. North American demand decreased 4.8% to 7.5 million tons, while in China, a key driver of global pulp consumption, demand was 20.9 million tons, stable when compared to 2017.Supply disruptions were a key factor in the global pulp market in 2018, with significant unplanned capacity outages in the industry due to weather and other events. Domtar experienced an orderly weather-related shutdown at one location, but total production across the mill system was consistent with the prior year.We entered 2019 with sound market fundamentals, with strong demand in our end markets, and no major industry capacity increase announcements. Because China has accounted for a significant share of demand growth for softwood pulp over the past several years, its economy will be an important factor in price trends in 2019.EXPLORING THE POTENTIAL OF WOOD-BASED BIOMATERIALS In a world seeking to transition from petroleum-based products, Domtar is exploring the potential for using wood fiber as a viable replacement or supplement. As fiber experts and innovators, we know that trees can be used as feedstock for developing a variety of sustainable and biodegradable alternatives to materials or chemicals currently made with petroleum.In 2018, Domtar acquired an interest in a company that uses lignin to make engineered plastic compounds such as acrylonitrile butadiene styrene (ABS), a material widely used in injection molding and 3D manufacturing, as well as other high-value fiber and lignin applications. We also installed a demonstration plant in Canada to show how lignin pellets can potentially be used as a bio-alternative to petroleum-based products, including plastics. These are but two tangible initiatives led by our BioMaterials Innovation team. They are also looking at extractives, advanced fibers and thermochemical fuels. While material revenues are not expected from biomaterials in the short term, we see compelling reasons to continue our research and development for the benefit of Domtar and our planet.BUSINESS OVERVIEWPULP AND PAPER SEGMENT END USE
1 Includes pulp shipments to Personal Care
DOMTAR 2018 ANNUAL REPORT 15
PULP, A GROWTH DRIVER Since establishing pulp as a growth driver, Domtar has been taking actions to build a globally competitive business. Market pulp sales have increased significantly to account for 22% of consolidated sales in 2018. Having achieved global scale, we are increasingly focused on enhancing our customer value proposition to build strong long-term relationships while increasing sales in higher margin product segments. This is supported by a disciplined investment plan on high-return projects over the next three years to optimize and improve efficiencies across our market pulp mills, with the objective of driving cost performance towards industry first quartile ranking.• Our Kamloops Mill undertook a major debottlenecking project and other improvements in 2018 that have resulted in increased softwood pulp production and improved environmental performance. • At our Dryden Mill, which also produces softwood pulp, we are taking actions to increase fiber yield.• Our Plymouth Mill is focused on increasing reliability to generate higher fluff pulp production and reducing energy and chemical use. • We continue to increase fluff pulp production at our Ashdown Mill, which operates one of the world’s largest and most advanced fluff pulp machines.As one of the world’s largest market pulp producers, Domtar is well-positioned to capitalize on growth opportunities in attractive markets.% of total shipmentsDOMTAR PULP SHIPMENTS BY END USES1ABSORBENT HYGIENE 40%TOWEL AND TISSUE 38%SPECIALTY PAPER AND MATERIALS 18%PRINTING AND WRITING 4%
2.6 BILLION
UNITS OF ADULT
DIAPERS
2,200
PERSONAL CARE
EMPLOYEES
6
MANUFACTURING
FACILITIES IN
EUROPE AND
NORTH AMERICA
16 DOMTAR 2018 ANNUAL REPORT
BUSINESS OVERVIEWPERSONAL CARESEGMENT PERSONAL CARE
Long-term growth trends for adult incontinence and
infant products remain strong but adverse market
conditions made for a difficult year in 2018. Domtar’s
vision to be a leader in this market has not changed and
we are taking strong measures across the business
to improve our performance.
DOMTAR 2018 ANNUAL REPORT 17
A YEAR OF TRANSITIONSignificant increases in input costs, over and above the commodity inflation experienced in the prior year, and intense pricing pressure have compressed margins in our personal care business in 2018. We were also affected by an unfavorable tender balance, and costs associated with ramping up a significant new customer beginning in the final quarter of the year.We responded to market conditions by launching a division-wide margin improvement plan in the second half of 2018. This included streamlining administrative and sales expenses, cost reductions, product rationalization, and commercial initiatives. Our Waco, Texas facility will be permanently shut by the third quarter of 2019, and some of the equipment will be installed in other locations as part of a manufacturing optimization. Our guiding principle is to reduce complexity to improve efficiency and productivity.We expect these actions to generate $25 million to $30 million in annual margin improvement and to strengthen our long-term competitive position. The full run rate effect of the margin improvement initiatives is expected by the end of 2020.FOCUS ON PRODUCTS AND CUSTOMERSA globally integrated provider of absorbent hygiene solutions, Domtar is gaining traction as a supplier of partner-branded adult incontinence and infant products in North America and Europe. This strategy continues to be a major focus going forward.We are making inroads in the institutional market for adult incontinence products in Europe, and we completed the installation of a new protective underwear line with the objective of capturing additional market share.Continued investments will also be made in our direct-to-consumer channel in North America to drive sales of our full line of branded adult incontinence products, including protective underwear, briefs, underpads, pads and washcloths.With our ability to create high-quality and cost-effective products, our well-invested manufacturing footprint, and dedicated employees, we are determined to rise to the challenge of a competitive market and to champion health, dignity and comfort through effective and affordable care.
PULP AND PAPER
PERSONAL CARE
Years ended December 31
2016
2017
2018
Years ended December 31
20161
2017
2018
(In millions of dollars)
(In millions of dollars)
Sales (including sales to Personal Care)
4,239
4,216
4,523
Sales
Operating income
Depreciation and amortization
Capital expenditures
Total assets
Paper shipments–manufactured (‘000 ST)
Market pulp shipments (‘000 ADMT)
201
284
287
3,637
3,021
1,513
237
254
128
3,649
2,891
1,722
438
238
164
3,475
2,971
1,536
Operating income (loss)
Depreciation and amortization
Capital expenditures
Total assets
909
996
1,000
57
64
55
(527)
67
48
(5)
70
37
1,884
1,406
1,331
1 Including HDIS since October 1, 2016
MANUFACTURING CAPACITY BY REGION
SALES BY PRODUCT CATEGORY
PAPER
MARKET PULP
U.S. 77%
Canada 23%
U.S. 54%
Canada 46%
SALES BY REGION
PAPER
MARKET PULP
Adult Incontinence 66%
Infant 25%
Other 9%
SALES BY REGION
U.S. 82%
Canada 10%
Other 8%
Other 58%
U.S. 39%
Canada 3%
U.S. 50%
Europe 48%
Other 2%
SHIPMENTS BY GRADE
SALES BY CHANNEL
PAPER–MANUFACTURED
MARKET PULP2
Communication 82%
Specialty and
Packaging 18%
Softwood 56%
Fluff 40%
Hardwood 4%
2 Includes pulp shipments to
Personal Care
Healthcare 47%
Retail 36%
Direct-to-Consumer 9%
Other 8%
18 DOMTAR 2018 ANNUAL REPORT
BUSINESS OVERVIEWSEGMENTED INFORMATION READY
FOR THE
FUTURE
DOMTAR 2018 ANNUAL REPORT 19
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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, 2018
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 every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit such files). YES È NO ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
È
Large accelerated filer
‘
Non-accelerated filer
Emerging growth 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, 2018, was $3,002,586,945.
The number of shares of Registrant’s Common Stock outstanding as of February 16, 2019 was 62,923,743.
Portions of the Registrant’s Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 8,
2019, are incorporated by reference into Part III of this Report.
DOMTAR CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2018
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Results of Operations and Segment Review . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting Pronouncements and Critical Accounting Estimates and
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . .
135
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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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
$5.5 billion in 2018, of which approximately 82% was from the Pulp and Paper segment and approximately 18%
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. 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, 2018, Domtar Corporation had a total of 62,914,569 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 20 “Shareholders’ Equity”.
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.
4
• 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 23 “Segment Disclosures”. Geographic information is also included under
Note 23 of the Financial Statements and Supplementary Data.
PULP AND PAPER
Our Manufacturing Operations
We produce approximately 4 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 million tons of uncoated freesheet
paper. Our paper manufacturing operations are supported by 13 converting and forms manufacturing operations
(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.
5
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)
Communication
Communication
Communication
Communication
Specialty & Packaging
Communication
Specialty & Packaging
Communication
Specialty & Packaging
Specialty & Packaging
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
Total Pulp
Total
Total Trade Pulp (4)
3
1
1
1
1
1
1
1
2
—
12
1
1
1
3
15
707
447
412
304
320
228
155
65
—
327
2,965
354
327
390
1,071
4,036
1,789
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) 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,
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
6
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
1.5 million cubic meters of softwood and 0.8 million cubic meters of hardwood per year. Access to harvesting of
fiber on public lands in Ontario and Quebec is subject to licenses and review by the respective governmental
authorities.
During 2018,
the
cost of wood fiber
relating to our Pulp and Paper
segment
comprised
approximately 20% 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 2018, 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 72% of the total energy required to manufacture our products
comes from renewable fuels such as bark and spent pulping liquor, generated as byproducts from our
manufacturing processes. The remainder of the energy comes from smaller amounts of other fossil fuels and
purchased steam procured under supply contracts. Under most of these contracts, suppliers are committed to
provide quantities within 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
locations: Espanola, Nekoosa and Rothschild. These generating assets produce approximately 72% of the
electricity requirements of this business segment, with the balance supplied from local utilities. Electricity is
primarily used to drive motors, pumps and other equipment, as well as provide lighting.
During 2018, net energy costs relating to our Pulp and Paper segment comprised approximately 5% of the
total consolidated cost of sales.
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 depending on destination and customer preference.
We work with all major railroads and approximately 350 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.
7
During 2018, outbound transportation costs relating to our Pulp and Paper segment comprised
approximately 11% of the total consolidated cost of sales.
Our Product Offering and Go-to-Market Strategy
PAPER
Our uncoated freesheet papers are categorized into both communication papers and specialty and packaging
papers. Communication papers are further categorized into business papers and commercial printing and
publishing papers.
Our business papers include copy and electronic imaging papers, which are used with inkjet and laser
printers, photocopiers and plain-paper fax machines, as well as computer papers, preprinted forms and digital
accounted for
papers. These products
approximately 50% of our shipments of paper products in 2018.
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 32% of our shipments of paper products
in 2018.
Our specialty and packaging papers includes papers used for thermal printing, flexible packaging, food
packaging, medical packaging, medical gowns and drapes, sandpaper backing, carbonless printing, labels and
other papers used for coating and laminating applications. We also manufacture papers for industrial and
specialty applications including carrier papers, treated papers, security papers and specialized printing and
converting applications. These specialty and packaging papers accounted for approximately 18% of our
shipments of paper products in 2018. These grades of papers require a certain amount of innovation and agility in
the manufacturing system.
The chart below illustrates our main uncoated freesheet papers products and their applications:
Communication Papers
Specialty and Packaging Papers
Category
Business Papers
Grade
Copy
Premium imaging
Technology papers
Application Photocopies
Office
documents
Presentations
Presentations
Reports
Commercial Printing and Publishing
Papers
Opaques
Premium opaques
Lightweight
Tradebook
Thermal papers
Food packaging
Bag stock
Security papers
Imaging papers
Label papers
Medical disposables
Food & candy packaging
Fast food takeout bag stock
Check and security papers
Surgical gowns
Stationery
Brochures
Annual reports
Books
Catalogs
Forms &
Envelopes
Offset
Colors
Index
Tag
Bristol
Commercial
printing
Direct mail
Pamphlets
Brochures
Cards
Posters
8
Our paper sales channels are aligned to efficiently bring a competitive and complete product offering to our
varied customers. Our customer service personnel work closely with sales, marketing and production staff to
provide service and support to merchants, converters, end-users, stationers, printers and retailers. We 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.
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 44% of our Pulp and Paper segment sales
or approximately 36% of our total sales in 2018. In 2018, 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 2018, approximately 71% of our Pulp and Paper segment sales were in the United
States, 11% were in Canada, and 18% were in other countries.
9
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 currently 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.
On November 1, 2018, we announced a margin improvement plan within our Personal Care segment. As
part of this plan, we announced the permanent closure of our Waco, Texas, manufacturing and distribution
facility, the relocation of certain of our manufacturing assets and a workforce reduction of 214 full time
employees as well as certain temporary positions across the division. The Waco, Texas facility is expected to
cease operations in the third quarter of 2019.
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 one billion people worldwide are estimated to be 65 years old or older, representing 12% of the
projected total world population.
Increased healthcare spending
While we are expected to benefit from the overall increase in healthcare spending due to an aging
population, the pressure to limit public spending on healthcare may impact overall consumption or the channels
in which consumption occurs.
Infant products
We compete within the competitive store brand segment of infant diapers and training pants. Future demand
growth based on birth rate and demographic trends is forecasted to be limited 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 securing multiyear contracts with
large retailers that control the majority of volume, leading to intense competition with other manufacturers in the
industry.
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.
10
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: increasing productivity in our pulp business, pursuing new sources of paper
consumption, pursuing asset repurposing opportunities and operating an optimal portfolio of strategic assets. We
believe that execution on these priorities will enable Domtar to expand into complementary growth areas and
protect its market position in Pulp and Paper.
Expanding into areas of growth and leveraging our fiber expertise. We are focused on optimizing and
expanding our operations in markets with positive demand dynamics through investments for organic growth, the
repurposing of assets and strategic acquisitions. Domtar has a history of proactively adapting to changing market
conditions, and today, we are repositioning the Company towards areas of growth. We are well positioned to
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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, which include an
extensive offering of high quality Forest Stewardship Council (“FSC”)-certified paper products. While we have a
leading position in the North American uncoated freesheet market, we also compete with other paper grades,
including coated freesheet, and with electronic transmission and document storage alternatives. As the use of
these alternative products continues to grow, we continue to see a decrease in the overall demand for paper
products. All of our pulp and paper manufacturing facilities are located in the United States or in Canada where
we sell approximately 82% of our products. Domtar is the largest of the five 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.
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
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fiber. All of our market pulp production capacity is located in the United States or in Canada, and we sell
approximately 58% 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 supply 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 remainder 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 remain 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 in recent years, including the entry of new competitors in the private label category, excess industry
capacity and the pressure to limit public healthcare spending are resulting in lower than previously anticipated
sales and operating 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 44% of our employees are covered by collective bargaining
agreements, generally on a facility-by-facility basis. Certain agreements will expire in 2019 and others will
expire between 2020 and 2022.
OUR APPROACH TO SUSTAINABILITY
Domtar aims to deliver value to our customers, employees, shareholders and communities by viewing our
business decisions within the larger context of sustainability. We take a long-term view on managing natural
resources for the future. We strive to minimize waste and encourage recycling. We aim to have the highest
standards for ethical conduct, for caring about the health and safety of each other, and for maintaining the
environmental quality in the communities where we live and work. We value the partnerships we have formed
with non-governmental organizations and believe they make us a better company. We focus on agility to respond
to new opportunities, and we are committed to turning innovation into value creation. By embracing sustainability
as our operating philosophy, we seek to internalize the fact that the choices we have and the impact of the
decisions we make on our stakeholders are all interconnected. We believe that our business and the people and
communities who depend on us are better served as we weave this focus on sustainability into the things we do.
Domtar executes this commitment to sustainability at every level and every location across the company.
With the support of the Board of Directors, our Management Committee empowers senior managers from
manufacturing, technology, finance, sales and marketing and corporate staff functions to regularly come together
and establish key sustainability performance metrics, and to routinely assess and report on progress. 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.
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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 21 “Commitments and Contingencies” and in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations under the section of
Critical accounting estimates and policies, 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.
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OUR EXECUTIVE OFFICERS (“MANAGEMENT COMMITTEE”)
Name
Position and Business Experience
Age
John D. Williams
64
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, the Chair of the advisory board of the Stern Center for Sustainable Business
at New York University and the Non-Executive Chairman of Form Technologies,
Inc., a privately-held leading global group of precision component manufacturers
based in Charlotte, North Carolina.
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 30 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, and of the USO of North
Carolina.
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
55
Michael D. Garcia
54
Michael Fagan
57
Zygmunt Jablonski
65
Patrick Loulou
50
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
15
business prospects and opportunities. These forward-looking statements are generally denoted by the use of
words such as “anticipate,” “believe,” “expect,” “intend,” “aim,” “target,” “plan,” “continue,” “estimate,”
“project,” “may,” “will,” “should” and similar expressions. These statements reflect management’s current
beliefs and are based on information currently available to management. Forward-looking statements are
necessarily based upon a number of estimates and assumptions that, while considered reasonable by
management, are inherently subject to known and unknown risks and uncertainties and other factors that could
cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances
can be given that any of the events anticipated by the forward-looking statements will occur, or if any occur,
what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors
include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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•
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continued decline in usage of fine paper products in our core North American market;
our ability to implement our business diversification initiatives, including repurposing of assets and
strategic acquisitions;
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 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.
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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.
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 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 such initiatives,
including significant business, economic and competitive uncertainties, many of which are outside the
Company’s control.
In addition, in the past we have converted paper mills to fluff pulp production facilities. If circumstances
warrant, in the future we may again convert paper mills to produce pulp or other products. Conversions can be
17
capital intensive and can involve the shutdown of a facility for an extended period of time, followed by an
extended ramp-up and customer certification process. In addition, the success of a conversion depends upon
demand over time for the new product relative to the previously produced paper products, as well as costs and
other factors, and there can be no assurance that a conversion will be as successful as expected.
Strategic acquisitions may expose the Company to additional risks. The Company may have to compete for
acquisition targets and any acquisition it makes may fail to accomplish our strategic objectives or may not
perform as expected. In addition, the costs of integrating an acquired business may exceed our estimates and may
require significant time and attention from senior management. Accordingly, the Company cannot predict
whether it will succeed in implementing these strategic initiatives. If it fails to successfully diversify our
business, it may have a material adverse effect on the Company’s competitive position, financial condition and
operating results.
The Company’s paper products are vulnerable to long-term declines in demand due to competing technologies or
materials.
The Company’s paper business competes with electronic transmission and document storage alternatives, as
well as with paper grades it does not produce, such as uncoated groundwood. As a result of such competition, the
Company is experiencing ongoing decreasing demand for most of its existing paper products. As the use of these
alternatives grows, demand for paper products is likely to decline further. Declines in demand for our paper
products may adversely affect the Company’s business, results of operations and financial position.
The pulp and paper industry is highly cyclical. Fluctuations in the prices of and the demand for the Company’s
pulp and paper products could result in lower sales 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
to producer,
producers. Because commodity products have few distinguishing qualities from 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
18
volatile. Because market conditions beyond the Company’s control determine the prices for its commodity
products, the price for any one or more of these products may fall below its cash production costs, requiring the
Company to either incur cash losses on product sales or cease production at one or more of its pulp and paper
manufacturing facilities. The Company continuously evaluates potential adjustments to its production capacity,
which may include additional closures of machines or entire mills, and the Company could recognize significant
cash and/or non-cash charges relating to any such closures in future periods. Refer to Item 8, Financial
Statements and Supplementary Data under Note 15 “Closure and restructuring costs and liability” for more
details. Therefore, the Company’s profitability with respect to these products depends on managing its cost
the largest
structure, particularly wood fiber, chemical,
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.
transportation and energy costs, which represent
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 hedging a significant
portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The
Company may use foreign exchange derivative instruments to mitigate its exposure to fluctuations in foreign
currency exchange rates. There can be no assurance that the Company will be protected against substantial
foreign currency fluctuations. Currency exchange rates could adversely affect
the Company’s results of
operations and financial position.
The Company relies heavily on a small number of significant customers, including one customer that represented
approximately 10% of the Company’s sales in 2018. 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 2018. A significant reduction in sales to any
of the Company’s key customers could materially adversely affect the Company’s business, financial condition
or results of operations, could result from such customers further diversifying their product sourcing, or
experiencing financial difficulty or consolidating with each other.
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 2018, the
Company’s total capital expenditures were $195 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
19
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 18 “Long-term debt” for more details.
these restrictions are subject
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 2018, the Company paid approximately $358 million in interest and principal payments. The Company’s
ability to make payments on and refinance its debt, including the Company’s unsecured long-term notes and
amounts borrowed under its revolving credit facility and term loan, if any, and other financial obligations and to
fund its operations will depend on its ability to generate substantial operating cash flow. The Company’s cash
flow generation will depend on its future performance, which will be subject to prevailing economic conditions
and to financial, business and other factors, many of which are beyond its control.
The Company’s business may not generate sufficient cash flow from operations and future borrowings may
not be available to the Company under its revolving credit facility or otherwise in amounts sufficient to enable
the Company to service its indebtedness, including the Company’s unsecured long-term notes, and borrowings, if
any, under its revolving credit facility and securitization or to fund its other liquidity needs. If the Company
cannot service its debt, the Company will have to take actions such as reducing or delaying capital investments,
selling assets, restructuring or refinancing its debt or seek additional equity capital. Any of these remedies may
not be executed on commercially reasonable terms, or at all, and may impede the implementation of its business
strategy. Furthermore, the revolving credit facility may restrict the Company from adopting any of these
alternatives. Because of these and other factors that may be beyond its control, the Company may be unable to
service its indebtedness.
The Company 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 $68 million of operating expenses and $8 million of capital expenditures in connection
with environmental compliance and remediation in 2018. As of December 31, 2018, the Company had a
provision of $37 million for environmental expenditures, including certain asset retirement obligations (such as
for landfill capping).
20
The Company could also incur substantial costs, such as civil or criminal fines, sanctions and enforcement
actions (including orders limiting its operations or requiring corrective measures, installation of pollution control
equipment or other remedial actions), cleanup and closure costs, and third-party claims for property damage and
personal injury as a result of violations of, or liabilities under, environmental laws and regulations. The
Company’s ongoing efforts to identify potential environmental concerns that may be associated with its past and
present properties may lead to future environmental investigations. Those efforts may result in the determination
of additional environmental costs and liabilities which cannot be reasonably estimated at this time.
As the owner and operator of real estate, the Company may be liable under environmental laws for cleanup,
closure and other damages resulting from the presence and release of hazardous substances, including asbestos,
on or from its properties or operations, including properties that it no longer owns. The amount and timing of
environmental expenditures is difficult to predict, and, in some cases, the Company’s liability may be imposed
without regard to contribution or to whether it knew of, or caused, the release of hazardous substances and may
exceed forecasted amounts or the value of the property itself. The discovery of additional contamination or the
imposition of additional cleanup obligations at the Company’s or third-party sites may result in significant
additional costs. Any material liability the Company incurs could adversely impact its financial condition or
preclude it from making capital expenditures that would otherwise benefit its business.
In addition, the Company may be subject to asbestos-related personal injury litigation arising out of
exposure to asbestos on or from its properties or operations, and may incur substantial costs as a result of any
defense, settlement, or adverse judgment in such litigation. The Company may not have access to insurance
proceeds to cover costs associated with asbestos-related personal injury litigation.
Enactment of new environmental laws or regulations or changes in existing laws or regulations (such as
changes in climate change regulation), or interpretation thereof, might require significant expenditures. For
to Item 8, Financial Statements and Supplementary Data under Note 21
additional
“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 21 “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
21
tax cross-border international trade have evolved partly due to the Base Erosion and Profit Shifting project led by
the Organization for Economic Cooperation and Development and supported by the G20. Changes in these laws
and regulations, or any change in the position of tax authorities regarding their application, administration or
interpretation could adversely affect the Company’s financial results. In addition, a number of countries are
actively pursuing changes to their tax laws applicable to multinational corporations, such as the U.S. Tax Cuts
and Jobs Acts (“U.S. Tax Reform”), enacted in 2017. Finally, foreign governments may enact tax laws in
response to the U.S. Tax Reform that could result in further changes to global taxation and materially impact the
Company’s financial results.
The U.S. Tax Reform significantly changes how the U.S. taxes corporations. The U.S. Tax Reform requires
complex computations to be performed that were not previously required under U.S. tax law, significant
judgments to be made in interpretation of the 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’s interpretation.
The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with
differing statutory tax rates or changes in the valuation of deferred tax assets and liabilities. The Company is also
subject to the examination of its tax returns and other matters by tax authorities and governmental bodies. The
Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine
the adequacy of its provision for taxes and as of December 31, 2018, has a reserve for liabilities relating to
uncertain tax positions of $32 million. Taxing authorities may disagree with the positions the Company has taken
regarding the tax treatment or characterization of its transactions. If any tax authorities were successful in
challenging the tax treatment or characterization of any of the Company’s transactions, it could also adversely
affect its financial results.
The Company’s 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 20% of the consolidated cost of sales in 2018. Wood fiber is a commodity, and prices historically
have been impacted by a variety of factors. The primary source for wood fiber is timber. Environmental litigation
and regulatory developments, alternative use for energy production and reduction in harvesting related to the
housing market, have caused, and may cause in the future, significant reductions in the amount of timber
available for commercial harvest in the 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.
22
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
polymers and nonwovens. The costs of these other raw materials have been volatile historically, and they are
influenced by capacity utilization, energy prices and other factors beyond the Company’s control.
Due to the commodity nature of the Company’s products, the relationship between supply and demand for
these products, rather than changes in the cost of raw materials or purchased energy, will determine the
Company’s ability to increase prices. Consequently, the Company may be unable to pass on increases in its
operating costs to its customers. Any sustained increase in raw material or energy 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 negotiated on a facility-by-facility
basis. In the future, the Company may not be able to negotiate acceptable new collective bargaining agreements,
which could result in strikes or work stoppages or other labor disputes by affected workers. Renewal of collective
bargaining agreements could also result in higher wages or benefits paid to union members. In addition, labor
organizing activities could occur at any of the Company’s facilities. Therefore, the Company could experience a
disruption of its operations or higher ongoing labor costs, which could have a material adverse effect on its
business and results of operations.
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.
23
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;
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 IT systems, some of which are dependent on services provided by third parties, serve an
important role in the efficient operation of its business. The protection of customers, employees and company
data is critical to the Company’s business. This role includes ordering and managing materials from suppliers,
managing its inventory, converting materials to finished products, facilitating order entry and fulfillment and
processing of transactions, summarizing and reporting its financial results, facilitating internal and external
communications, administering human resources functions, retaining certain personal information and providing
other processes necessary to manage its business. The 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,
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
limited to, natural disasters,
including, but not
24
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
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 intangible assets. For example, the Company expects that its 2019 results will
include approximately $42 million of closure and restructuring costs related to its 2018 announced margin
improvement plan at its Waco, Texas, Personal Care manufacturing and distribution facility. 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, 2018, the Company’s defined benefit plans had a surplus of
$107 million on certain plans and a deficit of $88 million on others.
Since pension fund obligations are primarily long-term in nature, losses in pension fund investments, if any,
would result in increased contributions by the Company, to be paid over 5 year or 10 year periods, depending
upon the applicable legislation for funding pension deficits. Losses, if any, would also impact the Company’s
results over a longer period of time and immediately increase liabilities and reduce equity.
The Company’s future funding obligations for its defined benefit pension plans depend upon changes to the
level of benefits provided by the plans, the future performance of assets set aside in trusts for these plans, the
level of interest rates used to determine minimum funding levels, actuarial data and experience, and any changes
in government laws and regulations. As of December 31, 2018, the Company’s defined benefit pension plans
held assets with a fair value of $1,588 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.
25
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.
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, 2018, the Company’s balance sheet included
intangible assets of $597 million, of which $311 million related to intangible assets subject to amortization and
$286 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 assessment of industry and
market conditions, estimates for future revenue growth rates, royalty rates, economic indicators, tax rates 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 2018, the
Company 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. Two Personal Care segment
indefinite-lived intangible assets are
considered to be at risk for future impairment given their respective fair values exceed their respective carrying
values by 3% and 20% at the time the test was performed. As of December 31, 2018, the carrying value of these
indefinite-lived intangible assets was $116 million and $39 million. If assumed revenue growth is not achieved in
future periods and/or events occur that lead to a royalty rate decrease 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 the Company is 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
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.
26
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.
Listing of facilities and locations
CORPORATE OFFICES
Fort Mill, South Carolina
Montreal, Quebec
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
Rock Hill, South Carolina
Tatum, South Carolina
Washington Court House, Ohio
Local Distribution Centers
Buffalo, New York
Cincinnati, Ohio
Cleveland, Ohio
Des Moines, Iowa
Houston, Texas
Kansas City, Kansas
Minneapolis, Minnesota
Nashville, Tennessee
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
Representative Office—
International
Hong Kong, China
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
Jesup, Georgia
Waco, Texas (1)
EUROPE
Aneby, Sweden
Toledo, Spain
Personal Care—
Sales offices
Daytona Beach, Florida
Tuitjenhorn, The Netherlands
Olivette, Missouri
Oslo, Norway
Linz, Austria
Madrid, Spain
Pusignan, France
Rheinfelden, Switzerland
Schwalbach am Taunus,
Germany
Stockholm, Sweden
Texarkana, Arkansas
Wakefield, United Kingdom
(1) On November 1, 2018, we announced a margin improvement plan within our Personal Care segment,
including the permanent closure of our Waco, Texas, manufacturing and distribution facility. The facility is
expected to cease operations in the third quarter of 2019.
27
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 21 “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”.
HOLDERS
At December 31, 2018, the number of shareholders of record (registered and non-registered) of Domtar
Corporation common stock was approximately 21,215.
PERFORMANCE GRAPH
This graph compares the return on a $100 investment in the Company’s common stock on December 31,
2013 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
s
r
a
l
l
o
D
180
160
140
120
100
80
60
40
20
0
2013
2014
2015
2016
2017
2018
Domtar Corporation
Peer Group
S&P 400
S&P 500
S&P 500 Materials
(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.
29
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 1
Closure and restructuring costs and
impairment of property, plant and
equipment and goodwill 2
Depreciation and amortization
Operating income 2, 3
Net (loss) earnings 4
Net (loss) earnings per common
share—basic
Net (loss) earnings per common
share—diluted
Cash dividends paid per common
share
Balance Sheet Data:
December 31,
2018
December 31,
2017
December 31,
2016
December 31,
2015
December 31,
2014
Year ended
$5,455
$5,148
$5,090
$5,257
$5,555
15
308
386
283
580
321
(328)
(258)
61
348
208
128
81
359
276
142
32
384
376
431
$ 4.50
$ (4.11)
$ 2.04
$ 2.24
$ 6.65
$ 4.48
$ (4.11)
$ 2.04
$ 2.24
$ 6.64
$ 1.72
$ 1.66
$ 1.63
$ 1.58
$ 1.30
Cash and cash equivalents
Property, plant and equipment, net
Total assets
Long-term debt due within one year
Long-term debt
Total shareholders’ equity
$ 111
2,605
4,925
1
853
2,538
$ 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
1
2
3
4
As a result of adopting the new accounting standard “Revenue from Contracts with Customers,” we have
revised our 2017, 2016, 2015 and 2014 previously reported Sales, which were as follows: $5,157 million,
$5,098 million, $5,264 million and $5,563 million, respectively. Refer to Item 8, Financial Statement and
Supplementary Data under Note 2 “Recent Accounting Pronouncements” for more details.
In the fourth quarter of 2017, we recorded 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 Property, Plant and Equipment and Goodwill.”
As a result of adoption the new accounting guideline “Improving the Presentation of Net Periodic Cost and
Net Periodic Postretirement Benefit Cost,” we have revised our 2017, 2016, 2015 and 2014 previously
reported Operating income (loss), which were as follows: $(317) million, $223 million, $288 million and
$364 million, respectively. Refer to Item 8, Financial Statement and Supplementary Data under Note 2
“Recent Accounting Pronouncements” for more details.
In the fourth quarter of 2017, we recorded a net tax benefit of $140 million related to the U.S. Tax Reform
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. During 2018, we recorded an additional tax
benefit of $13 million, $7 million related to adjustments to the repatriation tax and $6 million related to the
revaluation of net deferred tax liabilities. Also, the net earnings for the fourth quarter of 2018 included a tax
expense of $10 million related to the U.S. Tax Reform. For additional information, refer to Item 8, Financial
Statement and Supplementary Data under Note 10 “Income Taxes.”
30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
should be read in conjunction with Domtar Corporation’s audited consolidated financial statements and notes
thereto included in Item 8, Financial Statements and Supplementary Data. Throughout this MD&A, unless
otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers to Domtar
Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange
and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is
determined on the basis of accounting principles generally accepted in the United States.
The information contained on our website, www.domtar.com, is not incorporated by reference into this
Form 10-K and should in no way be construed as a part of this or any other report that we file with or furnish to
the SEC.
In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton,
an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT”
refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in
U.S. dollars, and the term “dollars” and the symbol “$” 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-month periods ended December 31, 2018, 2017
and 2016. The twelve month periods are also referred to as 2018, 2017 and 2016. 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
•
2018 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/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.
2018 HIGHLIGHTS
• Operating income and net earnings increased by 218% and 210%, respectively from 2017
31
•
Sales increased by 6% from 2017. Net average selling prices for pulp and paper were up while net
average selling prices for personal care products were down from 2017. Our manufactured paper
volumes were up while our pulp and personal care volumes were down when compared to 2017
• Recognition of a closure and restructuring charge and accelerated depreciation associated with an
announced margin improvement plan within our Personal Care segment of $8 million and $7 million,
respectively
•
$554 million of cash flow from operating activities
• We paid $108 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 2018 vs. 2017
Variance 2017 vs. 2016
December 31,
2018
December 31,
2017
December 31,
2016
$
%
$
%
$5,455
386
283
$5,148
(328)
(258)
$5,090
208
128
$ 307
714
541
6%
218%
210%
$
58
(536)
(386)
1%
-258%
-302%
$ 4.50
$ 4.48
$ (4.11)
$ (4.11)
$ 2.04
$ 2.04
$8.61
$8.59
$ (6.15)
$ (6.15)
At December 31,
2018
At December 31,
2017
$4,925
$5,212
$ 854
$1,130
1
2
3
As a result of the margin improvement plan within our Personal Care segment announced in the fourth quarter
of 2018, we recorded a closure and restructuring charge of $8 million and an accelerated depreciation of
property, plant and equipment charge of $7 million. In the fourth quarter of 2017, we recorded non-cash
goodwill impairment charge associated with our Personal Care segment of $578 million. See Item 8, Financial
Statements and Supplementary Data under Note 15 “Closure and Restructuring Costs and Liability” and Note
4 “Impairment of Property, Plant and Equipment and Goodwill”, 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, and adjusted by $7 million in the third quarter of 2018.
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 2019, our paper shipments will increase as we respond to increased demand from our customers
following the announced industry capacity closures while paper prices will continue to improve in the wake of
the recently announced price increases across the majority of our paper grades. Softwood and fluff pulp markets
will remain balanced through the year due to continued steady demand growth and limited announced new
capacity. We anticipate costs, including freight, labor and raw materials, to marginally increase. Personal Care is
expected to benefit from our margin improvement plan and new customer wins, partially offset by further raw
material cost inflation.
32
CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW
This section presents a discussion and analysis of our 2018, 2017 and 2016 sales, operating income (loss)
and other information relevant to the understanding of our results of operations.
As a result of adopting the new accounting standard “Revenue from Contracts with Customers,” we have
revised our segment disclosures to conform to the new guideline. In 2017 and 2016, previously reported Sales
were as follows: $4,216 million for Pulp and Paper (2016 – $4,239 million), $1,005 million for Personal Care
(2016 – $917 million), and $(64) million for Intersegment sales (2016 – $(58) million). As a result of adopting
the new accounting guideline “Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost,” we have revised our 2017 and 2016 segment disclosures to conform to the new
guideline. In 2017 and 2016, previously reported numbers for Operating income (loss) were as follows:
$250 million for Pulp and Paper (2016 – $217 million), ($527) million for Personal Care (2016 – $57 million),
and $(40) million for Corporate (2016 – $(51) million).
ANALYSIS OF NET SALES
By Business Segment
Twelve months ended
Variance 2018 vs. 2017 Variance 2017 vs. 2016
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)
December 31,
2018
December 31,
2017
December 31,
2016
$4,523
1,000
5,523
(68)
5,455
$4,216
996
5,212
(64)
5,148
$4,239
909
5,148
(58)
5,090
3,021
2,522
499
123
2,971
2,446
525
109
3,080
1,536
2,891
2,401
490
109
3,000
1,722
$
307
4
311
(4)
307
80
45
35
%
7%
— %
6%
6%
3%
2%
7%
$
(23)
87
64
(6)
58
(130)
(121)
(9)
%
-1%
10%
1%
1%
-4%
-5%
-2%
—
— %
(14)
-11%
3,144
1,513
80
(186)
3%
-11%
(144)
209
-5%
14%
ANALYSIS OF CHANGES IN SALES
2018 vs. 2017
% Change in Net Sales due to
2017 vs. 2016
% Change in Net Sales due to
Net Price
Volume /
Mix
Currency Total Net Price
Volume /
Mix
Currency Total
Pulp and Paper
Personal Care
Consolidated sales
8%
-1%
7%
-1%
-1%
-1%
(a)
Includes sales of HDIS since October 1, 2016.
33
— %
7% — %
-1% — % -1%
2% — % -1% 11%(a) — % 10%
1% — % 1%
6% — %
— %
ANALYSIS OF OPERATING INCOME (LOSS)
By Business Segment
Twelve months ended
2018 vs. 2017 Variance
2017 vs. 2016 Variance
December 31,
2018 (a)
December 31,
2017 (b)
December 31,
2016
$
%
$
%
Operating income (loss)
Pulp and Paper
Personal Care
Corporate
Consolidated operating
income (loss)
$438
$ (5)
$ (47)
$ 237
$(527)
$ (38)
$201
$ 57
$ (50)
201
522
(9)
85%
99%
-24%
36
(584)
12
18%
(1025)%
24%
$386
$(328)
$208
714
218%
(536)
(258)%
(a)
(b)
Includes closure and restructuring charge and accelerated depreciation of property, plant and equipment
associated with an announced margin improvement plan within our Personal Care segment of $8 million and
$7 million, respectively.
Includes non-cash goodwill impairment charge associated with our Personal Care segment of $578 million.
2018 VS. 2017
$ Change in Segmented Operating Income (Loss) due to
Volume/
Mix Net Price
Input
Costs (a)
Operating (b)
Expenses Currency
Depreciation/
Impairment (c) Restructuring (d)
Other Income/
Expense (e)
Pulp and Paper
Personal Care
Corporate
Consolidated operating
(1)
(2)
—
355
(5)
—
(69)
(25)
—
(94)
(11)
7
(9)
4
—
income (loss)
(3)
350
(94)
(98)
(5)
16
568
—
584
—
(6)
—
(6)
Total
201
522
(9)
3
(1)
(16)
(14)
714
Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy
costs.
Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs.
In our Personal Care segment, in 2018, we recorded $7 million of non-cash impairment of property, plant
and equipment compared to $578 million of non-cash impairment of goodwill recorded in 2017.
Depreciation charges were lower by $13 million in 2018, excluding foreign currency impact.
(a)
(b)
(c)
(d)
2018 restructuring charges relate mostly to:
—Inventory write-down ($4 million)
—Severance and termination costs ($3 million)
—Other costs ($1 million)
(e)
2017 restructuring charges relate mostly to:
—Severance and termination costs ($2 million)
2018 operating expenses/income includes:
—Net gain on sale of property, plant and equipment
2017 operating expenses/income includes:
—Net gain on sale of property, plant and equipment
($4 million)
—Foreign exchange gain ($2 million)
—Environmental provision ($5 million)
—Bad debt expense ($2 million)
—Other income ($1 million)
($13 million)
—Reversal of contingent consideration ($2 million)
—Bad debt expense ($1 million)
—Environmental provision ($3 million)
—Foreign exchange loss ($1 million)
—Other income ($4 million)
34
Commentary—2018 vs. 2017
Interest Expense, net
We incurred $62 million of net interest expense in 2018 compared to net interest expense of $66 million in
2017. Interest expense decreased mainly due to the repayment at maturity of the 10.75% Notes due in June 2017
and was partially offset by an increase in interest rate on the Term Loan.
Income Taxes
We recorded an income tax expense of $57 million in 2018 compared to an income tax benefit of
$125 million in 2017, which yielded an effective tax rate of 17% and 33% for 2018 and 2017, respectively.
During 2018, we recorded $19 million of tax credits, mainly research and experimentation credits, which
significantly impacted our effective tax rate.
On December 22, 2017, the U.S. Tax Reform was signed into law. The U.S. Tax Reform significantly
changed U.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax
rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a one-time
deemed repatriation tax on accumulated foreign earnings. As a result of the U.S. Tax Reform, we recorded a net
tax benefit of $140 million in the fourth quarter of 2017 when the legislation was enacted. This consisted of a
provisional tax benefit of $186 million relating to the revaluation of our ending net deferred tax liabilities and a
provisional expense of $46 million related to the deemed repatriation tax. Additionally, Staff Accounting Bulletin
No. 118 (“SAB 118”) was issued to address the application in situations when a registrant did 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. The end of the measurement period for SAB 118 purposes was
December 22, 2018. We have completed our analysis, including currently available legislative updates, and have
recorded an additional tax benefit of $13 million for the year ended December 31, 2018. Of this benefit,
$7 million related to adjustments to the deemed mandatory repatriation tax and $6 million related to the
revaluation of the Company’s net deferred tax liabilities. Both of these amounts impacted the effective tax rate
for 2018.
As a result of the deemed mandatory repatriation tax requirement of the U.S. Tax Reform, we have taxed
our undistributed foreign earnings as of December 31, 2017, at reduced tax rates. After completing our evaluation
of the U.S. Tax Reform’s impact on business operations, we have determined that we are no longer indefinitely
reinvested in these undistributed foreign earnings as well as foreign earnings after December 31, 2017.
Therefore, as of December 31, 2018, we have recorded a deferred tax liability of $10 million for foreign
withholding tax and various state income taxes associated with future repatriation of these earnings. This
$10 million of tax expense impacted the effective tax rate for 2018. We have not provided for deferred taxes on
outside basis differences in our investments in foreign subsidiaries that are unrelated to unremitted earnings as
we estimate that the deferred tax liability recorded in 2018 in combination with the repatriation tax amount
covers all tax liabilities with foreign investments to date. We remain indefinitely reinvested in the outside basis
differences of our foreign subsidiaries.
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 was 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. 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 current tax credits, mainly research and experimentation credits. 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.
35
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 us to include in our 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.
We are required to make an accounting policy election to either (1) treat taxes due related to GILTI as a current-
period expense when incurred or (2) factor such amounts into the measurement of deferred taxes. We have
elected to account for any taxes associated with GILTI in accordance with the current-period expense method.
2017 VS. 2016
Pulp and Paper
Personal Care
Corporate
Consolidated operating income
$ 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)
(17)
6
—
(2)
(11)
—
14
3
—
(73)
3
2
15
(4)
(1)
60
(579)
—
31
(1)
—
Other
Income/
Expense (f)
8
(1)
11
Total
36
(584)
12
(loss)
(11)
(13)
17
(68)
10
(519)
30
18
(536)
(a)
Includes results of HDIS since October 1, 2016.
(b)
Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy
costs.
(c)
Includes maintenance, freight costs, 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 exchange currency impact.
(d)
(e)
2016 restructuring charges related mostly to:
—Fluff pulp conversion outage ($26 million)
—Severance and termination costs ($9 million)
—Pension settlement and withdrawal liability
($3 million)
2016 operating expenses/income includes:
—Foreign exchange loss ($6 million)
—Environmental provision ($2 million)
—Other income ($4 million)
2017 restructuring charges related mostly to:
—Severance and termination costs ($2 million)
(f)
2017 operating expenses/income includes
—Net gain on sale of property, plant and equipment
($13 million)
—Reversal of contingent consideration ($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 both 2017 and 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”
below 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 current 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 Reform
The U.S. Tax Reform was signed into law on December 22, 2017. The U.S. Tax Reform significantly
changed U.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax
rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a one-time
deemed repatriation tax on accumulated foreign earnings. 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 provided 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 elected
to pay over eight years, and which impacted the 2017 tax rate. While we made a reasonable estimate of the
repatriation tax amount, we continued to analyze various factors, including the impact of foreign tax credits
available to offset the tax. We continued 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 continued 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. As of December 31, 2017 we had
not completed our analysis of the impacts of the U.S Tax Reform and how these changes would impact
operational decisions around the utilization of cash residing in the foreign subsidiaries. As such, we had not
recorded a tax liability amount for this item.
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.
Commentary—Segment Review
Pulp and Paper Segment
2018 vs. 2017
Sales in our Pulp and Paper segment increased by $307 million, or 7%, when compared to sales in 2017.
This increase in sales is mostly due to an increase in net average selling price for pulp and paper as well as an
increase in our paper sales volume. This increase was partially offset by a decrease in our pulp sales volumes.
37
Operating income in our Pulp and Paper segment amounted to $438 million in 2018, an increase of
$201 million, when compared to operating income of $237 million in 2017. Our results were positively impacted
by:
• Higher average selling prices for pulp and paper ($355 million)
• Lower depreciation charges ($16 million) due to certain assets being fully depreciated
• Higher other income/expense ($3 million)
These increases were partially offset by:
• Higher operating expenses ($94 million) mostly due to higher freight as a result of a shortage of truck
capacity in North America and higher maintenance costs due to timing of planned maintenance, as well
as lower production
• Higher input costs ($69 million) mostly related to higher costs of chemical, fiber, and energy in part
due to severe weather conditions as well as unfavorable market conditions
• Negative impact of our hedging program and a stronger Canadian dollar on our Canadian denominated
expenses ($9 million)
• Lower volume and mix ($1 million) mostly related to lower volume of pulp, partially offset by higher
volume of paper
2017 vs. 2016
Sales in 2017 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 $237 in 2017, an increase of $36 million,
when compared to operating income of $201 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 ($73 million) mostly due to higher freight, compensation, warehousing and
packaging costs as well as lower production
• Lower volume and mix ($17 million) mostly related to lower volume of paper, partially offset by
higher volume of pulp
38
• Lower average selling prices for paper, partially offset by higher average selling prices for pulp ($2
million)
The markets in which our pulp and paper business operate are highly competitive with well-established
domestic and foreign manufacturers. Most of our products are commodities that are widely available from other
producers as well. Because commodity products have few distinguishing qualities from producer to producer,
competition for these products is based primarily on price, which is determined by supply relative to demand. We
also compete on the basis of product quality, breadth of offering and service solutions. Further, we compete
against electronic transmission and document storage alternatives. As a result of such competition, we are
experiencing ongoing decreasing demand for most of our existing paper products.
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.
Personal Care
2018 vs. 2017
Sales in 2018 in our Personal Care segment increased by $4 million, remaining relatively flat, when
compared to sales in 2017. This increase in sales was driven by favorable foreign currency exchange, mostly due
to a stronger Euro and favorable mix, partly offset by lower volume and selling prices.
Operating income increased by $522 million compared to 2017. Our results were positively impacted by:
• Lower depreciation/impairment charges ($568 million) mostly due to the non-cash impairment of
goodwill recorded in 2017 of $578 million partially offset by a non-cash impairment of property, plant
and equipment charge of $7 million recorded in 2018
•
Favorable foreign exchange ($4 million), mostly due to a stronger Euro, net of our hedging program
These increases were partially offset by:
• Higher input costs ($25 million) mostly due to increasing raw materials pricing
• Higher operating expenses ($11 million) mostly due to higher manufacturing and freight costs
• Higher closure and restructuring charges ($6 million) mostly due to the charge recorded in the fourth
quarter of 2018 for our margin improvement plan
• Unfavorable average net selling prices ($5 million)
• Lower volume and mix ($2 million)
• Unfavorable other income/expense ($1 million)
2017 vs. 2016
Sales in 2017 in our Personal Care segment increased by $87 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
• Unfavorable average net selling prices ($11 million)
39
• 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 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-wovens
• Lower operating expenses ($3 million) mostly due to lower manufacturing costs, partially offset by
higher salaries & wages
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
recent years. 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 are expected to benefit from the overall increase in healthcare spending due to an aging
population, the pressures to limit spending on healthcare may 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.
The principal methods and elements of competition remain brand recognition and loyalty, product
innovation, quality and performance, price and marketing and distribution capabilities.
Margin Improvement Plan
On November 1, 2018, we announced a margin improvement plan within our Personal Care segment. As
part of this plan, our Board of Directors approved the permanent closure of our Waco, Texas, manufacturing and
distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction across the
division. The Waco, Texas facility is expected to cease operations in the third quarter of 2019.
The aggregate pre-tax earnings charge in connection with this margin improvement plan is estimated to be
$57 million, which includes: a) an estimated $29 million in charges relating to accelerated depreciation of the
carrying amounts of certain manufacturing equipment and the write-down of related spare parts; b) $10 million
of estimated severance and related employee benefits; c) $11 million of estimated relocation and other costs; and
d) $7 million of an estimated amount related to the future lease payments at the Waco facility, net of expected
sublease revenues. We also expect to incur approximately $5 million of capital expenditures related to certain
equipment installation costs.
Closure and restructuring costs are based on management’s best estimates. Although we do not anticipate
significant changes, actual costs may differ from these estimates due to subsequent business developments. As
such, additional costs and further impairment charges may be required in future periods.
We recorded $7 million for the year ended December 31, 2018 of accelerated depreciation under
Impairment of property, plant and equipment and goodwill on the Consolidated Statement of Earnings (Loss) and
Comprehensive Income (Loss). During the fourth quarter of 2018, we also recorded a $4 million write-down of
inventory, $3 million of severance and termination costs, and $1 million of other costs under Closure and
restructuring costs. The balance will be recognized through the third quarter of 2019.
40
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, 2018, stock-based compensation expense recognized in our results of
operations was $10 million (2017 – $20 million; 2016 – $16 million) for all of the outstanding awards.
Compensation costs not yet recognized amounted to $17 million (2017 – $20 million; 2016 – $17 million) and
will be recognized over the remaining service period of approximately 26 months. The aggregate value of
liability awards settled in 2018 was $8 million (2017 – $7 million; 2016 – $4 million). The total fair value of
equity awards settled in 2018 was $6 million (2017 – $3 million), representing the fair value at the time of
settlement. The fair value at the grant date for these settled equity awards was $7 million (2017 – $4 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 $48 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 and adjusted by $7 million in the third quarter of 2018. After
completing our evaluation of the U.S. Tax Reform’s impact on the business operations, we have determined that
we are no longer indefinitely reinvested in these undistributed foreign earnings as well as foreign earnings after
December 31, 2017. We remain indefinitely reinvested in the outside basis differences of our foreign
subsidiaries.
Operating Activities
Our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials,
including fiber and energy, and other expenses such as income tax and property taxes.
Cash flows from operating activities totaled $554 million in 2018, a $105 million increase compared to cash
flows from operating activities of $449 million in 2017. This increase in cash flows from operating activities is
primarily due to an increase in profitability, partially offset by a decrease in cash flow from working capital
elements in 2018 when compared to 2017. We made income tax payments, net of refunds, of $71 million in 2018
41
compared to income tax payments, net of refunds of $33 million in 2017. We paid $46 million of employer
pension and other post-retirement contributions in excess of pension and other post-retirement expense in 2018,
compared to $32 million in 2017.
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.
Investing Activities
Cash flows used for investing activities in 2018 amounted to $196 million, a $25 million increase compared
to cash flows used for investing activities of $171 million in 2017.
The use of cash in 2018 was attributable to additions to property, plant and equipment of $195 million. Also,
in 2018, we made an additional investment of $4 million in our joint venture CelluForce (a company that
develops and manufactures nanocrystalline cellulose, a recyclable and renewable nanomaterial) and a $2 million
investment in Prisma Renewable Composites, LLC (a company focused on developing advanced materials from
lignin and other natural resources). These uses of cash were partially offset by the proceeds from disposal of
property, plant and equipment of $5 million.
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 Home Delivery Incontinent Supplies (“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 2019 are expected to be between $220 million and $240 million.
Financing Activities
Cash flows used for financing activities totaled $382 million in 2018 compared to cash flows used for
financing activities of $274 million in 2017.
The use of cash in 2018 was primarily the result of the repayment of our term loan ($300 million) and
dividend payments ($108 million), partially offset by the net proceeds of borrowings under our receivables
securitization ($25 million).
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).
42
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).
Capital Resources
Net indebtedness, consisting of long-term debt, net of cash and cash equivalents, was $743 million as of
December 31, 2018 compared to $991 million as of December 31, 2017.
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 fourth quarter of 2018, we repaid the $300 million unsecured Term Loan that had been entered into in
2015 by a wholly-owned subsidiary of Domtar with certain domestic banks.
Revolving Credit Facility
In August 2018, we amended and restated our unsecured revolving credit facility (the “Credit Agreement”)
with certain domestic and foreign banks, extending the Credit Agreement’s maturity date from August 18, 2021
to August 22, 2023. The amount available under the Credit Agreement remains at $700 million.
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.
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, 2018, we were in compliance with these financial covenants, and had no
borrowings (December 31, 2017 – nil). At December 31, 2018, we had no outstanding letters of credit
(December 31, 2017 – nil), leaving $700 million unused and available under this facility.
Receivables Securitization
We have a $150 million receivables securitization facility that matures in November 2021, extended during
2018 from its previous maturity in March 2019.
At December 31, 2018, borrowings under the receivables securitization facility amounted to $50 million and
we had $52 million of letters of credit under the program (December 31, 2017 – $25 million and $50 million,
respectively). The program contains certain termination events, which include, but are not limited to, matters
related to receivable performance, certain defaults occurring under the Credit Agreement or our failure to repay
or satisfy material obligations. At December 31, 2018, we had $48 million unused and available under this
facility.
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Common Stock
During 2018, we declared four quarterly dividends of $0.435 per share, to holders of our common stock.
Dividends of $27 million, $28 million, $27 million and $27 million were paid on April 16, 2018, July 16, 2018,
October 15, 2018 and January 15, 2019, respectively, to shareholders of record as of April 2, 2018, July 3, 2018,
October 2, 2018 and January 2, 2019, respectively.
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.
On February 19, 2019, our Board of Directors approved a quarterly dividend of $0.435 per share, to be paid
to holders of our common stock. This dividend is to be paid on April 15, 2019 to shareholders of record on
April 2, 2019.
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, 2018, we were
unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts
are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably
estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded
significant expenses in the past.
Pension Plans
We have indemnified and held harmless the trustees of our pension funds, and the respective officers,
directors, employees and agents of such trustees, from any and all costs and expenses arising out of the
performance of their obligations under the relevant trust agreements, including in respect of their reliance on
authorized instructions from us or for failing to act
in the absence of authorized instructions. These
indemnifications survive the termination of such agreements. At December 31, 2018, we have not recorded a
liability associated with these indemnifications, as we do not expect to make any payments pertaining to these
indemnifications.
44
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, 2018:
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)
2019
2020
2021
2022
2023
THEREAFTER TOTAL
—
2
26
3
—
2
21
3
50
2
17
3
300 —
1
10
6
1
12
3
$ 31
$ 26
$72
$316
$ 17
$500
7
17
18
$542
$ 850
15
103
36
1,004
2019
2020
2021
2022
2023
THEREAFTER TOTAL
$ 84
$ 13
$ 3
1 —
2
$ 103
(1)
(2)
In connection with the U.S. Tax Reform, we have remaining liabilities of $36 million in repatriation tax to
pay through 2025. See Note 10 “Income Taxes” for additional information on the U.S. Tax Reform.
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 $12 million to the pension plans in 2019 and
a minimum total amount of $5 million in 2019 to the other post-retirement benefits plans.
For 2019 and the foreseeable future, we expect cash flows from operations and from our various sources of
financing to be sufficient to meet our contractual obligations and commercial commitments.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Item 8, Financial Statements and Supplementary Data under Note 2 “Recent Accounting
Pronouncements”.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our principal accounting policies are described in Item 8, Financial Statements and Supplementary Data
under Note 1 “Summary of Significant Accounting Policies”. Notes referenced in this section are included in
Item 8, Financial Statements and Supplementary Data.
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates, assumptions and choices amongst acceptable
accounting methods that affect our reported results of operations and financial position. Critical accounting
estimates pertain to matters that contain a significant level of management estimates about future events,
encompass the most complex and subjective judgments and are subject to a fair degree of measurement
uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental
matters and asset retirement obligations,
lives of long-lived assets, closure and
impairment and useful
restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes
and contingencies related to legal claims. These critical accounting estimates and policies have been reviewed
with the Audit Committee of our Board of Directors. We believe these accounting policies, and others as set forth
in Note 1 “Summary of Significant Accounting Policies”, should be reviewed as they are essential
to
understanding our results of operations, cash flows and financial condition. Actual results could differ from those
estimates.
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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
the remediation plan approved by the relevant government
based on an awarded contract
authorities. Additional information regarding Seaspan and other environmental matters is available in Note 21
“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 21 “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 4.7% 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, 2018, we had an asset retirement obligation provision of $12 million for 11 locations (2017 – $15
million).
As at December 31, 2018, we had a provision of $37 million for environmental matters and other asset
retirement obligations (2017 – $44 million). Certain of these amounts have been discounted due to more certainty
of the timing of expenditures using the credit adjusted risk-free interest rate for the corresponding period until the
settlement date. The rates used vary, based on the prevailing rate at the moment of recognition of the liability and
on its settlement period. Additional costs, not known or identified, could be incurred for remediation efforts.
Based on policies and procedures in place to monitor environmental exposure, management believes that such
additional remediation costs would not have a material adverse effect on our financial position, result of
operations or cash flows.
Impairment of Property Plant and Equipment 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
46
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 2018, we recorded depreciation
and amortization expense of $308 million compared to $321 million and $348 million in 2017 and 2016,
respectively. At December 31, 2018, we had property, plant and equipment with a net book value of
$2,605 million (2017 – $2,765 million) and definite-lived intangible assets, net of amortization, of $311 million
(2017 – $337 million).
In the fourth quarter of 2018, we announced the permanently closure of our Waco, Texas Personal Care
manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce
reduction across the division. As a result, we recognized $7 million of accelerated depreciation in 2018.
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.
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 restructuring require judgment. Closure and
restructuring liabilities are based on management’s best estimates of future events at December 31, 2018.
47
Although we do not anticipate significant changes, actual costs may differ from these estimates due to
subsequent business developments. As such, additional costs and further impairment charges may be required in
future periods.
In 2018, in connection with our announced plan to permanently close our Waco, Texas Personal Care
manufacturing and distribution facility, we recognized a $4 million write-down of inventory, $3 million of
severance and termination costs, and $1 million of other costs under Closure and restructuring costs.
During 2018,
there were no other costs related to previous and ongoing closures and restructuring
(severance and termination costs of $2 million and $3 million in 2017 and 2016, respectively, and pension
settlement costs of nil and $1 million in 2017 and 2016, respectively).
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 15 “Closure and Restructuring Costs and Liability”.
Indefinite-lived intangible assets impairment assessment
Indefinite-lived intangible assets consist of trade names ($238 million) and catalog rights ($38 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. Financial forecasts are consistent with our operating plans and are prepared for each indefinite-lived
intangible asset quantitative assessment.
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 the fourth quarter of 2018, 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
exceed their carrying amounts. Two Personal Care segment indefinite-lived intangible assets are considered to be
at risk for future impairment given their respective fair values exceed their respective carrying values by 3% and
20% at the time the test was performed. As of December 31, 2018, the carrying value of these indefinite-lived
intangible assets was $116 million and $39 million.
48
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.
Specifically, regarding the indefinite-lived intangible asset noted above with carrying value of $116 million and a
fair value that exceeded the carrying value by 3%, a 0.5% decrease in expected growth rates, a 0.25% decrease in
royalty rate or a 0.70% increase in the discount rate would have the effect of making the fair value to be equal to
the carrying 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 $50 million for the year ended
December 31, 2018 (2017– $39 million and 2016 – $40 million).
We sponsor both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. We
also sponsor a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans
are unfunded and include life insurance programs and medical and dental benefits. In addition, we provide
supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension
plans to certain senior management employees.
We account for pensions and other post-retirement benefits in accordance with Compensation-Retirement
Benefits Topic of the Financial Accounting Standards Board-Accounting Standards Committee which requires
employers to recognize the overfunded or underfunded status of defined benefit pension plans as an asset or
liability in its Consolidated Balance Sheets. Pension and other post-retirement benefit charges require
assumptions in order to estimate the projected and accumulated benefit obligations. These assumptions require
considerable management judgment and include:
• Expected long—term rate of return on plan assets—used to estimate the growth and expected return on
assets
• Discount rate—used to determine interest costs and the net present value of our obligations
• Rate of compensation increase—used to calculate the impact of future increases on our obligations
• Health care cost trends—used to calculate the impact of future health care costs on our obligations
• Employee related factors, such as mortality rates, turnover, retirement age and disabilities—used to
determine the extent of our obligations
Changes in these assumptions result in actuarial gains or losses, which are amortized over the expected
average remaining service life of the active employee group covered by the plans, only to the extent that the
unrecognized net actuarial gains and losses are in excess of 10% of the greater of the projected benefit obligation
and the market value of assets, over the average remaining service period of approximately nine years of the
active employee group covered by the pension plans, and 13 years of the active employee group covered by the
other post-retirement benefits plans.
An expected rate of return on plan assets of 5.2% was considered appropriate by management for the
determination of pension expense for 2018. Effective January 1, 2019, 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
49
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, 2018 for pension plans were estimated at 3.8% for the projected benefit obligation and 3.5% for
the net periodic benefit cost for 2018 and for post-retirement benefit plans were estimated at 3.8% for the
projected benefit obligation and 3.5% for the net periodic benefit cost for 2018.
We used a full yield curve approach to estimate the current service and interest cost components of net
periodic benefit cost for Canadian pension plans and U.S. funded pension plans. The estimate of these
components is made by applying the specific spot rates along the yield curve used in the determination of the
benefit obligation to the relevant projected cash flows. We used this approach to provide a more precise
measurement of current service and interest cost components by improving the correlation between projected
benefit cash flows to the corresponding spot yield curve rates.
The rate of compensation increase is another significant assumption in the actuarial model for pension (set
at 2.7% for the projected benefit obligation and 2.8% for the net periodic benefit cost) and for post-retirement
benefit plans (set at 2.8% for the projected benefit obligation and 2.7% for the net periodic benefit cost) and is
determined based upon our long-term plans for such increases.
For employee related factors, mortality rate tables tailored to our industry were used and the other factors
reflect our historical experience and management’s best estimate regarding future expectations.
For measurement purposes, a 4.4% weighted average annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2018. The rate was assumed to decrease gradually to 3.5% by 2033
and remain at that level thereafter.
The following table provides a sensitivity analysis of the key weighted average economic assumptions used
in measuring the projected pension benefit obligation, the accrued other post-retirement benefit obligation and
related net periodic benefit cost for 2018. 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
Projected
Benefit
Obligation
Net Periodic
Benefit Cost
Projected
Benefit
Obligation
Net Periodic
Benefit Cost
(16)
17
(5)
20
N/A
N/A
N/A
N/A
(170)
207
N/A
N/A
50
N/A
N/A
(7)
8
3
(3)
N/A
N/A
—
—
—
—
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 $12 million in 2019
compared to $57 million in 2018 (2017 – $47 million; 2016 – $31 million) to the pension plans. We expect to
contribute a minimum total amount of $5 million in 2019 compared to $4 million in 2018 to the other post-
retirement benefit plans (2017 – $3 million; 2016 – $5 million).
Benefit obligations and fair values of plan assets as of December 31, 2018 for our pension and post-
retirement plans were are follows:
Projected benefit obligation at end of year
Fair value of assets at end of year
Funded status
December 31, 2018
December 31, 2017
Pension
plans
$
(1,569)
1,588
19
Other
post-retirement
benefit plans
$
(62)
—
(62)
Pension
plans
$
(1,764)
1,765
1
Other
post-retirement
benefit plans
$
(76)
—
(76)
For additional details on our pension plans and other post-retirement benefit plans, refer to Note 7 “Pension
Plans and Other Post-Retirement Benefit Plans”.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined according to differences between the carrying amounts and tax bases of the assets
and liabilities. The change in the net deferred tax asset or liability is included in earnings. Deferred tax assets and
liabilities are measured using enacted tax rates and laws expected to apply in the years in which assets and
liabilities are expected to be recovered or settled. Deferred tax assets and liabilities are classified as non-current
items on the Consolidated Balance Sheets. For these years, a projection of taxable income and an assumption of
the ultimate recovery or settlement period for temporary differences are required. The projection of future taxable
income is based on management’s best estimate and may vary from actual taxable income.
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, 2018, and certain foreign loss carryforwards for which a valuation allowance of $10 million
exists at December 31, 2018. Of this amount, ($8) million favorably impacted tax expense and the effective tax
rate for 2018 (2017 – $3 million; 2016 – ($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
51
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, 2018, we had gross unrecognized tax benefits of $32 million (2017 – $37 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, 2018, we believe it is
reasonably possible that up to $6 million of our unrecognized tax benefits may be recognized in 2019, 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 U.S. Tax Reform, enacted in 2017. Finally, foreign
governments may enact tax laws in response to the U.S. Tax Reform that could result in further changes to global
taxation and materially impact our financial results.
We operate in multiple jurisdictions with complex tax policy and regulatory environments. U.S. and foreign
tax rules and regulations are subject to interpretation and require judgment that may be challenged by taxation
authorities. 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.
Tax audits by their nature are often complex and can require several years to resolve. We have a number of
audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on
currently available information, we believe that we have adequately provided for our future tax consequences
based upon current facts and circumstances and current tax law, and we believe that the ultimate outcomes will
not have a material adverse effect on our financial position, results of operations or cash flows. For further details
refer to Note 10 “Income Taxes”.
Contingencies related to legal claims
As discussed in Item 1A Risk Factors, under the risk “Failure to comply with applicable laws and
regulations could have a material adverse effect on our business, financial results or condition” and in Note 21
“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
required in both the probability
more likely,
the minimum is accrued. There is significant
judgment
52
determination and as to whether an exposure can be reasonably estimated. For further details on “Contingencies”
and legal claims refer to Note 21 “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
10
5
$10
7
1
9
2
7
1
2
Based on estimated 2019 capacity (ST or ADMT).
Based on estimated 2019 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, 2018, one of our Pulp and Paper segment customers located
in the United States represented 10% or $67 million (2017 – 12% or $83 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.
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
53
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.
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 42 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 currently used to hedge forecasted purchases in Canadian dollars by our Canadian subsidiary
over the next 24 months. A small amount of derivatives has also been used to hedge a portion of the expected
non-Euro foreign exchange cash flow of the Company’s European subsidiaries into Euros for the next 2 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, 2018. There were no
amounts reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the
year ended December 31, 2018 resulting from hedge ineffectiveness (2017 and 2016 – nil).
54
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Reports to Shareholders of Domtar Corporation
Management’s Report on Financial Statements and Practices
The accompanying Consolidated Financial Statements of Domtar Corporation and its subsidiaries (the
“Company”) were prepared by management. The statements were prepared in accordance with accounting
principles generally accepted in the United States of America and include amounts that are based on
management’s best judgments and estimates. Management is responsible for the completeness, accuracy and
objectivity of the financial statements. The other financial information included in the annual report is consistent
with that in the financial statements.
Management has established and maintains a system of internal accounting and other controls for the Company
and its subsidiaries. This system and its established accounting procedures and related controls are designed to
provide reasonable assurance that assets are safeguarded,
that the books and records properly reflect all
transactions, that policies and procedures are implemented by qualified personnel, and that published financial
statements are properly prepared and fairly presented. The Company’s system of internal control is supported by
written policies and procedures, contains self-monitoring mechanisms, and is audited by the internal audit
function. Appropriate actions are taken by management to correct deficiencies as they are identified.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for
the Company. 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.
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.
limitations,
Based on the assessment, management has concluded that the Company maintained effective internal control
over financial reporting as of December 31, 2018, 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, 2018 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report, which is included herein.
55
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Domtar Corporation:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Domtar Corporation and its subsidiaries (the
“Company”) as of December 31, 2018 and December 31, 2017, 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, 2018, 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, 2018, 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, 2018 and December 31, 2017, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018 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, 2018,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it
accounts for revenues from contracts with customers in 2018.
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.
56
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
internal control over financial reporting may not prevent or detect
Because of its inherent
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.
limitations,
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 22, 2019
We have served as the Company’s auditor since 2007.
57
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 property, plant and equipment and goodwill
(NOTE 4)
Closure and restructuring costs (NOTE 15)
Other operating (income) loss, net (NOTE 8)
Operating income (loss)
Interest expense, net (NOTE 9)
Non-service components of net periodic benefit cost (NOTE 7)
Earnings (loss) before income taxes and equity loss
Income tax expense (benefit) (NOTE 10)
Equity loss, net of taxes
Net earnings (loss)
Per common share (in dollars) (NOTE 6)
Net earnings (loss)
Basic
Diluted
Weighted average number of common shares outstanding (millions)
Basic
Diluted
Cash dividends per common share
Net earnings (loss)
Other comprehensive (loss) income:
Net derivative (losses) gains on cash flow hedges
Net (losses) gains arising during the period, net of tax $10
(2017 – $(5); 2016 – $(15))
Less: Reclassification adjustment for (gains) losses included in
net earnings (loss), net of tax of $1 (2017 – $5; 2016 – $(10))
Foreign currency translation adjustments
Change in unrecognized (losses) gains and prior service cost related to
pension and post-retirement benefit plans, net of tax of $3
(2017 – $(5); 2016 – $12)
Other comprehensive (loss) income
Comprehensive income (loss)
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$
5,455
4,303
308
443
7
8
—
$
5,148
4,145
321
444
578
2
(14)
$
5,090
4,051
348
418
29
32
4
5,069
5,476
4,882
386
62
(18)
342
57
2
283
4.50
4.48
62.9
63.1
1.72
283
(30)
(2)
(91)
(8)
(131)
152
(328)
66
(11)
(383)
(125)
—
(258)
(4.11)
(4.11)
62.7
62.7
1.66
(258)
6
(9)
146
20
163
(95)
208
66
(15)
157
29
—
128
2.04
2.04
62.6
62.7
1.63
128
27
14
(7)
(32)
2
130
The accompanying notes are an integral part of the consolidated financial statements.
58
DOMTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
Assets
Current assets
Cash and cash equivalents
Receivables, less allowances of $6 and $7
Inventories (NOTE 11)
Prepaid expenses
Income and other taxes receivable
Total current assets
Property, plant and equipment, net (NOTE 12)
Intangible assets, net (NOTE 13)
Other assets (NOTE 14)
Total assets
Liabilities and shareholders’ equity
Current liabilities
Trade and other payables (NOTE 16)
Income and other taxes payable
Long-term debt due within one year (NOTE 18)
Total current liabilities
Long-term debt (NOTE 18)
Deferred income taxes and other (NOTE 10)
Other liabilities and deferred credits (NOTE 19)
Commitments and contingencies (NOTE 21)
Shareholders’ equity (NOTE 20)
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; 2,086,535 and 2,305,419 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
At
December 31,
2018
December 31,
2017
$
$
111
670
762
24
22
1,589
2,605
597
134
4,925
757
25
1
783
853
476
275
1
—
1,981
1,023
(467)
2,538
4,925
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
The accompanying notes are an integral part of the consolidated financial statements.
59
DOMTAR CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
Issued and
outstanding
common
shares
(millions of
shares)
Common
stock, at par
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
loss
Total
shareholders’
equity
Balance at December 31, 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
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 $10
Less: Reclassification adjustments for
gains included in net earnings, net
of tax of $1
Foreign currency translation adjustments
Change in unrecognized losses and prior
service cost related to pension and post-
retirement benefit plans, net of tax of $3
Cash dividends declared
62.8
0.1
—
—
—
—
—
(0.3)
—
62.6
0.1
—
—
—
—
—
—
62.7
0.2
—
—
—
—
—
—
$
1
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
$
1,966
7
—
—
—
—
—
(10)
—
1,963
6
—
—
—
—
—
—
1,969
12
—
—
—
—
—
—
Balance at December 31, 2018
62.9
1
1,981
$
1,186
—
128
—
—
—
—
—
(103)
1,211
—
(258)
—
—
—
—
(104)
849
—
283
—
—
—
—
(109)
1,023
$
(501)
—
—
27
14
(7)
(32)
—
—
(499)
—
—
6
(9)
146
20
—
(336)
—
—
(30)
(2)
(91)
(8)
—
(467)
$
2,652
7
128
27
14
(7)
(32)
(10)
(103)
2,676
6
(258)
6
(9)
146
20
(104)
2,483
12
283
(30)
(2)
(91)
(8)
(109)
2,538
The accompanying notes are an integral part of the consolidated financial statements
60
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
Operating activities
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to cash flows from operating
activities
Depreciation and amortization
Deferred income taxes and tax uncertainties (NOTE 10)
Impairment of property, plant and equipment and goodwill (NOTE 4)
Net gains on disposals of property, plant and equipment
Stock-based compensation expense
Equity loss, net
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
Repayments of long-term debt
Other
Cash flows 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
Supplemental cash flow information
Net cash payments for:
Interest
Income taxes
$
283
308
13
7
(4)
8
2
(1)
18
(24)
2
24
(32)
(46)
(4)
554
(195)
5
—
(6)
(196)
(108)
—
—
—
85
(60)
(301)
2
(382)
(24)
(4)
139
111
57
71
$
(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
The accompanying notes are an integral part of the consolidated financial statements.
61
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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 PROPERTY, PLANT AND EQUIPMENT AND GOODWILL
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 PROPERTY, PLANT AND EQUIPMENT
NOTE 13
INTANGIBLE ASSETS
NOTE 14 OTHER ASSETS
NOTE 15 CLOSURE AND RESTRUCTURING COSTS AND LIABILITY
NOTE 16 TRADE AND OTHER PAYABLES
NOTE 17 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
NOTE 18 LONG-TERM DEBT
NOTE 19 OTHER LIABILITIES AND DEFERRED CREDITS
NOTE 20 SHAREHOLDERS’ EQUITY
NOTE 21 COMMITMENTS AND CONTINGENCIES
NOTE 22 DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
NOTE 23 SEGMENT DISCLOSURES
NOTE 24 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
63
70
75
76
78
82
83
92
92
93
98
99
100
101
101
104
105
107
109
110
111
115
120
123
62
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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. The equity method of accounting is used for
investments in affiliates over which the Company has significant influence but does not have effective control.
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 22 “Derivatives and hedging activities and fair value measurement”).
63
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 2018, the accumulated translation adjustment accounts amounted to $(223) million
(2017 – $(132) million).
REVENUE RECOGNITION
The Company’s revenue is generated from the sale of finished goods to customers. Revenue is recognized at
a single point in time when the performance obligation is satisfied which occurs when the control over the goods
is transferred to customers. For shipping and handling activities performed after customers obtain control of the
goods, the Company elected to account for these activities as fulfillment activities rather than assessing such
activities as separate performance obligations. Accordingly, the sale of goods to customers represents a single
performance obligation to which the entire transaction price is allocated.
The point in time when the control of goods is transferred to customers is largely dependent on delivery
terms. Revenue is recorded at the time of shipment for delivery terms designated free on board (“f.o.b.”) shipping
point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to
the customer’s delivery site.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for goods
transferred to customers. Revenue is recognized net of variable consideration in the form of rebates, discounts
and other commercial incentives extended to customers. Variable consideration is recognized using the most
likely amounts which are based on an analysis of historical experience and current period expectations. The
Company includes estimated amounts of variable consideration in revenue to the extent that it is probable that
there will not be a significant reversal of recognized revenue when the uncertainty related to that variable
consideration is resolved.
For all the Company’s contracts, customer payments are due in less than one year. Accordingly, the
Company does not adjust the amount of revenue recognized for the effects of a significant financing component.
Sales taxes, and other similar taxes, collected from customers are excluded from revenue.
SHIPPING AND HANDLING COSTS
The Company classifies shipping and handling costs as a component of Cost of sales in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss).
CLOSURE AND RESTRUCTURING COSTS
Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are
measured at their fair value. For such recognition to occur, management, with the appropriate level of authority,
must have approved and committed to a firm plan and appropriate communication to those affected must have
occurred. These provisions may require an estimation of costs such as severance and termination benefits,
pension and related curtailments, environmental remediation and may also include expenses related to demolition
and outplacement. Actions taken may also require an evaluation of any remaining assets to determine required
impairments, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation
expense.
64
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2018.
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 expense (benefit) or in Other comprehensive (loss) income in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss). Deferred tax assets and liabilities are
measured using enacted tax rates and laws expected to apply in the years in which the assets and liabilities are
expected to be recovered or settled. Uncertain tax positions are recorded based upon the Company’s evaluation of
whether it is “more likely than not” (a probability level of more than 50%) that, based upon its technical merits,
the tax position will be sustained upon examination by the taxing authorities. The Company establishes a
valuation allowance for deferred tax assets when it is more likely than not that they will not be realized. In
general, “realization” refers to the incremental benefit achieved through the reduction in future taxes payable or
an increase in future taxes refundable from the deferred tax assets. Deferred tax assets and liabilities are
classified as non-current items on the Consolidated Balance Sheets.
The Company recognizes interest and penalties related to income tax matters as a component of Income tax
expense (benefit) in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).
If and when incurred, the Company accounts for any taxes associated with Global Intangible Low-Taxed
Income (“GILTI”) as a period cost.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with original maturities of less than
three months and are presented at cost which approximates fair value.
RECEIVABLES
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
65
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
materials, in process and finished goods inventories. LIFO inventories were $227 million and $236 million at
December 31, 2018 and 2017, 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 $61 million and $54 million greater at
December 31, 2018 and 2017, 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.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reviewed for impairment upon the occurrence of events or changes in
circumstances indicating that the carrying value of the assets may not be recoverable, by comparing the net book
value of the asset group to their estimated undiscounted future cash flows expected from their use and eventual
disposition. Impaired assets are recorded at estimated fair value, determined principally by using the present
value of estimated future cash flows expected from their use and eventual disposition (refer to Note 4
“Impairment of property, plant and equipment and goodwill”).
INTANGIBLE ASSETS AND GOODWILL
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 below. 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.
66
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Useful life
40 years
10 to 40 years
7 to 20 years
9 years
12 years
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
67
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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.
OTHER ASSETS
Other assets are recorded at cost.
DEBT ISSUANCE COSTS
Debt issuance costs are presented in the Consolidated Balance Sheets as a deduction from the carrying value
of long-term debt. Debt issuance costs associated with revolving credit arrangements are presented in Other
assets in the Consolidated Balance Sheets. Debt issuance costs are amortized using the effective rate method over
the term of the related debt and included in Interest expense, net in the Consolidated Statements of Earnings
(Loss) and Comprehensive Income (Loss).
ENVIRONMENTAL COSTS AND ASSET RETIREMENT OBLIGATIONS
Environmental expenditures for effluent treatment, air emission, silvicultural activities and site remediation
(together referred to as environmental matters) are expensed or capitalized depending on their future economic
benefit. In the normal course of business, Domtar incurs certain operating costs for environmental matters that
are expensed as incurred. Expenditures for property, plant and equipment that prevent future environmental
impacts are capitalized and amortized on a straight-line basis over 10 to 40 years. Provisions for environmental
matters are recorded when remediation efforts are probable and can be reasonably estimated. Provisions for
environmental matters are generally not discounted, due to uncertainty with respect to timing of expenditures.
Asset retirement obligations are mainly associated with landfill operation and closure, dredging of settling
ponds and bark pile management and are recognized, at fair value, in the period in which Domtar incurs a legal
obligation associated with the retirement of an asset. Conditional asset retirement obligations are recognized, at
fair value, when the fair value of the liability can be reasonably estimated 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 in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss) and presented in Additional paid-in capital on
the Consolidated Balance Sheets for equity type awards and presented in Other liabilities and deferred credits on
the Consolidated Balance Sheets for liability type awards.
68
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company’s awards may be subject to market, performance and/or service conditions. Any consideration
paid by plan participants on the exercise of stock options or the purchase of shares is credited to Additional
paid-in capital in the Consolidated Balance Sheets. The par value included in the Additional paid-in capital
component of stock-based compensation is transferred to Common stock upon the issuance of shares of common
stock.
Stock options subject to service conditions vest pro rata on the first three anniversaries of the grant and have
a seven-year term. Service and performance-based awards vest on the third anniversary of the grant. The
performance-based awards have an additional feature where the ultimate number of units that vest will be
determined by the Company’s performance results or shareholder return in relation to a predetermined target
over the vesting period. Deferred Share Units vest immediately at the grant date and are remeasured at the end of
each reporting period, until settlement, using the quoted market value.
Under the amended and restated Domtar Corporation 2007 Omnibus Incentive Plan (“Omnibus Plan”), a
maximum of 1,246,036 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 (loss) income. 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,
69
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
• 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
projected benefit obligation and the market value of assets over the average remaining service period of
approximately nine years of the active employee group covered by the plans.
The defined benefit plan obligations are determined in accordance with the projected unit credit actuarial
cost method.
OTHER POST-RETIREMENT BENEFIT PLANS
than
The Company recognizes the unfunded status of other post-retirement benefit plans (other
multiemployer plans) as a liability in the Consolidated Balance Sheets. These benefits, which are funded by
Domtar as they become due, include life insurance programs, medical and dental benefits and short-term and
long-term disability programs. The Company amortizes the cumulative net actuarial gains and losses in excess of
10% of the greater of the projected benefit obligation and the market value of assets over the average remaining
service period of approximately 13 years of the active employee group covered by the plans.
GUARANTEES
A guarantee is a contract or an indemnification agreement that contingently requires Domtar to make
payments to the other party of the contract or agreement, based on changes in an underlying item that is related to
an asset, a liability or an equity security of the other party or on a third party’s failure to perform under an
obligating agreement. It could also be an indirect guarantee of the indebtedness of another party, even though the
payment to the other party may not be based on changes in an underlying item that is related to an asset, a
liability or an equity security of the other party. Guarantees, when applicable, are accounted for at fair value.
NOTE 2.
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING CHANGES IMPLEMENTED
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 supersedes the revenue recognition requirements found in
topic 605.
70
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On January 1, 2018, the Company adopted the standard using the full retrospective method which resulted
in a reclassification in the Company’s Consolidated Statement of Earnings (Loss) and Comprehensive Income
(Loss) for the years ended December 31, 2017 and 2016. The previously reported amounts for Sales and Selling,
general and administrative expenses were decreased by $9 million and $8 million, respectively, in relation to the
reclassification of certain payments made to customers classified as a reduction of Sales under the new standard.
These reclassifications are exclusively contained within the Company’s Consolidated Statement of Earnings
(Loss) and Comprehensive Income (Loss) and do not have a cumulative effect on retained earnings or other
components of equity or net assets in the Company’s Consolidated Balance Sheet as of January 1, 2017.
No practical expedients were used in the transition to the new standard as they were not applicable.
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 are 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) are presented outside of any subtotal of operating income.
71
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On January 1, 2018, the Company adopted the guidance of this accounting standard update which resulted
in a reclassification in the Company’s Consolidated Statement of Earnings (Loss) and Comprehensive Income
(Loss) for the years ended December 31, 2017 and 2016. The previously reported amounts of Cost of sales were
increased by $14 million and $16 million, respectively, Selling, general and administrative expenses were
decreased by $3 million and $1 million, respectively, both with a corresponding impact
in Non-service
components of net periodic benefit cost. The Company utilized a practical expedient included in the accounting
standard update which allowed the Company to use amounts previously disclosed in its pension plans and other
post-retirement benefits plans note for the prior periods as the estimation basis for applying the required
retrospective presentation requirements. In addition, these required retrospective reclassifications resulted in
adjustments to the previously reported Operating income (loss) within the Company’s reportable operating
segment disclosures for the years ended December 31, 2017 and 2016.
Year ended December 31, 2017
As Reported
Impact of
ASU 2014-09
Impact of
ASU 2017-07 As Adjusted
(Unaudited)
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 income, net
Operating loss
Interest expense, net
Non-service components of net periodic benefit cost
Loss before income taxes
Income tax benefit
Net loss
$
5,157
4,131
321
456
578
2
(14)
5,474
(317)
66
—
(383)
(125)
(258)
$
(9)
—
—
(9)
—
—
—
(9)
—
—
—
—
—
—
$
—
14
—
(3)
—
—
—
11
(11)
—
(11)
—
—
—
$
5,148
4,145
321
444
578
2
(14)
5,476
(328)
66
(11)
(383)
(125)
(258)
72
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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, net
Operating income (loss)
Interest expense, net
Non-service components of net periodic benefit cost
Earnings before income taxes
Income tax expense
Net earnings
FINANCIAL INSTRUMENTS
Year ended December 31, 2016
As Reported
Impact of
ASU 2014-09
Impact of
ASU 2017-07 As Adjusted
(Unaudited)
$
5,098
4,035
348
427
29
32
4
4,875
223
66
—
157
29
128
$
(8)
—
—
(8)
—
—
—
(8)
—
—
—
—
—
—
$
—
16
—
(1)
—
—
—
15
(15)
—
(15)
—
—
—
$
5,090
4,051
348
418
29
32
4
4,882
208
66
(15)
157
29
128
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 Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial
statements.
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.
The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial
statements.
73
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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
new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement
of cash flows.
The Company adopted the new guidance on January 1, 2018 with no impact on the consolidated financial
statements.
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.
The Company early adopted the new guidance on January 1, 2018 with no impact on the consolidated
financial statements.
FUTURE ACCOUNTING CHANGES
LEASES
In February 2016,
the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize
right-of-use assets and lease liabilities for all of their operating leases while continuing to recognize expenses in
the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) in a manner similar to current
accounting standard. Under the standard, disclosures are required to meet the objective of enabling users of
financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
As a lessee, Domtar’s various leases under the existing accounting standard are classified as operating leases
that are not recorded on the Consolidated Balance Sheets but are recorded in the Consolidated Statement of
Earnings (Loss) and Comprehensive Income (Loss) as the lease expense is recognized on a straight-line basis
over the lease term. With the adoption of the new standard, the Company is required to record substantially all
operating leases on the Consolidated Balance Sheets as right-of-use assets and lease liabilities. The operating
lease expense will continue to be recognized on a straight-line basis over the lease term. The accounting for
finance leases will remain substantially unchanged.
The Company elected to apply the new leases standard as of January 1, 2019. Upon adoption, no
cumulative-effect adjustments to the retained earnings were required. At January 1, 2019, the amounts of the
operating lease right-of-use assets and lease liabilities were $81 million and $90 million, respectively. The
adoption of the standard will not have an impact on the Company’s Consolidated Statements of Earnings (Loss)
and Comprehensive Income (Loss).
74
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
For all comparative periods presented in the Consolidated financial statements prior to the adoption of the
new leases standard, the Company will continue to report operating leases under Topic 840 “Leases” and provide
the related required disclosures.
IMPLEMENTATION COSTS FOR CLOUD COMPUTING ARRANGEMENTS
In August 2018, the FASB issued ASU 2018-15 “Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That Is a Service Contract”. Under the guidance, implementation costs for
cloud computing arrangements (“CCA”) should be evaluated for capitalization using the same approach as
implementation costs associated with internal-use software and expensed over the term of the hosting
arrangement. The ASU also provides the following guidance on presentation and disclosure:
• Capitalized implementation costs should be presented in the same line item on the balance sheet as
amounts prepaid for the hosted CCA service, if any (generally as an “other asset”).
• The amortization of capitalized implementation costs should be presented in the same statement of
earnings line item as the fees associated with the hosted CCA service. Accordingly, the amortization of
capitalized implementation costs should not be included with depreciation or amortization expense
related to property, plant, and equipment or intangible assets.
• Cash flows related to capitalized implementation costs should be presented as operating activities,
consistent with the presentation of cash flows for the fees related to the hosted CCA service.
• Entities are required to disclose the nature of the hosting arrangements that are service contracts and
significant judgments made when applying the guidance. Additionally, companies are required to
provide quantitative disclosures, including amounts capitalized, amortized, and impaired.
This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments in this ASU
should be applied either retrospectively or prospectively to all implementation costs incurred after the date of
adoption.
While the Company is still evaluating the impact of adopting the new standard, it does not expect this new
guidance to have a material impact on the consolidated financial statements.
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
75
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 3. ACQUISITION OF BUSINESSES (CONTINUED)
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.
NOTE 4.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND GOODWILL
IMPAIRMENT OF GOODWILL
In 2017, the Company performed its annual goodwill impairment testing at October 1. At that date, total
goodwill amounting to $578 million resided in the Personal Care reporting unit. 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
76
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 4. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND GOODWILL (CONTINUED)
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 throughout 2017, including the
entry of new competitors in the private label category, excess industry capacity and the pressure to limit
healthcare spending by governmental agencies, resulted in lower than previously anticipated sales and operating
margin. In light of this weakened market outlook, the Company’s 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 2016, the Company performed its annual goodwill impairment tests at October 1 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.
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.
Waco, Texas personal care manufacturing and distribution facility—Permanent closure
In the fourth quarter of 2018, the Company announced a margin improvement plan within the Personal Care
Division. As part of this plan, the Board of Directors approved the permanent closure of its Waco, Texas
Personal Care manufacturing and distribution facility. As a result, in 2018 the Company recognized $7 million of
accelerated depreciation in Impairment of property, plant and equipment and goodwill on the Consolidated
Statement of Earnings (Loss) and Comprehensive Income (Loss).
Ashdown, Arkansas pulp and paper mill—Conversion of a paper machine
In 2016, as a result of a previously announced conversion of a paper machine at Ashdown, Arkansas pulp
and paper mill to a high quality fluff pulp line, the Company recognized $29 million of accelerated depreciation
in Impairment of property, plant and equipment and goodwill on the Consolidated Statement of Earnings (Loss)
and Comprehensive Income (Loss).
77
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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 20, 2021.
PSUs
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
Granted
Forfeited
Issued
Vested and settled
Vested and non-vested at December 31, 2018
78
Number of units
Weighted average
grant date fair value
426,079
295,504
(28,523)
(101,124)
(74,655)
517,281
256,078
(24,581)
(75,710)
(50,600)
622,468
238,537
(36,932)
52,563
(154,178)
722,458
$
46.00
32.38
39.81
51.27
35.97
38.98
39.04
37.59
38.78
54.95
37.78
41.39
38.09
41.05
44.22
37.82
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
The fair value of PSUs granted in 2018, 2017 and 2016 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:
2018
2017
2016
Dividend yield
Expected volatility 1 year
Expected volatility 3 years
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
Risk-free interest rate December 31, 2020
22%
26%
—
—
3.800% 4.130%
28%
28%
—
1.614%
2.233% 1.606%
2.461% 1.751%
2.607%
—
4.740%
24%
30%
1.057%
0.860%
0.900%
—
—
At December 31, 2018, of the total vested and non-vested PSUs, 352,241 are expected to be settled in shares
and 370,217 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, 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
Granted/issued
Forfeited
Vested and settled
Non-vested at December 31, 2018
79
Number of units
Weighted average
grant date fair value
346,966
196,786
(17,884)
(107,198)
418,670
182,937
(19,194)
(121,750)
460,663
157,502
(27,251)
(135,323)
455,591
$
44.21
34.04
39.69
39.12
40.90
39.83
37.97
48.72
38.56
44.04
39.91
42.54
39.16
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
At December 31, 2018, of the total non-vested RSUs, 189,079 are expected to be settled in shares and
266,512 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
2018, no vested awards were deferred to DSUs (2017 – nil; 2016 – nil).
DSUs
Vested at December 31, 2015
Granted/issued
Settled
Vested at December 31, 2016
Granted/issued
Settled
Vested at December 31, 2017
Granted/issued
Settled
Vested at December 31, 2018
Number of units
Weighted average
grant date fair value
289,460
46,737
(15,123)
321,074
36,215
(85,055)
272,234
31,691
(9,752)
294,173
$
28.20
37.43
39.60
29.01
40.68
32.27
29.55
44.64
40.95
30.79
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 20, 2021 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.
80
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
The fair value of the stock options granted in 2018, 2017 and 2016 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
2018
2017
2016
3.27%
29%
2.62%
4.5 years
43.66
$
3.48%
28%
1.86%
4.5 years
39.81
$
3.78%
30%
1.17%
4.5 years
33.78
$
The grant date fair value of the non-qualified options granted in 2018 was $8.65 (2017 – $7.05;
2016 – $5.95).
OPTIONS (including Performance options)
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
Outstanding at December 31, 2017
Granted
Exercised
Forfeited/expired
Outstanding at December 31, 2018
Options exercisable at December 31, 2018
Number
of
options
Weighted
average
exercise
price
Weighted
average
remaining life
(in years)
Aggregate
intrinsic
value
(in millions)
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
563,065
104,086
(147,397)
(6,102)
513,652
44.46
43.66
39.42
50.05
45.68
303,055
49.15
4.8
6.2
—
—
4.5
3.9
4.5
6.2
—
4.1
3.2
4.1
6.2
—
—
3.6
2.3
$
0.1
—
—
—
0.7
0.1
0.7
—
—
3.6
1.3
3.6
—
—
—
0.1
—
The total intrinsic value of options exercised in 2018 was $1 million (2017 – nil; 2016 – nil). Based on the
Company’s closing year-end stock price of $35.13 (2017 – $49.52; 2016 – $39.03), the aggregate intrinsic value
of options outstanding and options exercisable is nil.
81
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
For the year ended December 31, 2018, stock-based compensation expense recognized in the Company’s
results of operations was $10 million (2017 – $20 million; 2016 – $16 million) for all of the outstanding awards.
Compensation costs not yet recognized amounted to $17 million (2017 – $20 million; 2016 – $17 million) and
will be recognized over the remaining service period of approximately 26 months. The aggregate value of
liability awards settled in 2018 was $8 million (2017 – $7 million; 2016 – $4 million). The total fair value of
equity awards settled in 2018 was $6 million (2017 – $3 million), representing the fair value at the time of
settlement. The fair value at the grant date for these settled equity awards was $7 million (2017 – $4 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 earnings (loss)
Weighted average number of common shares outstanding (millions)
Effect of dilutive securities (millions)
Weighted average number of diluted common shares outstanding
(millions)
Basic net earnings (loss) per common share (in dollars)
Diluted net earnings (loss) per common share (in dollars)
82
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$ 283
62.9
0.2
63.1
$4.50
$4.48
$ (258)
62.7
—
62.7
$(4.11)
$(4.11)
$ 128
62.6
0.1
62.7
$2.04
$2.04
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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,
2018
December 31,
2017
December 31,
2016
227,221
312,893
410,978
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, 2018, the related pension
expense was $50 million (2017 – $39 million; 2016 – $40 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 $12 million in 2019 compared to
$57 million in 2018 (2017 – $47 million; 2016 – $31 million) to the pension plans. The Company expects to
contribute a minimum total amount of $5 million in 2019 compared to $4 million in 2018 (2017 – $3 million;
2016 – $5 million) to the other post-retirement benefit plans.
83
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
CHANGE IN PROJECTED BENEFIT OBLIGATION
The following table represents the change in the projected benefit obligation as of December 31, 2018 and
December 31, 2017, the measurement date for each year:
Projected benefit obligation at beginning of year
Service cost for the year
Interest expense
Plan participants’ contributions
Actuarial (gain) loss
Plan amendments
Benefits paid
Direct benefit payments
Settlement
Effect of foreign currency exchange rate change
Projected benefit obligation at end of year
CHANGE IN FAIR VALUE OF ASSETS
December 31, 2018
December 31, 2017
Pension
plans
$
1,764
34
53
6
(80)
—
(101)
(3)
—
(104)
1,569
Other
post-retirement
benefit plans
$
76
1
2
—
(8)
—
—
(4)
—
(5)
62
Pension
plans
$
1,584
30
52
6
95
1
(85)
(3)
(2)
86
1,764
Other
post-retirement
benefit plans
$
90
2
4
—
(17)
(5)
—
(3)
—
5
76
The following table represents the change in the fair value of assets, as of December 31, 2018 and
December 31, 2017, reflecting the actual return on plan assets, the contributions and the benefits paid for each
year:
December 31, 2018 December 31, 2017
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
$
1,765
(27)
57
6
(104)
—
(109)
1,588
Pension plans
$
1,546
166
47
6
(88)
(2)
90
1,765
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
84
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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 2018:
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,
2018
Percentage of
plan assets at
December 31,
2017
Target allocation
0% - 9%
46% - 56%
5%
3% - 10%
8% - 18%
17% - 27%
2%
52%
5%
6%
13%
22%
100%
2%
52%
5%
6%
13%
22%
100%
(1) Approximately 77% of the pension plans’ assets relate to Canadian plans and 23% relate to U.S. plans.
85
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
RECONCILIATION OF FUNDED STATUS TO AMOUNTS RECOGNIZED IN THE CONSOLIDATED
BALANCE SHEETS
The following table presents the difference between the fair value of assets and the actuarially determined
projected benefit obligation. This difference is also referred to as either the deficit or surplus, as the case may be,
or the funded status of the plans. The table further reconciles the amount of the surplus or deficit (funded status)
to the net amount recognized in the Consolidated Balance Sheets.
Projected benefit obligation at end of year
Fair value of assets at end of year
Funded status
December 31, 2018
December 31, 2017
Pension
plans
$
(1,569)
1,588
19
Other
post-retirement
benefit plans
$
(62)
—
(62)
Pension
plans
$
(1,764)
1,765
1
Other
post-retirement
benefit plans
$
(76)
—
(76)
The funded status includes $49 million of projected benefit obligation ($54 million at December 31, 2017)
related to supplemental unfunded defined benefit and defined contribution plans.
Trade and other payables (Note 16)
Other liabilities and deferred credits (Note 19)
Other assets (Note 14)
Net amount recognized in the Consolidated Balance Sheets
December 31, 2018
December 31, 2017
Pension
plans
Other
post-retirement
benefit plans
$
—
(88)
107
19
$
(5)
(57)
—
(62)
Pension
plans
$
—
(130)
131
1
Other
post-retirement
benefit plans
$
(5)
(71)
—
(76)
The following table presents the pre-tax amounts included in Other comprehensive (loss) income:
Prior service (cost) credit
Amortization of prior year service cost
Net (loss) gain
Amortization of net actuarial loss (gain)
Net amount recognized in other comprehensive
(loss) income (pre-tax)
Year ended
December 31, 2018
Year ended
December 31, 2017
Year ended
December 31, 2016
Pension
plans
Other
post-retirement
benefit plans
Pension
plans
Other
post-retirement
benefit plans
Pension
plans
Other
post-retirement
benefit plans
$
—
5
(31)
8
(18)
$
—
—
8
(1)
7
$
(1)
5
(10)
9
$
5
—
17
—
$
—
5
(53)
6
$
—
—
(2)
—
3
22
(42)
(2)
An estimated loss of $15 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 2019.
86
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
At December 31, 2018, the projected benefit obligation and the fair value of defined benefit plan assets with
a projected benefit obligation in excess of fair value of plan assets were $731 million and $643 million,
respectively (2017 – $811 million and $680 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
Amortization of net actuarial gain
Net periodic benefit cost
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$
34
53
(85)
8
—
5
15
$
30
52
(81)
9
—
5
15
$
32
50
(80)
5
1
5
13
Year ended
December 31,
2018
$
1
2
(1)
2
Year ended
December 31,
2017
$
Year ended
December 31,
2016
$
2
4
—
6
2
4
6
—
WEIGHTED-AVERAGE ASSUMPTIONS
The Company used the following key assumptions to measure the projected 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
Projected 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,
2018
December 31,
2017
December 31,
2016
3.8%
2.7%
3.5%
2.8%
5.2%
3.5%
2.7%
3.9%
2.8%
5.3%
3.8%
2.7%
4.1%
2.8%
5.3%
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.
87
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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 4.2% 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, 2019, the Company will use 5.2% (2018 – 5.2%; 2017 – 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
Projected benefit obligation
Discount rate
Rate of compensation increase
Net periodic benefit cost
Discount rate
Rate of compensation increase
December 31,
2018
December 31,
2017
December 31,
2016
3.8%
2.8%
3.5%
2.7%
3.5%
2.8%
3.8%
2.8%
3.9%
2.8%
4.1%
2.8%
For measurement purposes, a 4.4% weighted average annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2018. The rate was assumed to decrease gradually to 3.5% 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 projected benefit obligation
Increase of 1% Decrease of 1%
$
—
3
$
—
(3)
88
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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, 2018, by asset category:
Fair Value Measurements at
December 31, 2018
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
Canadian provincial government bonds
Canadian corporate debt securities
U.S. corporate debt securities
International corporate debt securities
Bond fund (1 & 2)
Canadian equities (3)
U.S. equities (4)
International equities (5)
U.S. stock index funds (2 & 6)
Insurance contracts (7)
Total
$
68
493
123
37
9
156
94
91
233
200
84
$
68
492
100
37
9
—
94
91
233
—
—
Total
1,588
1,124
$
—
1
23
—
—
156
—
—
—
200
—
380
$
—
—
—
—
—
—
—
—
—
—
84
84
(1) This category represents a U.S. actively managed bond fund that is benchmarked to the Barclays Capital
Long-term Government/Credit index.
(2) 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.
(3) 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.
89
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
(4) This category represents U.S. equities held within an active segregated global equity portfolio and an active
international equity portfolio.
(5) 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.
(6) This category represents two equity index funds, not actively managed, that track the Russell 3000 index.
(7) This category includes: 1) two group annuity contracts totaling $75 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.
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
Canadian provincial government bonds
Canadian corporate debt securities
U.S. corporate debt securities
International corporate debt securities
Bond fund (1 & 2)
Canadian equities (3)
U.S. equities (4)
International equities (5)
U.S. stock index funds (2 & 6)
Insurance contracts (7)
Derivative contracts (8)
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 represents a U.S. actively managed bond fund that is benchmarked to the Barclays Capital
Long-term Government/Credit index.
(2) 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.
(3) 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.
90
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
(4) This category represents U.S. equities held within an active segregated global equity portfolio and an active
international equity portfolio.
(5) 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.
(6) This category represents equity two equity index funds, not actively managed, that track the Russell 3000
index.
(7) 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.
(8) 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 changes during the period for Level 3 fair value measurements of plan assets:
Balance at December 31, 2016
Settlements
Return on plan assets
Effect of foreign currency exchange rate change
Balance at December 31, 2017
Settlements
Return on plan assets
Effect of foreign currency exchange rate change
Balance at December 31, 2018
Fair Value Measurements
Using Significant
Unobservable Inputs (Level 3)
Insurance
contracts Other TOTAL
$
84
(5)
9
6
94
(5)
2
(7)
84
$
3
(2)
—
—
1
(1)
—
—
—
$
87
(7)
9
6
95
(6)
2
(7)
84
ESTIMATED FUTURE BENEFIT PAYMENTS FROM THE PLANS
Estimated future benefit payments from the plans for the next 10 years at December 31, 2018 are as follows:
2019
2020
2021
2022
2023
2024 – 2028
.
91
Pension
plans
Other
post-retirement
benefit plans
$
103
102
103
103
104
517
$
5
5
4
4
4
21
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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
Bad debt expense
Environmental provision
Foreign exchange (gain) loss
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)
Interest on receivables securitization
Interest on withdrawal liabilities for multiemployer plans
Amortization of debt issuance costs and other
Year ended
December 31,
2018
$
(4)
—
2
5
(2)
(1)
—
Year ended
December 31,
2017
$
(13)
(2)
1
3
1
(4)
(14)
Year ended
December 31,
2016
$
—
—
—
2
6
(4)
4
Year ended
December 31,
2018
$
56
1
2
3
62
Year ended
December 31,
2017
$
59
2
3
2
Year ended
December 31,
2016
$
59
2
3
2
66
66
(1) The Company capitalized $1 million of interest expense in 2018 (2017 – $1 million; 2016 – $5 million).
92
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10.
INCOME TAXES
The Company’s earnings (loss) before income taxes by taxing jurisdiction were:
U.S. earnings (loss)
Foreign earnings (loss)
Earnings (loss) before income taxes
Provisions for income taxes include the following:
U.S. Federal and State:
Current
Deferred
Foreign:
Current
Deferred
Income tax expense (benefit)
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$
216
126
342
$
(209)
(174)
(383)
$
69
88
157
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$
32
(6)
12
19
57
$
73
(208)
9
1
(125)
$
10
1
10
8
29
93
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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 21% (35% for December 31, 2017 and December 31, 2016) to earnings (loss) 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
Deferred taxes on foreign earnings
Net operating loss cancellation
Valuation allowance on deferred tax assets
Other
Income tax expense (benefit)
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$
72
8
1
(19)
—
(9)
(7)
(4)
—
10
9
(8)
4
57
$
(134)
2
(16)
(24)
200
(188)
46
(6)
(4)
—
—
3
(4)
(125)
$
55
3
(14)
(18)
—
—
—
2
(2)
—
—
(1)
4
29
During 2018, the Company recorded $19 million of tax credits, mainly research and experimentation credits,
which significantly impacted the effective tax rate. The effective tax rate was also impacted by the cancellation
of $9 million, after-tax, of net operating losses in a foreign jurisdiction. This was offset by the reversal of
$9 million of valuation allowance on these same net operating losses. Additionally, a valuation allowance of
$1 million was recorded on new operating losses in 2018 for a net benefit pertaining to valuation allowance
movements of $8 million.
On December 22, 2017, the U.S. Tax Reform was signed into law. The U.S. Tax Reform significantly
changed U.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax
rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a one-time
deemed repatriation tax on accumulated foreign earnings. As a result of the U.S. Tax Reform, the Company
recorded a net tax benefit of $140 million in the fourth quarter of 2017 when the legislation was enacted. This
consisted of a provisional tax benefit of $186 million relating to the revaluation of the Company’s ending net
deferred tax liabilities and a provisional expense of $46 million related to the deemed repatriation tax.
Additionally, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application in situations
when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to
complete the accounting for certain income tax effects of the U.S. Tax Reform. December 22, 2018 marked the
end of the measurement period for purposes of SAB 118. As such, the Company completed its analysis,
including currently available legislative updates, and recorded an additional tax benefit of $13 million for the
year ended December 31, 2018. Of this benefit, $7 million related to adjustments to the deemed mandatory
repatriation tax and $6 million related to the revaluation of the Company’s net deferred tax liabilities. The
94
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10. INCOME TAXES (CONTINUED)
$6 million benefit for the revaluation of the net deferred tax liabilities is included in the “Tax rate changes”
above, along with $3 million of additional tax benefits relating to 2018 law changes in Sweden and various U.S.
states.
As a result of the deemed mandatory repatriation tax requirement of the U.S. Tax Reform, the Company has
taxed its undistributed foreign earnings as of December 31, 2017, at reduced tax rates. After completing its
evaluation of the U.S. Tax Reform’s impact on its business operations, the Company has determined that it is no
longer indefinitely reinvested in these undistributed foreign earnings as well as foreign earnings after
December 31, 2017. As such, as of December 31, 2018, the Company has recorded a deferred tax liability of
$10 million for foreign withholding tax and various state income taxes associated with future repatriation of these
earnings. This $10 million tax expense impacted the effective tax rate for 2018.
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 Reform was signed into law. The U.S. Tax Reform significantly
changed U.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax
rate from 35% to 21% effective January 1, 2018, implementing a territorial tax system, and imposing a one-time
deemed repatriation tax on accumulated foreign earnings. 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 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 Company 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.
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.
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.
95
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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, 2018 and December 31, 2017 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
Intangible assets
Other
Total deferred tax liabilities
Net deferred tax liabilities
Included in:
Other assets (Note 14)
Deferred income taxes and other
Total
December 31,
2018
December 31,
2017
$
38
36
22
10
21
127
(16)
111
(422)
(122)
(10)
(554)
(443)
1
(444)
(443)
$
36
43
31
10
36
156
(25)
131
(436)
(131)
(16)
(583)
(452)
2
(454)
(452)
At December 31, 2018, 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 $176 million, all except
$3 million of which may be carried forward indefinitely. In 2027, a small amount of the $3 million of foreign net
operating losses will begin to expire.
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
96
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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, 2018, and certain foreign loss carryforwards for which
a valuation allowance of $10 million exists at December 31, 2018. Of this amount, $(8) million favorably
impacted tax expense and the effective tax rate for 2018 (2017 – $3 million; 2016 – $(1) million).
As of December 31, 2018, the Company has recorded a deferred tax liability of $10 million for foreign
withholding tax and various state income taxes associated with the repatriation of earnings subject to the
repatriation tax as well as future repatriation of its unremitted foreign earnings. The Company has not provided
for deferred taxes on outside basis differences in its investments in its foreign subsidiaries that are unrelated to
unremitted earnings as it estimates that the deferred tax liability recorded in 2018, in combination with the
repatriation tax amount, covers all tax liabilities with foreign investments to date.
The U.S. Tax Reform also includes a base erosion provision for 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 or (2) factor such amounts into the measurement of deferred taxes. The Company has elected to
account for any taxes associated with GILTI as a period cost.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
At December 31, 2018, the Company had gross unrecognized tax benefits of approximately $32 million
($37 million and $43 million for 2017 and 2016, respectively). If recognized in 2019, 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
97
December 31,
2018
$
37
3
4
—
—
(12)
1
(1)
32
December 31,
2017
$
43
3
4
—
(1)
(13)
1
—
37
December 31,
2016
$
41
3
3
(2)
—
(3)
1
—
43
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(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, 2018 ($1 million and $1 million for 2017 and 2016, 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 $6 million of its unrecognized tax benefits
may be recognized by December 31, 2019, 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 2018, 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, 2018, the Company’s subsidiaries are subject to foreign federal income tax
examinations for the tax years 2008 through 2017, with federal years prior to 2015 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,
2018
December 31,
2017
$
410
126
226
762
$
399
135
223
757
98
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 12.
PROPERTY, PLANT AND EQUIPMENT
The following table presents the components of property, plant and equipment:
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,
2018
December 31,
2017
$
7,655
1,043
193
131
9,022
(6,417)
2,605
$
7,674
1,059
207
104
9,044
(6,279)
2,765
(1) Amortization is calculated using the unit of production method.
Depreciation expense related to property, plant and equipment for the year ended December 31, 2018 was
$289 million (2017 – $302 million; 2016 – $329 million).
99
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 13.
INTANGIBLE ASSETS
The following table presents the components of intangible assets:
Estimated useful lives
(in years)
December 31, 2018
December 31, 2017
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
384
8
1
28
424
4
238
6
38
710
(1)
(94)
(4)
(1)
(13)
(113)
—
—
—
—
(113)
Net
$
2
290
4
—
15
311
4
238
6
38
597
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
Amortization expense related to intangible assets for the year ended December 31, 2018 was $19 million
($19 million in 2017 and 2016, respectively).
Amortization expense for the next five years related to intangible assets is expected to be as follows:
Amortization expense related to intangible assets
2019
2020
2021
2022
2023
$
21
$
21
$
21
$
21
$
20
The Company performed its annual impairment test on its indefinite-lived intangible assets at October 1,
2018, 2017 and 2016, 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 2018, 2017 or 2016.
100
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 14.
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 22)
Investments and advances
Other
NOTE 15.
December 31,
2018
$
107
5
4
1
—
6
11
134
December 31,
2017
$
131
7
4
2
5
—
8
157
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, 2018, the total
provision for the withdrawal liabilities was $47 million.
Waco, Texas facility
On November 1, 2018, the Company announced a margin improvement within the Personal Care Division.
As part of this plan, the Board of Directors approved the permanent closure of its Waco, Texas Personal Care
manufacturing and distribution facility, the relocation of certain of its manufacturing assets and a workforce
reduction across the division. The Waco, Texas facility is expected to cease operations in the third quarter of
2019.
The Company recorded $7 million for the year ended December 31, 2018 of accelerated depreciation under
Impairment of property, plant and equipment and goodwill on the Consolidated Statement of Earnings (Loss) and
Comprehensive Income (Loss). During the fourth quarter of 2018, the Company also recorded a $4 million write-
down of inventory, $3 million of severance and termination costs, and $1 million of other costs under Closure
and restructuring costs.
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 was completed in 2018, included the permanent closure
101
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 15. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)
of a pulp dryer and idling of assets, in addition to a workforce reduction of approximately 100 positions. The
streamlining process also right-sized the mill to an annualized production target of 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
quarter of 2016. 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 and goodwill 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.
Other costs
During 2018,
there were no other costs related to previous and ongoing closures and restructuring
(severance and termination costs of $2 million and $3 million in 2017 and 2016, respectively, and pension
settlement costs of nil and $1 million in 2017 and 2016, respectively).
The following tables provide the components of closure and restructuring costs by segment:
Severance and termination costs
Inventory write-down
Other
Closure and restructuring costs
Severance and termination costs
Closure and restructuring costs
102
Year ended
December 31, 2018
Pulp and Paper
Personal Care Total
$
—
—
—
—
$
3
4
1
8
$
3
4
1
8
Year ended
December 31, 2017
Pulp and Paper
Personal Care
Total
$
—
—
$
2
2
$
2
2
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 15. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)
Severance and termination costs
Pension settlement and withdrawal liability
Fluff pulp conversion outage
Closure and restructuring costs
Year Ended
December 31, 2016
Pulp and Paper
Personal Care
Total
$
8
(3)
26
31
$
1
—
—
1
$
9
(3)
26
32
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,
2018
December 31,
2017
$
7
4
(5)
6
$
7
2
(2)
7
The $6 million provision is comprised of $5 million of severance and termination costs, of which $3 million
and $2 million relate to the Pulp and Paper segment and Personal Care segment, respectively, and $1 million of
other costs which relate to the Personal Care segment.
Closure and restructuring costs are based on management’s best estimates at December 31, 2018. Actual
costs may differ from these estimates due to subsequent developments such as the results of environmental
to be dismantled and demolished and other business
studies,
developments. As such, additional costs and further impairment charges may be required in future periods.
the ability to find a buyer for assets set
103
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 16.
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 21)
Closure and restructuring costs liability (Note 15)
Derivative financial instruments (Note 22)
Dividends payable (Note 20)
Stock-based compensation—liability awards (Note 22)
Other
December 31,
2018
December 31,
2017
$
404
173
16
21
64
5
2
10
6
21
27
6
2
757
$
382
164
16
11
72
5
2
13
7
7
26
6
5
716
104
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 17.
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, 2018 and 2017.
Net derivative gains
(losses)
on cash flow
hedges
Pension
items (2)
Post-retirement
benefit items (2)
Foreign currency
items
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
Natural gas swap contracts
Currency options
Foreign exchange forward contracts
Net (gain) loss
Foreign currency items
Other comprehensive (loss) income
before reclassifications
Amounts reclassified from Accumulated
other comprehensive loss
Net current period other comprehensive
(loss) income
Balance at December 31, 2018
$
11
(5)
11
N/A
N/A
6
(9)
(3)
8
1
(12)
(19)
N/A
N/A
(30)
(2)
(32)
(24)
$
(221)
N/A
N/A
(6)
N/A
(6)
9
3
(218)
N/A
N/A
N/A
(23)
N/A
(23)
10
(13)
(231)
$
(11)
N/A
N/A
17
N/A
17
—
17
6
N/A
N/A
N/A
6
N/A
6
(1)
5
11
$
(278)
N/A
N/A
N/A
146
146
—
146
(132)
N/A
N/A
N/A
N/A
(91)
Total
$
(499)
(5)
11
11
146
163
—
163
(336)
1
(12)
(19)
(17)
(91)
(91)
(138)
—
7
(91)
(223)
(131)
(467)
(1) All amounts are after tax. Amounts in parentheses indicate losses.
(2) The projected benefit obligation is actuarially determined on an annual basis as of December 31.
105
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 17. 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
Amount reclassified from
Accumulated other
comprehensive loss (1)
Net derivative (losses) gains on cash flow hedge
Natural gas swap contracts (2)
Currency options and forwards (2)
Total before tax
Tax benefit (expense)
Net of tax
Amortization of defined benefit pension items
Amortization of net actuarial loss (3)
Amortization of prior year service cost (3)
Total before tax
Tax expense
Net of tax
Amortization of other post-retirement benefit items
Amortization of net actuarial gain (3)
Total before tax
Tax expense
Net of tax
Year ended
December 31,
2018
$
(2)
(1)
(3)
1
(2)
8
5
13
(3)
10
(1)
(1)
—
(1)
Year ended
December 31,
2017
$
Year ended
December 31,
2016
$
—
(14)
(14)
5
(9)
9
5
14
(5)
9
—
—
—
—
12
12
24
(10)
14
6
5
11
(4)
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).
106
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 18.
LONG-TERM DEBT
Maturity
Amount Currency
Par
December 31,
2018
$
300
2022
250
2042
2044
250
2023 —
300
2025
50
2021
2019 – 2032
US
US
US
US
US
US
$
300
249
249
—
—
50
11
859
5
1
853
December 31,
2017
$
300
249
249
—
300
25
14
1,137
7
1
1,129
Unsecured 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
Principal long-term debt repayments, including capital lease obligations, in each of the next five years will
amount to:
2019
2020
2021
2022
2023
Thereafter
Less: Amounts representing interest
Total payments
UNSECURED NOTES
Long-term debt
Capital leases
and other
$
—
—
50
300
—
500
850
—
850
$
2
2
2
1
1
7
15
4
11
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.
REVOLVING CREDIT FACILITY
In August 2018, the Company amended and restated its $700 million unsecured revolving credit facility (the
“Credit Agreement”) with certain domestic and foreign banks. The amendment extended the Credit Agreement’s
107
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 18. LONG-TERM DEBT (CONTINUED)
maturity date from August 18, 2021 to August 22, 2023. 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 certain foreign subsidiaries 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, 2018, the Company was in compliance with these financial covenants,
and there were no borrowings (December 31, 2017 – nil).
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.
In the fourth quarter of 2018, the Term Loan was fully repaid.
RECEIVABLES SECURITIZATION
The Company has a $150 million receivables securitization facility. This facility was amended in November
2018 to extend the maturity date from March 2019 to November 2021. 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
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 Credit Agreement, or the failure by Domtar to
satisfy material obligations.
At December 31, 2018, $50 million was borrowed and $52 million of letters of credit were outstanding
under this facility (2017 – $25 million and $50 million, respectively).
108
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 18. LONG-TERM DEBT (CONTINUED)
In 2018, a net charge of $1 million (2017 – $2 million; 2016 – $2 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 19.
OTHER LIABILITIES AND DEFERRED CREDITS
The following table presents the components of other liabilities and deferred credits:
.
December 31,
2018
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 21)
Stock-based compensation—liability awards (Note 22)
Derivative financial instruments (Note 22)
Other
$
57
88
45
9
27
14
16
19
December 31,
2017
$
71
130
47
42
31
20
5
22
275
368
ASSET RETIREMENT OBLIGATIONS
The asset retirement obligations are principally linked to landfill capping obligations and demolition of
certain abandoned buildings. At December 31, 2018, Domtar estimated the net present value of its asset
retirement obligations to be $12 million (2017 – $15 million); the present value is based on probability weighted
undiscounted cash outflows of $59 million (2017 – $58 million). The majority of the asset retirement obligations
are estimated to be settled prior to December 31, 2058. 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 4.7% and 12.0%,
based on the prevailing rate at the moment of recognition of the liability and on its settlement period.
The following table reconciles Domtar’s asset retirement obligations:
Asset retirement obligations, beginning of year
Asset retirement obligation payments
Accretion expense
Effect of foreign currency exchange rate change
Asset retirement obligations, end of year
109
December 31,
2018
$
15
(3)
1
(1)
12
December 31,
2017
$
14
—
1
—
15
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 20.
SHAREHOLDERS’ EQUITY
During 2018, the Company declared four quarterly dividends of $0.435 per share, to holders of the
Company’s common stock. Dividends of $27 million, $28 million, $27 million and $27 million were paid on
April 16, 2018, July 16, 2018, October 15, 2018 and January 15, 2019, respectively, to shareholders of record as
of April 2, 2018, July 3, 2018, October 2, 2018 and January 2, 2019, respectively.
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.
On February 19, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.435 per
share, to be paid to holders of the Company’s common stock. This dividend is to be paid on April 15, 2019 to
shareholders of record on April 2, 2019.
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
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 2018 and 2017, there were no shares repurchased under the Program.
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.
110
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 20. SHAREHOLDERS’ EQUITY (CONTINUED)
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, 2018 or
December 31, 2017.
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, 2018 and December 31, 2017, were as follows:
Common stock
Balance at beginning of year
Shares issued
Treasury stock
Balance at end of year
December 31, 2018
December 31, 2017
Number
of shares
$
Number
of shares
$
62,695,685
1 62,588,837
218,884 —
106,848 —
62,914,569
1 62,695,685
1
1
NOTE 21.
COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations enacted by federal, provincial, state and
local authorities. The Company may also incur substantial costs in relation to enforcement actions (including
orders requiring corrective measures, installation of pollution control equipment or other remedial actions) as a
result of violations of, or liabilities under, environmental laws and regulations applicable to its past and present
properties. The Company’s ongoing efforts to identify potential environmental concerns that may be associated
with such properties may result in additional environmental costs and liabilities which cannot be reasonably
estimated at this time.
In 2018, the Company’s operating expenses for environmental matters amounted to $68 million (2017 –
$67 million; 2016 – $65 million).
The Company made capital expenditures for environmental matters of $8 million in 2018 (2017–
$2 million; 2016 – $4 million).
111
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 21. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with 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 and other changes
Environmental spending
Effect of foreign currency exchange rate change
Balance at end of year(1)
December 31,
2018
December 31,
2017
$
44
4
(9)
(2)
37
$
50
4
(12)
2
44
(1) At December 31, 2018, $10 million is shown in Trade and other payables (see Note 16) and $27 million is
shown in Other liabilities and deferred credits (see Note 19).
At December 31, 2018, anticipated undiscounted payments in each of the next five years are as follows:
Environmental provision and asset retirement
obligations
2019
2020
2021
2022
2023
Thereafter
Total
$
10
$
1
$
2
$
2
$
2
$
67
$
84
The U.S. Environmental Protection Agency (the “EPA”) and/or various state agencies have notified the
Company that it may be a potentially responsible party under the Comprehensive Environmental Response
Compensation and Liability Act, commonly known as “Superfund,” and similar state laws with respect to other
hazardous waste sites as to which no proceedings have been instituted against the Company. The Company
continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a
number of former 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 EPA Clean Power Plan regulation is being litigated and has been stayed. The EPA has proposed to
repeal and replace the Clean Power Plan. The proposed replacement rule, entitled the “Affordable Clean Energy”
(“ACE”) rule, was published on August 31, 2018, and the EPA plans to finalize the rule in the first part of 2019.
112
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 21. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Regardless of the outcome for the Clean Power Plan and ACE,
to be
disproportionately affected compared with other pulp and paper producers located in the states where the
Company operates.
the Company does not expect
The province of Quebec has a greenhouse gases (“GHG”) cap-and-trade system with reduction targets.
British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company
does not expect its facilities to be disproportionately affected by these measures compared with other pulp and
paper producers located in these jurisdictions.
In October 2018, the Government of Canada proposed to establish a federal carbon pricing system in
provinces that do not already impose a cost on carbon emissions. This system is expected to become effective in
2019. The Government of Canada is seeking to impose a carbon pricing program for regulating GHG emissions
in Ontario, where there is not currently a provincial program. This effort may result in the determination of
additional environmental costs which cannot be reasonably estimated at this time.
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, 2018, 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.
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).
113
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 21. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 2018, were as follows:
Operating leases
Other commercial commitments
2019
2020
2021
2022
2023 Thereafter
Total
$
26
84
$
21
13
$
17
3
$
12
$
10
1 —
$
17
2
$
103
103
Total operating lease expense amounted to $29 million in 2018 (2017 – $31 million; 2016 – $28 million).
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,
2018, the Company is unable to estimate the potential maximum liabilities for these types of indemnification
guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which
cannot be reasonably estimated at
time. Accordingly, no provision has been recorded. These
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
114
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 21. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 2018 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 22.
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.
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, 2018, one of Domtar’s Pulp and Paper segment
customers located in the U.S. represented 10% or $67 million (2017 – 12% or $83 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
115
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it
agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an
agreed upon notional principal amount.
COST RISK
Cash flow hedges:
The Company is exposed to price volatility for raw materials and energy used in its manufacturing process.
The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company
purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow
and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural
gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other
comprehensive 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 42 months.
The following table presents the volumes under derivative financial instruments for natural gas contracts
outstanding as of December 31, 2018 to hedge forecasted purchases:
Commodity
Natural gas
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
11,430,000
8,880,000
3,920,000
2,070,000
$34
$27
$12
$ 6
41%
32%
14%
7%
(1) MMBTU: Millions of British thermal units
The natural gas derivative contracts were fully effective as of December 31, 2018. There were no amounts
reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the year
ended December 31, 2018 resulting from hedge ineffectiveness (2017 and 2016 – 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
116
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative
financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to
fluctuations in foreign currency exchange rates.
Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian
subsidiary over the next 24 months. Derivatives are also currently used to hedge a portion of forecasted non-Euro
cash flows of its European subsidiaries for the next 2 months. Such derivatives are designated as cash flow
hedges. The changes in the fair value on qualifying instruments are included in Accumulated other
comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which
the hedged transaction affects earnings.
The following table presents the currency values under significant currency positions pursuant to currency
derivatives outstanding as of December 31, 2018 to hedge forecasted purchases and sales:
Currency exposure
hedged
Business Segment
Year of
maturity
Notional
contractual
value
Percentage of
forecasted net
exposures under
contracts
Average
Protection rate
Average
Obligation rate
CAD/USD
Pulp and Paper
2019
699 CAD
78%
1 USD = 1.2873
1 USD = 1.3168
CAD/USD
Pulp and Paper
2020
324 CAD
36%
1 USD = 1.2937
1 USD = 1.2937
The foreign exchange derivative contracts were fully effective as of December 31, 2018. There were no
amounts reflected in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the
year ended December 31, 2018 resulting from hedge ineffectiveness (2017 and 2016 – 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.
117
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. 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, 2018 and
December 31, 2017, 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
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,
2018
Quoted prices in
active markets for
identical assets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance sheet classification
$
1
1
2
19
2
11
5
37
6
14
858
$
$
$
—
—
—
—
—
—
—
—
6
14
—
1
1
2
19
2
11
5
37
—
—
858
—
—
—
—
—
—
—
—
—
—
—
(a) Prepaid expenses
(a) Prepaid expenses
(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, 2018, of which a loss of $1 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, 2018.
118
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
The net cumulative loss recorded in Accumulated other comprehensive loss relating to currency options and
forwards hedging forecasted purchases is $29 million at December 31, 2018, of which a loss of $18 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, 2018.
Fair Value of financial instruments at:
Derivatives designated as hedging
instruments:
December 31,
2017
$
Asset derivatives
Currency derivatives
Currency derivatives
Natural gas swap contracts
Total Assets
Liabilities derivatives
Currency derivatives
Natural gas swap contracts
Natural gas swap contracts
Total Liabilities
Other Instruments:
Stock-based
compensation—liability awards
Stock-based
16
4
1
21
5
2
5
12
6
compensation—liability awards
Long-term debt
20
1,216
Quoted prices in
active markets for
identical assets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Balance sheet classification
$
—
—
—
—
—
—
—
—
6
20
—
$
$
16
4
1
21
5
2
5
12
—
—
1,216
—
—
—
—
—
—
—
—
—
—
—
(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
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,
2018 and December 31, 2017. However, fair value disclosure is required. The carrying value of the
Company’s long-term debt is $854 million and $1,130 million at December 31, 2018 and December 31,
2017, respectively.
119
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
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 23.
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.
120
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. 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:
SEGMENT DATA
Sales(1)
Pulp and Paper
Personal Care
Total for reportable segments
Intersegment sales
Consolidated sales(2)
Sales by product group
Communication papers
Specialty and packaging papers
Market pulp
Absorbent hygiene products
Consolidated sales(2)
Depreciation and amortization
Pulp and Paper
Personal Care
Total for reportable segments
Impairment of property, plant and equipment and goodwill—
Personal Care
Impairment of property, plant and equipment—Pulp and Paper
Consolidated depreciation and amortization and impairment of
property, plant and equipment and goodwill
Year ended
December 31,
2018
$
Year ended
December 31,
2017
$
Year ended
December 31,
2016
$
4,523
1,000
5,523
(68)
5,455
2,548
710
1,197
1,000
5,455
238
70
308
7
—
315
4,216
996
5,212
(64)
5,148
2,382
651
1,119
996
5,148
254
67
321
578
—
899
4,239
909
5,148
(58)
5,090
2,571
680
930
909
5,090
284
64
348
—
29
377
(1) As a result of adopting ASU 2014-09 “Revenue from Contracts with Customers,” the Company has revised
its 2017 and 2016 segment disclosures to conform to the new guideline. (Previously reported numbers for
Sales for the years ended December 31, 2017 and 2016 were as follows: Pulp and Paper: $4,216 million and
$4,239 million, respectively; Personal Care: $1,005 million and $917 million, respectively; Intersegment
sales: $(64) million and $(58) million, respectively.)
In 2018 and 2017, Staples, one of the Company’s largest customers in the Pulp and Paper segment,
represented approximately 10% (2017 – 10%) of the total sales.
(2)
121
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. SEGMENT DISCLOSURES (CONTINUED)
Operating income (loss)(1)
Pulp and Paper
Personal Care
Corporate
Consolidated operating income (loss)
Interest expense, net
Non-service components of net periodic benefit cost
Earnings (loss) before income taxes and equity loss
Income tax expense (benefit)
Equity loss, net of taxes
Net earnings (loss)
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
438
(5)
(47)
386
62
(18)
342
57
2
283
237
(527)
(38)
(328)
66
(11)
(383)
(125)
—
(258)
201
57
(50)
208
66
(15)
157
29
—
128
(1) As a result of adopting ASU 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost,” the Company has revised its 2017 and 2016 segment disclosures to
conform to the new guideline. (Previously reported numbers for Operating income (loss) for the years ended
December 31, 2017 and 2016 were as follows: Pulp and Paper: $250 million and $217 million, respectively;
Personal Care: $(527) million and $57 million, respectively; Corporate: $(40) million and $(51) million,
respectively.)
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
122
December 31,
2018
December 31,
2017
$
$
3,475
1,331
4,806
119
4,925
3,649
1,406
5,055
157
5,212
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$
164
37
201
2
203
(8)
195
$
128
48
176
4
180
2
182
$
287
55
342
4
346
1
347
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. SEGMENT DISCLOSURES (CONTINUED)
Geographic information
Sales
United States
Canada
Europe
Asia
Other foreign countries
Long-lived assets
United States
Canada
Europe
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$
$
$
3,669
480
682
489
135
5,455
3,486
474
610
444
134
5,148
3,571
493
597
351
78
5,090
December 31,
2018
December 31,
2017
$
$
2,056
604
542
3,202
2,136
677
585
3,398
NOTE 24.
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’s significant
100% owned domestic subsidiaries, including Domtar Paper Company, LLC, 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., (“Guarantor
Subsidiaries”), on a joint and several basis. The Guaranteed Debt is not guaranteed by certain of Domtar’s
(collectively the “Non-Guarantor
foreign and non-significant domestic subsidiaries, all 100% owned,
Subsidiaries”). A 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.
123
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
The following supplemental condensed consolidating financial information sets forth, on an unconsolidated
the Balance Sheets at December 31, 2018 and 2017 and the Statements of Earnings (Loss) and
basis,
Comprehensive Income (Loss) and Cash Flows for the years ended December 31, 2018, 2017 and 2016 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.
CONDENSED CONSOLIDATING STATEMENT
OF EARNINGS AND COMPREHENSIVE INCOME
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Year ended December 31, 2018
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 (income) loss, net
Operating (loss) income
Interest expense (income), net
Non-service components of net periodic benefit cost
(Loss) earnings before income taxes and equity loss
Income tax (benefit) expense
Equity loss, net of taxes
Share in earnings of equity accounted investees
Net earnings
Other comprehensive loss
Comprehensive income
$
4,411
3,782
216
108
7
6
(1)
4,118
293
91
1
201
30
1
166
336
(133)
203
$
2,226
1,703
92
324
—
2
1
2,122
104
(91)
(19)
214
47
1
—
166
(110)
56
$
(1,182)
(1,182)
—
—
—
—
—
(1,182)
—
—
—
—
—
—
(502)
(502)
243
(259)
$
5,455
4,303
308
443
7
8
—
5,069
386
62
(18)
342
57
2
—
283
(131)
152
$
—
—
—
11
—
—
—
11
(11)
62
—
(73)
(20)
—
336
283
(131)
152
124
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2017
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
Non-service components of net periodic benefit
cost
Loss before income taxes
Income tax expense (benefit)
Share in earnings of equity accounted investees
Net loss
Other comprehensive income
Comprehensive (loss) income
$
—
—
—
9
—
—
—
9
(9)
63
—
(72)
9
(177)
(258)
163
(95)
$
4,243
3,688
233
142
313
2
1
4,379
(136)
86
1
(223)
(179)
(133)
(177)
175
(2)
Non-
Guarantor
Subsidiaries
$
2,053
Consolidating
Adjustments
Consolidated
$
(1,148)
$
5,148
1,605
88
293
265
—
(15)
2,236
(183)
(83)
(12)
(88)
45
—
(133)
170
37
(1,148)
—
—
—
—
—
(1,148)
—
—
—
—
—
310
310
(345)
(35)
4,145
321
444
578
2
(14)
5,476
(328)
66
(11)
(383)
(125)
—
(258)
163
(95)
125
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. 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
Non-service components of net periodic benefit
cost
(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
$
2,032
1,558
92
308
—
1
4
1,963
69
(49)
(15)
133
36
—
97
(35)
62
Consolidating
Adjustments
Consolidated
$
(1,145)
(1,145)
—
—
—
—
—
(1,145)
—
—
—
—
—
(265)
(265)
47
(218)
$
5,090
4,051
348
418
29
32
4
4,882
208
66
(15)
157
29
—
128
2
130
126
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
Parent
December 31, 2018
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
—
—
—
6
1
498
505
—
—
3,645
5
18
4,173
52
125
1
—
178
793
636
—
28
2,538
—
344
525
12
3
194
1,078
1,802
256
2,611
1
26
5,774
464
264
12
—
740
—
938
335
116
3,645
111
326
237
6
18
35
733
803
341
—
1,569
104
3,550
241
338
12
1
592
60
1
155
131
2,611
—
—
—
—
—
(727)
(727)
—
—
(6,256)
(1,575)
(14)
(8,572)
—
(727)
—
—
(727)
—
(1,575)
(14)
—
(6,256)
111
670
762
24
22
—
1,589
2,605
597
—
—
134
4,925
757
—
25
1
783
853
—
476
275
2,538
Total liabilities and shareholders’
equity
4,173
5,774
3,550
(8,572)
4,925
127
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. 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
128
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2018
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
Parent
$
Guarantor
Subsidiaries
$
283
336
Non-
Guarantor
Subsidiaries
$
166
$
(502)
Consolidating
Adjustments
Consolidated
(557)
434
(108)
502
58
(53)
4
(4)
(53)
—
85
(60)
(1)
(36)
—
—
(12)
(7)
(4)
122
111
—
—
—
—
—
—
—
—
—
377
(377)
—
—
—
—
—
—
Cash flows (used for) provided from operating
activities
(274)
770
Investing activities
Additions to property, plant and equipment
Proceeds from disposals of property, plant and
equipment
Other
Cash flows used for investing activities
Financing activities
Dividend payments
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 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
(142)
1
(2)
(143)
—
—
—
(300)
(341)
—
—
(641)
(14)
—
14
—
—
—
—
—
(108)
—
—
—
—
377
2
271
(3)
—
3
—
129
$
283
271
554
(195)
5
(6)
(196)
(108)
85
(60)
(301)
—
—
2
(382)
(24)
(4)
139
111
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2017
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 provided from operating activities
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
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
$
$
Parent
$
(258)
(177)
(133)
287
29
—
—
—
—
(104)
—
(50)
—
—
(63)
—
173
1
259
82
(99)
—
—
(99)
—
(12)
—
—
—
—
—
29
—
471
338
(83)
19
(8)
(72)
—
—
—
45
(90)
(1)
(202)
—
—
Cash flows (used for) provided from financing
activities
(43)
17
(248)
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
(14)
—
17
3
—
—
14
14
18
10
94
122
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
130
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2016
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 (used for) provided 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
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
Parent
$
Guarantor
Subsidiaries
$
128
168
(4,280)
4,149
(4,152)
4,317
—
—
—
—
—
(102)
(10)
—
—
—
(38)
—
4,273
(3)
(265)
—
(1)
—
(266)
—
—
12
—
—
(1)
(4,050)
—
—
$
97
203
300
(82)
1
(45)
1
(125)
—
—
—
140
(70)
(1)
(223)
—
—
Cash flows provided from (used for) financing
activities
4,120
(4,039)
(154)
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
(32)
—
49
17
12
—
2
14
21
(2)
75
94
131
$
(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
Domtar Corporation
Interim Financial Results (Unaudited)
(In millions of dollars, unless otherwise noted)
2018
Sales
Operating income
Earnings before income taxes and equity loss
Net earnings
Basic net earnings per common share
Diluted net earnings per common share
2017
Sales
Operating income (loss)
Earnings (loss) before income taxes and equity loss
Net earnings (loss)
Basic net earnings (loss) per common share
Diluted net earnings (loss) per common share
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$1,345
$1,353
77 (a)
65
54
0.86
0.86
62 (b)
51
43
0.68
0.68
$1,367
114
103
99 (c)
1.57
1.57
$1,390
133 (d)
123
87 (e)
1.38
1.38
Year
$5,455
386
342
283
4.50
4.48
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
$1,302
38
25
20
0.32
0.32
$1,221
62
47
38
0.61
0.61
$1,290
$1,335
$5,148
(328)
(383)
(258)
(4.11)
(4.11)
(513) (g)
(528)
(386) (h)
(6.16)
(6.16)
85 (f)
73
70
1.12
1.11
(a) The operating income for the first Quarter of 2018 included a gain on disposal of property, plant and
equipment of $1 million related to our Pulp and Paper segment.
The Company also recorded a litigation settlement of $2 million related to our Corporate segment.
(b) The operating income for the second Quarter of 2018 included a gain on disposal of property, plant and
equipment of $3 million related to our Pulp and Paper segment.
(c) The net earnings for the third Quarter of 2018 included a tax benefit of $7 million related to the U.S. Tax
Reform.
(d) The operating income for the fourth Quarter of 2018 included closure and restructuring costs of $8 million
and accelerated depreciation of $7 million, both related to our Personal Care segment.
(e) The net earnings for the fourth Quarter of 2018 included a tax expense of $10 million related to the U.S. Tax
Reform.
(f) 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.
(g) 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.
(h) 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.
132
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, 2018, 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, 2018, 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, 2018, 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, 2018 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.
133
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, 2018.
ITEM 9B. OTHER INFORMATION
The Company has nothing to report under this item.
134
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 2019 Annual
Meeting of Stockholders, to be filed on or about March 31, 2019, 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 2019 Annual Meeting of
Stockholders, to be filed on or about March 31, 2019, 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 2019 Annual Meeting of Stockholders, to be filed on or about
March 31, 2019, 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, 2018:
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)
1,698,973(1)
$45.68(2)
1,246,036(3)
N/A
1,698,973
N/A
$45.68
N/A
1,246,036
(1)
(2)
(3)
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, 2018 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.
Represents the weighted average exercise price of options disclosed in column (a).
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 2019 Annual Meeting of Stockholders is incorporated
herein by reference.
135
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 2019 Annual Meeting of Stockholders is incorporated herein by reference.
136
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
137
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*
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
10.10*
Form of Indemnification Agreement for members of Pension
Administration Committee of Domtar Corporation
10.11
10.12
Amended and Restated Domtar Corporation 2007 Omnibus
Incentive Plan
Domtar Corporation Annual Incentive Plan for members of the
Management Committee
10.13*
Employment agreement of Mr. Michael Fagan
10.14*
10.15*
10.16*
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
10-K
10-Q
10.7
10.1
02/24/2017
08/04/2017
10-K
10.50
02/27/2009
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
10.17*
Employment agreement of Mr. Michael D. Garcia
10-Q
10.1
08/01/2014
138
Incorporated by reference to:
Form
Exhibit
Filing Date
10-Q
10.1
11/03/2016
Exhibit
Number
10.18
21
23
24.1
31.1
31.2
32.1
32.2
Exhibit Description
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.
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
139
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
2018
2017
2016
Valuation Allowance on Deferred Tax Assets
2018
2017
2016
Balance at
beginnings of year
Charged to
income
(Deductions) from
/ Additions to
reserve
Balance at end
of year
$
7
7
6
$
2
1
—
$
(3)
(1)
1
$
6
7
7
Balance at
beginnings of year
Charged to
income
Deductions from
reserve
Balance at end
of year
$
25
22
23
$
(8)
3
(1)
$
(1)
—
—
$
16
25
22
140
ITEM 16. FORM 10-K SUMMARY
None.
141
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 22, 2019
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 22, 2019
Senior Vice-President and Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
February 22, 2019
Director
Director
Director
Director
Director
Director
Director
Director
142
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
February 22, 2019
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 22, 2019
/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 22, 2019
/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, 2018 (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 22, 2019
/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, 2018 (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 22, 2019
/S/ DANIEL BURON
Daniel Buron
Senior Vice-President and Chief Financial Officer
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SHAREHOLDER INFORMATION
DIVIDENDS DECLARED IN 2018
Declared
Record Date
Payable Date
Amount
February 8, 2018
May 8, 2018
August 8, 2018
November 7, 2018
April 2, 2018
July 3, 2018
October 2, 2018
January 2, 2019
April 16, 2018
July 16, 2018
October 15, 2018
January 15, 2019
$0.435
$0.435
$0.435
$0.435
INVESTOR RELATIONS
Investor Relations Department
Domtar Corporation
395 de Maisonneuve Blvd. West
Montreal, QC 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, 2019, 7:45 a.m. ET
Domtar Corporate Office
234 Kingsley Park Drive
Fort Mill, SC 29715
EXCHANGE LISTINGS
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
By regular mail
Computershare
PO Box 505000
Louisville, KY 40233-5000
By overnight delivery
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
North American Toll Free Number:
1-877-282-1168
Tel.: 1-781-575-2879
computershare.com/investor
TENTATIVE EARNINGS
RELEASE SCHEDULE
First Quarter 2019: Wednesday, May 1, 2019
Second Quarter 2019: Thursday, August 1, 2019
Third Quarter 2019: Thursday, October 31, 2019
Fourth Quarter 2019: Thursday, February 6, 2020
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.
2016
2017
2018
Reconciliation of "Earnings before items" to Net earnings (loss)
Net earnings (loss)
(+) Impairment of property, plant and equipment and goodwill
(+) 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
(=) Earnings before items
($)
($)
($)
($)
($)
($)
($)
($)
($)
(/) Weighted avg. number of common shares outstanding (diluted)
(=) Earnings before items per diluted share
(millions)
($)
Reconciliation of “EBITDA” and “EBITDA before items” to Net earnings (loss)
Net earnings (loss)
(+) Equity loss, net of taxes
(+) Income tax expense (benefit)
(+) Interest expense, net
(+) Depreciation and amortization
(+) Impairment of property, plant and equipment and goodwill
(-) Net gains on disposals of property, plant and equipment
(=) EBITDA
(/) Sales
(=) EBITDA margin
EBITDA
(+) Closure and restructuring costs
(+) Litigation settlement
(-) Reversal of contingent consideration
(+) Impact of purchase accounting
(=) EBITDA before items
(/) Sales
(=) EBITDA margin before items
Reconciliation of “Free cash flow” to Cash flow from operating activities
Cash flows from operating activities
(-) Additions to property, plant and equipment
(=) Free cash flow
($)
($)
($)
($)
($)
($)
($)
($)
($)
(%)
($)
($)
($)
($)
($)
($)
($)
(%)
($)
($)
($)
128
22
25
2
—
—
1
—
178
62.7
2.84
128
—
29
66
348
29
—
600
5,090
12%
600
32
2
—
1
635
5,090
12%
465
(347)
118
(258)
573
1
—
(11)
(2)
—
(140)
163
62.7
2.60
(258)
—
(125)
66
321
578
(13)
569
5,148
11%
569
2
—
(2)
—
569
5,148
11%
449
(182)
267
283
5
6
2
(3)
—
—
(2)
291
63.1
4.61
283
2
57
62
308
7
(4)
715
5,455
13%
715
8
2
—
—
725
5,455
13%
554
(195)
359
(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
2016
2017
2018
12
63
1,218
1,293
(125)
1,168
2,676
3,844
1,168
3,844
30%
—
1
1,129
1,130
(139)
991
2,483
3,474
991
3,474
29%
—
1
853
854
(111)
743
2,538
3,281
743
3,281
23%
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
(%)
“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.
Pulp and Paper
Personal Care1
Corporate
2016
2017
2018
2016
2017
2018
2016
2017
2018
"Reconciliation of Operating income (loss)
to "Operating income (loss) before items"
Operating income (loss)
(+) Impairment of property, plant and equipment and goodwill
(-) Net gains on disposals of property, plant and equipment
(+) Closure and restructuring costs
(+) Litigation settlement
(+) Impact of purchase accounting
(-) Reversal of contingent consideration
(=) Operating income (loss) before items
Reconciliation of “Operating income (loss)
before items” to “EBITDA before items”
Operating income (loss) before items
(+) Non-service components of net periodic benefit cost
(+) Depreciation and amortization
(=) EBITDA before items
(/) Sales
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
201
237
438
29
—
31
—
—
—
—
(4)
—
—
—
—
—
(4)
—
—
—
—
261
233
434
261
16
284
561
233
13
254
500
434
19
238
691
4,239 4,216 4,523
57
—
—
1
—
1
—
59
59
—
64
123
909
(527)
578
—
2
—
—
—
53
53
—
67
120
(5)
7
—
8
—
—
—
10
10
—
70
80
996 1,000
(=) EBITDA margin before items
(%)
13%
12%
15%
14%
12%
8%
(50)
—
—
—
2
—
—
(48)
(48)
(1)
—
(49)
—
—
(38)
—
(9)
—
—
—
(2)
(49)
(49)
(2)
—
(51)
—
—
(47)
—
—
—
2
—
—
(45)
(45)
(1)
—
(46)
—
—
“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.
WHERE WE WORK
CORPORATE OFFICES
MARKET PULP
CONVERTING AND FORMS
REGIONAL REPLENISHMENT
Fort Mill, South Carolina
capacity in air-dry metric tons)
Addison, Illinois
(Annual pulp manufacturing
MANUFACTURING
Montreal, Quebec
PULP AND PAPER
Ashdown, Arkansas
(516,000 tons)
DIVISION HEADQUARTERS
Fort Mill, South Carolina
Dryden, Ontario
(327,000 tons)
Brownsville, Tennessee
Dallas, Texas
DuBois, Pennsylvania
Griffin, Georgia
Owensboro, Kentucky
Ridgefields, Tennessee
Rock Hill, South Carolina
CENTERS – CANADA
Richmond, Quebec
Toronto, Ontario
Winnipeg, Manitoba
REPRESENTATIVE
OFFICE – INTERNATIONAL
Hong Kong, China
Kamloops, British Columbia
Tatum, South Carolina
LOCAL DISTRIBUTION CENTERS
(354,000 tons)
Washington Court House, Ohio
Buffalo, New York
Plymouth, North Carolina
(390,000 tons)
CHIP MILLS
Hawesville, Kentucky
Johnsonburg, Pennsylvania
Kingsport, Tennessee
Marlboro (Bennettsville),
South Carolina
CONVERTING AND
ARIVA – CANADA
Halifax, Nova Scotia
Montreal, Quebec
Cincinnati, Ohio
Cleveland, Ohio
Des Moines, Iowa
Houston, Texas
Mount Pearl, Newfoundland
Kansas City, Kansas
and Labrador
Ottawa, Ontario
Quebec City, Quebec
Toronto, Ontario
REGIONAL REPLENISHMENT
CENTERS – UNITED STATES
Minneapolis, Minnesota
Nashville, Tennessee
Phoenix, Arizona
Plain City, Ohio
Richmond, Virginia
Salt Lake City, Utah
San Antonio, Texas
DISTRIBUTION – ONSITE
Charlotte, North Carolina
San Lorenzo, California
Ashdown, Arkansas
Rothschild, Wisconsin
Windsor, Quebec
Chicago, Illinois
Dallas, Texas
Delran, New Jersey
Indianapolis, Indiana
Jacksonville, Florida
Mira Loma, California
Seattle, Washington
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)
PERSONAL CARE
DIVISION HEADQUARTERS
Raleigh, North Carolina
MANUFACTURING AND
DISTRIBUTION
Aneby, Sweden
Delaware, Ohio
Greenville, North Carolina
Jesup, Georgia
Toledo, Spain
Waco, Texas1
SALES OFFICES
Daytona Beach, Florida
Tuitjenhorn, The Netherlands
Olivette, Missouri
Oslo, Norway
Linz, Austria
Madrid, Spain
Pusignan, France
Rheinfelden, Switzerland
Schwalbach am Taunus, Germany
Stockholm, Sweden
Texarkana, Arkansas
Wakefield, United Kingdom
PRODUCTION
NOTES
Paper
Cover 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.
Printing
Cover 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.
1 On November 1, 2018, we announced a margin
improvement plan within our Personal Care
Division, including the permanent closure of our
Waco, Texas, manufacturing and distribution
facility. The facility is expected to cease
operations in the third quarter of 2019.
Cougar® paper contains
10% post-consumer fiber
Learn the environmental, social and
economic impacts of Domtar products at
domtarpapertrail.com.
DOMTAR.COM