BUILDING ON OUR CAPABILITIES
2019 ANNUAL REPORT
Domtar-AR2019_ENG_MAR10.indd 1
3/11/20 5:48 PM
TED FINANCIAL
SELECTED FINANCIAL
FIGURES
ES
Years ended December 31
2017
2018
2019
(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)
4,216
(64)
996
4,523
(68)
1,000
4,332
(65)
953
5,148
5,455
5,220
237
(527)
(38)
(328)
(258)
449
182
267
5,212
1,130
29%
2,483
62.7
438
(5)
(47)
386
283
554
195
359
4,925
854
23%
2,538
63.1
225
(15)
(47)
163
84
442
255
187
4,903
939
27%
2,376
61.4
1 Non-GAAP financial measure. Please see “Reconciliation of non-GAAP Financial Measures”
at the end of this document.
2019 SALES BY BUSINESS
SEGMENT
Pulp and Paper 82%
Personal Care 18%
2019 SALES BY REGION
U.S. 71%
Europe 11%
Canada 8%
Asia 7%
Other 3%
Domtar-AR2019_ENG_MAR10.indd 2
3/11/20 5:48 PM
SALES
(In millions of dollars)
5,148
5,455
5,220
EBITDA
BEFORE ITEMS1
(In millions of dollars)
725
569
563
CASH RETURNED
TO SHAREHOLDERS
(In millions of dollars)
329
104
108
2017
2018
2019
2017
2018
2019
2017
2018
2019
CASH FLOWS
FROM OPERATING
ACTIVITIES
(In millions of dollars)
554
449
442
FREE
CASH FLOW1
(In millions of dollars)
359
267
187
LONG-TERM DEBT,
INCLUDING CURRENT
PORTION
(In millions of dollars)
1,130
939
854
2017
2018
2019
2017
2018
2019
2017
2018
2019
Domtar-AR2019_ENG_MAR10.indd 1
3/11/20 5:48 PM
DOMTAR 2019 ANNUAL REPORT 1
MESSAGE
TO SHAREHOLDERS
BUILDING ON OUR CAPABILITIES
DOMTAR CONTINUES TO BUILD
ON ITS CAPABILITIES AND EXECUTE
A WELL-DEFINED STRATEGY TO
MAXIMIZE THE VALUE OF EACH
OF ITS BUSINESSES.
Led by a strong team, Domtar is well positioned to drive
growth, return capital to shareholders and reach the
next stage in its evolution as a leading North American
pulp and paper company and a recognized personal care
products supplier.
Despite market challenges in 2019, we showed resilience
and delivered strong results, including $442 million in cash
flows from operating activities. The businesses in which we
operate are adjusting to market volatility, and we continue
to be agile and flexible in these changing market conditions.
Our solid financial position allowed us to return $329 million
to our shareholders for the year through dividends and
share buy-backs, while we continue to invest strategically
in our assets.
Our commitment to operating responsibly and sustainably
remains steadfast. Versatile and renewable wood fiber is
the foundation of our business. As a fiber innovator, we are
proud of our record as a sustainability leader for the benefit
of our people, our communities and our planet.
1 Non-GAAP financial measure. Please see “Reconciliation of non-GAAP Financial
Measures” at the end of this document.
2 DOMTAR 2019 ANNUAL REPORT
RESILIENT PAPER BUSINESS
Our paper business EBITDA margins1 improved in 2019 compared to
the prior year due to pricing and improved product mix. We continue
to provide best-in-class service to our customers and to increase our
share of wallet with them, while pursuing new sales opportunities.
We remain committed to balancing our supply with customer
demand, maintaining lower inventories and minimizing our
downtime costs. We took approximately 300,000 short tons of
market downtime during the year to match our capacity with
customer demand before permanently idling 204,000 short tons
of paper capacity. Our ability to adjust quickly to changing market
conditions reflects both the agility of our team and the optionality of
our asset base. We have shown that we can find creative uses for our
paper assets as demand declines, and we have identified repurposing
optionality for approximately half of our remaining paper capacity.
We continue to invest in projects that strengthen our best-performing
mills, reduce our cost structure and support new capabilities. As we
accelerate our efforts in the development of innovative products for
plastic substitution and other emerging markets, we remain focused
on being North America’s uncoated freesheet market leader and
supplier of choice for our paper customers.
EXPANDING MARKET PULP BUSINESS
While 2019 was a challenging year for pulp pricing, our growth
plans remain on track. We made progress toward improving our
cost position through targeted investments and continuous
improvement projects, while aligning our business with winning
customers and markets. Tissue, hygiene and select specialty pulp
markets are showing global demand growth, and our product mix
evolved further in their direction during the year.
Domtar-AR2019_ENG_MAR10.indd 2
3/11/20 5:48 PM
“WHETHER IT’S THE QUALITY
OF OUR ASSETS, THE MARKETS
IN WHICH WE OPERATE,
OR THE STRENGTH AND
CREATIVITY OF OUR PEOPLE,
DOMTAR IS WELL POSITIONED
FOR LONG-TERM SUCCESS.”
Domtar-AR2019_ENG_MAR10.indd 3
3/11/20 5:49 PM
DOMTAR 2019 ANNUAL REPORT 3
MESSAGE
TO SHAREHOLDERS
Domtar is a major pulp supplier with high-performing,
low-cost mills and has the ability to meet customer needs for
high-quality products in North America and globally. We plan
to continue improving customer and product mix, enhancing
our value proposition and increasing productivity so that we
can fully realize the capability of our assets.
FOCUSED PERSONAL CARE BUSINESS
In Personal Care, we improved EBITDA margins1 when
compared to the prior year, and we simplified and stabilized
the business to compete more effectively in a challenging
global market. These actions included consolidating our North
American manufacturing footprint, streamlining expenses,
and simplifying our operating structure and work processes,
which resulted in productivity improvements and supply chain
efficiencies. While executing our margin improvement plan,
we also achieved some important wins in our infant diaper
business that will scale up this year.
We have built the foundation for a lower cost position and
established the commercial focus required to unlock future
growth and profitability. Looking ahead, we will focus on
delivering on our commercial commitments, developing our
strategic customer relationships and investing to serve our
customers in the longer term.
DISCIPLINED CAPITAL ALLOCATION
The shareholder returns consistently generated by Domtar
through the years are driven by a successful and sustainable
business strategy underpinned by disciplined capital
allocation. Across our businesses, our objective is to make
sound investments that will help sustain earnings throughout
the business cycle.
1 Non-GAAP financial measure. Please see “Reconciliation of non-GAAP Financial
Measures” at the end of this document.
4 DOMTAR 2019 ANNUAL REPORT
In paper, we maximize value by providing best-in-class service
and keeping our supply in line with our customers’ demand.
Capital is judiciously allocated to projects that increase
productivity and efficiency across our operations in support
of higher profitability. Paper manufacturing assets no longer
required to serve our customers will be repurposed in a timely
manner to their next best use, being either low-cost pulp or
competitive containerboard. In our growing pulp business,
we are investing strategically to strengthen the long-term
competitiveness of our assets, while the priority in Personal Care
is to reach the profitability potential of our current asset base.
With strong cash generation and a solid balance sheet, we
also have the capacity to consider value-creating acquisitions.
In terms of targets, we will favor only meaningful, fiber-based
opportunities with a strong overlap with our existing businesses.
We will maintain a balanced capital allocation approach
by returning the majority of future free cash flows1 to
shareholders, while maintaining the flexibility to deploy
capital to the highest value-creating options.
CREATING A SUSTAINABLE FUTURE
While striving to make Domtar even more resilient and
successful, we are also committed to operating responsibly.
Wood fiber, the building block of all our products, is a highly
versatile and renewable resource. Our unwavering support
for sustainable forestry is evidenced by our actions in both
Domtar-owned lands and in our continuing efforts to help
small landowners achieve certification for their forest
management. Additionally, we are among the leaders in the
use of renewable energy to power our mills and the beneficial
reuse of manufacturing by-products. Each year, our goal is to
outperform industry benchmarks and other key sustainability
performance indicators, including the safety of our workplaces
and well-being of our people.
Domtar-AR2019_ENG_MAR15_CORR.indd 4
3/18/20 4:45 PM
Our latest sustainability report was published last year, and
it provides a full picture of our approach and performance.
Operating responsibly, ethically and sustainably is embedded
in Domtar’s culture, and we will continue to report with
candor and transparency on the issues that matter most to
our stakeholders.
TAKING DOMTAR TO THE NEXT LEVEL
We are focused on transforming Domtar into a growth
company while living up to our values of agility, caring and
innovation.
I am confident that we have the capabilities to move forward
on our current path, while driving value for all our stakeholders.
Our readiness and adaptability are reflected in the strength of
s we have identified.
our team and the potential opportunities we have identified.
By remaining focused and disciplined in aareas where we can
add value and improve our business, wee will make Domtar
even stronger.
Thank you to our employees for their hardd work and creativity,
our customers for their partnership aand trust, and our
shareholders for their continued supportt and investment in
Domtar. I also recognize and appreciate our management team
and Board members for their vision and leeadership.
Sincerely,
John D. Williams
President and Chhief Executive Officer
Domtar-AR2019_ENG_MAR10.indd 5
3/11/20 5:49 PM
DOMTAR 2019 ANNUAL REPORT 5
MANAGEMENT COMMITTEE AND
BOARD OF DIRECTORS
LEADERSHIP
AND CORPORATE
GOVERNANCE
Domtar upholds the highest standards of business
integrity and corporate social responsibility. These are
reflected in our wide range of policies, regularly reviewed
and updated, to promote strong governance, best
practices, diversity and sustainability.
Our commitment to operating responsibly is supported
by our Code of Business Conduct and Ethics applicable
to all employees and Board members. Strict Corporate
Governance Guidelines are the basis for our robust
compliance program. For more information on our
governance practices, or to consult our proxy statement,
please visit domtar.com.
1.
3.
5.
2.
4.
6.
MANAGEMENT
COMMITTEE
1. John D. Williams
President and
Chief Executive Officer
2. Daniel Buron
Senior Vice President and
Chief Financial Officer
3. Michael D. Garcia
President
Pulp and Paper
Division
4. Michael Fagan
President
Personal Care
Division
5. Zygmunt Jablonski
Senior Vice President and
Chief Legal and
Administrative Officer
6. Patrick Loulou
Senior Vice President
Corporate
Development
6 DOMTAR 2019 ANNUAL REPORT
Domtar-AR2019_ENG_MAR15_CORR.indd 6
3/18/20 4:47 PM
1.
4.
7.
2.
5.
8.
3.
6.
9.
BOARD
OF DIRECTORS
1. Robert E. Apple
Chief Operating Officer
MasTec, Inc.
Miami, Florida
Member of our
Board of Directors since
2012 and Chairman of
the Board since 2017
4. Brian M. Levitt
Chairman of the Board
The Toronto
Dominion Bank
Kingston, Ontario
Member of our
Board of Directors
since 2007
7. Denis Turcotte
Managing Partner and
Chief Operating Officer
Brookfield Asset
Management Inc.
Toronto, Ontario
Member of our
Board of Directors
since 2007
2. Giannella Alvarez
Corporate Director
Atlanta, Georgia
Member of our
Board of Directors
since 2012
3. David J. Illingworth
Corporate Director
Orchid, Florida
Member of our
Board of Directors
since 2013
5. David G. Maffucci
Corporate Director
Isle of Palms, South Carolina
Member of our
Board of Directors
since 2011
6. Pamela B. Strobel
Corporate Director
Chicago, Illinois
Member of our
Board of Directors
since 2007
8. John D. Williams
President and
Chief Executive Officer
Domtar Corporation
Charlotte, North Carolina
Member of our
Board of Directors
since 2009
9. Mary A. Winston
President
WinsCo Enterprises, Inc.
Charlotte, North Carolina
Member of our
Board of Directors
since 2015
COMMITTEE
MEMBERSHIPS
Audit Committee
David G. Maffucci, Chair
David J. Illingworth
Mary A. Winston
Environmental, Health, Safety
and Sustainability Committee
Denis Turcotte, Chair
Giannella Alvarez
David J. Illingworth
Finance Committee
Brian M. Levitt, Chair
David G. Maffucci
Denis Turcotte
Mary A. Winston
Human Resources Committee
Pamela B. Strobel, Chair
Giannella Alvarez
Brian M. Levitt
Denis Turcotte
Nominating and Corporate
Governance Committee
Robert E. Apple, Chair
Brian M. Levitt
David G. Maffucci
Pamela B. Strobel
DOMTAR 2019 ANNUAL REPORT 7
Domtar-AR2019_ENG_MAR10.indd 7
3/11/20 5:49 PM
BUSINESS OVERVIEW
PULP AND PAPER SEGMENT
PULP AND PAPER
Domtar is the largest integrated manufacturer and marketer of
uncoated freesheet paper in North America and an important
supplier of specialty and packaging papers, with an annual
paper production capacity of 2.9 million short tons. We are
also one of the largest global pulp manufacturers, and a major
supplier of high-quality papergrade, fluff and specialty pulp.
We produce over 4 million air-dried metric tons of pulp in
total, approximately half for internal use and the balance for
sale to third parties.
TRUSTED PAPER PARTNER
Maintaining our position as the leading North American
uncoated freesheet paper manufacturer, Domtar sold just
over 2.8 million short tons of paper in 2019. We provide a wide
range of communication, specialty and packaging papers to a
variety of customers, primarily in the United States, including
merchants, retail outlets, stationers, printers, converters and
end-users. Domtar is committed to remaining the long-term
paper supplier of choice for its customers.
Our pulp and paper business is built on a network of wood
fiber converting assets strategically located across the United
States and Canada. Over the past decade, we have repurposed
1.7 million short tons of our paper capacity to manufacture
products for growing markets. We invest annually in projects
that strengthen our best-performing mills while actively
seeking new opportunities to redeploy assets no longer
needed for paper production.
8 DOMTAR 2019 ANNUAL REPORT
Domtar-AR2019_ENG_MAR10.indd 8
3/11/20 5:49 PM
DOMTAR PAPER PRODUCTS AND APPLICATIONS
Communication Papers
Specialty and Packaging Papers
CATEGORY
Business Papers
Commercial Printing and Publishing Papers
GRADE
• Copy
• Premium imaging
• Technology papers
• Offset
• Colors
• Index
• Tag
• Bristol
• Opaques
• Premium opaques
• Lightweight
• Tradebook
• Thermal papers
• Food packaging
• Bag stock
• Security papers
• Imaging papers
• Label papers
• Medical
disposables
APPLICATION
• Photocopies
• Office documents
• Presentations
• Reports
• Commercial printing
• Forms and Envelopes
• Annual reports
• Direct mail
• Pamphlets
• Brochures
• Books
• Catalogs
• Cards
• Posters
• Food and candy
• Check and security
packaging
papers
• Fast food takeout
• Surgical gowns
bag stock
Right-sizing our paper
production capacity
We produce paper at 10 mills in the
United States and Canada, supported
by an efficient network of 13 offsite
and onsite converting and forms
manufacturing operations. In 2019,
we permanently shut down two paper
machines located in the United States,
thereby reducing our uncoated freesheet
production capacity by 204,000 short
tons, in addition to taking approximately
300,000 short tons of market-related
downtime during the year, to balance
supply with our customers’ demand.
Specialty and packaging papers
We manufacture specialty and packaging
papers destined for applications as far
ranging as food packaging and medical
supplies. In addition, we supply base
stock for thermal papers used to
make cash register receipts, ATM print
outs and lottery tickets, as well as an
extensive range of industrial papers for
applications such as sandpaper or tile
backing, among other uses.
We continue to leverage our innovation
and new product development pipeline
to grow our position in specialty papers.
We see an opportunity in this category
to use specialty paper as a substitution
for single-use plastics as customers
increasingly seek alternatives for such
items as straws and food packaging.
Communication papers
Communication papers represent the
majority of our total sales, with business
papers being the largest product
offering within this category. They are
sold mainly to major North American
retailers, independent office supply
dealers and paper merchants. We offer
a selection of our own recognized
business paper brands, including
Xerox® Paper and Specialty Media,
ImagePrint® MultiUse and EarthChoice®
Office Paper, and we also assist our
customers in developing their own
store brands.
Our communication papers are also
used for commercial printing and
publishing. In this category, customers
are primarily paper merchants and
converters who further process the
paper to its final end-use state such as
into books, pamphlets or envelopes,
depending on the application. Cougar®,
Lynx® Opaque Ultra and Husky® Opaque
Offset are among our most recognized
brands in this category.
Domtar-AR2019_ENG_MAR10.indd 9
3/11/20 5:49 PM
DOMTAR 2019 ANNUAL REPORT 9
BUSINESS OVERVIEW
PULP AND PAPER SEGMENT
PAPER MARKET DYNAMICS
In 2019, 6.5 million short tons of
uncoated freesheet paper were
manufactured in North America,
representing an approximately
10% decline compared to the previous
year. This reflects market-related
downtime and permanent paper
production capacity reductions in
response to the market developments.
North American demand was nearly
7 million short tons, an 8.4% decrease
compared to 2018. This decline
exceeded the long-term secular trend
due mostly to customer destocking. For
its part, the North American specialty
papers market is expected to continue
to grow in line with population
growth, and the manufacturing and
construction sectors.
FOCUSED ON GROWTH IN
MARKET PULP
Domtar is a major global producer of
softwood and fluff pulp. We operate
two stand-alone pulp mills in Canada
and one in the Southern United States,
and we produce market pulp in six of
our integrated North American pulp
and paper mills. In 2019, we shipped
1.6 million air-dried metric tons of
papergrade, fluff and specialty pulp to
a diverse range of customers in over
50 countries around the world, in line
with shipments in prior years. In 2020,
we expect volume growth driven by our
strategic investments, the restart of our
Espanola, Ontario, mill and additional
market pulp from our Ashdown,
Arkansas, mill following the paper
machine closure late last year.
Most of the pulp we sell is used in
products that serve growing end-use
markets. Our papergrade pulp is used
for manufacturing consumer products
10 DOMTAR 2019 ANNUAL REPORT
such as bathroom and facial tissue, and
paper towels. Domtar Lighthouse® fluff
pulp is mainly used in the absorbent core
of infant diapers, adult incontinence
products, feminine hygiene products
and airlaid nonwovens. Our specialty
pulp customers produce a wide variety
of products ranging from specialty and
packaging papers to electrical insulating
papers and building products.
DOMTAR PULP SHIPMENTS
BY END USES1
End Use
% of Total
Shipments
Absorbent Hygiene
Towel and Tissue
Specialty Paper
and Materials
Printing and Writing
43%
34%
18%
5%
1 Includes pulp shipments to Personal Care
Domtar-AR2019_ENG_MAR10.indd 10
3/11/20 5:49 PM
HEALTH AND SAFETY
Domtar made significant progress during
the past decade in reducing total injury
frequency rates and the severity of
injuries in Pulp and Paper. Over the past
three years, our performance has been
stable as we strive to eliminate workplace
injuries through a comprehensive accident
prevention strategy.
PULP AND PAPER
TOTAL INJURY
FREQUENCY RATES
0.84
0.79
0.85
2017
2018
2019
LEADING THE SHIFT TO A BIO-BASED ECONOMY
As a fiber innovator working with one of the world’s most renewable resources,
Domtar has extensive experience turning wood fiber into useful, sustainable
products. In recent years, we have accelerated our fiber-based product development
activities to create new revenue opportunities from biomaterials, as the world shifts
to a bio-based economy.
We have developed BioChoice® Lignin, a kraft lignin that can be used in the
production of resins, thermoplastics and other chemicals, and to produce products
as an alternative to common petroleum-based products, including plastics. We are
also a major partner in CelluForce, a world leader in the commercial production
of CelluForce NCC®, which is a form of Cellulose NanoCrystals. Produced from the
cellulose in trees, it is abundant, renewable and biodegradable. Its properties help
improve product performance in materials for the oil and gas, health care, and
food and beverage industries, among others.
Market pulp is subject to short-term
fluctuations in selling prices, and
2019 was a challenging year in both
domestic and global markets. However,
the historical trend in average prices
over a period of consecutive years
has been positive. Our growing pulp
business is well-positioned in attractive
markets with a favorable medium to
long-term outlook.
,
g
In 2019, we invested in strategic
projects at several mills to improve
our overall competitive position in the
global pulp market. These investments
included projects to increase energy
efficiency and related environmental
benefits, reduce fiber loss and maximize
resource use, as well as improved
productivity.
Domtar-AR2019_ENG_MAR10.indd 11
3/11/20 5:49 PM
DOMTAR 2019 ANNUAL REPORT 11
BUSINESS OVERVIEW
PULP AND PAPER SEGMENT
PULP AND PAPER SEGMENT
KEY FIGURES
Years ended December 31
2017
2018
2019
(In millions of dollars)
Sales (including sales to Personal Care)
4,216
4,523
4,332
Operating income (loss)
Depreciation and amortization
Capital expenditures
Total assets
Paper shipments – manufactured (‘000 ST)
Market pulp shipments (‘000 ADMT)
237
254
128
3,649
2,891
1,722
438
238
164
225
228
220
3,475
3,507
2,971
2,745
1,536
1,539
MANUFACTURING CAPACITY BY REGION
PAPER
MARKET PULP
U.S. 76%
Canada 24%
U.S. 54%
Canada 46%
SALES BY REGION
PAPER
MARKET PULP
U.S. 88%
Canada 8%
Europe 4%
U.S. 40%
China 24%
Other 16%
Europe 11%
Mexico 7%
Canada 2%
SHIPMENTS BY GRADE
PAPER – MANUFACTURED
MARKET PULP1
Communication 84%
Specialty and Packaging 16%
Softwood 54%
Fluff 42%
Hardwood 4%
1 Includes pulp shipments
to Personal Care
PULP MARKET DYNAMICS
Global demand for chemical market pulp in
2019 was approximately 64.2 million air-dried
metric tons, compared to 61.2 million tons in
2018. North American demand was 7.4 million
tons, a 0.5% increase, while demand in China
was 23.9 million tons, a 16% increase when
compared to 2018.
Papergrade wood pulp consumption is
expected to grow by an average of 1.6% per
year for 2020-2023. Demand for wood pulp
in China is projected to generate the largest
portion of this growth, with an expected annual
growth rate of 3.1% during the same period. For
2020-2023, global tissue demand is expected
to grow on average 2.7% per year. As a result,
global tissue demand is projected to rise well
over 4 million tons, fueling demand for chemical
market pulp.
World fluff pulp demand is forecast to expand
at a 2.4% annual rate over the next five years.
This is expected to be driven by the growth in
the use of disposable diapers in less developed
economies and incontinence products in
developed economies as the population ages.
Worldwide demand for absorbent hygiene
products by units is expected to grow 2.9%
over the same period.
12 DOMTAR 2019 ANNUAL REPORT
Domtar-AR2019_ENG_MAR15_CORR.indd 12
3/18/20 4:47 PM
PULP AND PAPER SEGMENT
FOOTPRINT
CORPORATE OFFICES
Fort Mill, South Carolina
Montreal, Quebec
DIVISION HEADQUARTERS
Fort Mill, South Carolina
UNCOATED FREESHEET
(Annual paper manufacturing
capacity in short tons)
Ashdown, Arkansas
(200,000 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
(95,000 tons)
Rothschild, Wisconsin
(131,000 tons)
Windsor, Quebec
(642,000 tons)
MARKET PULP
(Annual pulp manufacturing
capacity in air-dried metric tons)
Ashdown, Arkansas
(586,000 tons)2
Dryden, Ontario
(327,000 tons)
Kamloops, British Columbia
(408,000 tons)
Plymouth, North Carolina
(390,000 tons)
CHIP MILLS
Hawesville, Kentucky
ARIVA – CANADA
Halifax, Nova Scotia
REPRESENTATIVE
OFFICE – INTERNATIONAL
Johnsonburg, Pennsylvania
Montreal, Quebec
Hong Kong, China
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
Mount Pearl, Newfoundland
and Labrador
Ottawa, Ontario
Quebec City, Quebec
Toronto, Ontario
REGIONAL REPLENISHMENT
CENTERS – UNITED STATES
Charlotte, North Carolina
Chicago, Illinois
Dallas, Texas
Delran, New Jersey
Indianapolis, Indiana
Jacksonville, Florida
Mira Loma, California
Seattle, Washington
REGIONAL REPLENISHMENT
CENTERS – CANADA
Richmond, Quebec
Toronto, Ontario
Washington Court House, Ohio
Winnipeg, Manitoba
LOCAL DISTRIBUTION
CENTERS
Buffalo, New York
Cincinnati, Ohio
Cleveland, Ohio
Denver, Colorado
Des Moines, Iowa
Houston, Texas
Kansas City, Kansas
Minneapolis, Minnesota
Omaha, Nebraska
Phoenix, Arizona
Plain City, Ohio
Richmond, Virginia
Salt Lake City, Utah
San Antonio, Texas
San Lorenzo, California
St. Louis, Missouri
Vancouver, Washington
Walton, Kentucky
Wayne, Michigan
Wisconsin Rapids, Wisconsin
2 This reflects an incremental 70,000 tons of softwood and fluff pulp production expected
as a result of the closure of a paper machine in November of 2019.
DOMTAR 2019 ANNUAL REPORT 13
Domtar-AR2019_ENG_MAR10.indd 13
3/11/20 5:49 PM
BUSINESS OVERVIEW
PERSONAL CARE SEGMENT
PERSONAL CARE
Domtar is a recognized manufacturer of high-quality and
innovative absorbent hygiene products, which we also design,
market and distribute. We are one of the leading suppliers of
adult incontinence products sold into North America and
Europe. We are also a recognized supplier of infant diaper
products and engineered absorbent materials.
Our five manufacturing plants are supported by a sales force
in Europe and the United States. We sell our products primarily
in North America and Europe, as well as in other countries
around world.
IMPROVING QUALITY OF LIFE
Our vision is to be a global leader in absorbent hygiene markets
by meeting the diverse needs of consumers through effective,
affordable and widely available personal care solutions. Each
year, we manufacture and ship billions of products for adults,
infants and children that help improve their quality of life. Our
products are designed with the consumer in mind, focused
on leakage protection, absorbency, comfort, fit and aesthetics.
Adult incontinence products
We produce high-quality branded and partner-branded
products for people – both young and old – living with light to
heavy incontinence Our proprietary brands include Attends®
heavy incontinence. Our proprietary brands include Attends ,
Indasec®, IndasSlip® and Reassure®. Additionally, we make
partner brands for major retailers around the world.
We serve institutional and consumer channels with products
available online, in pharmacies and stores, and through
healthcare services. In 2019, we shipped over 2.6 billion units of
adult diapers, a 3% increase when compared to 2018 reflecting
strong product and customer growth.
14 DOMTAR 2019 ANNUAL REPORT
Domtar-AR2019_ENG_MAR10.indd 14
3/11/20 5:49 PM
HEALTH AND SAFETY
HEA
Ongoing attention to the prevention
Ongo
of hand injuries has enabled a major
of ha
redu
reduction in total injury frequency
rates in Personal Care during the past
rates
decade. In 2019, our performance
deca
improved during the first 11 months
impr
of the year before suffering a setback
of the
in December.
in De
PERSONAL CARE
TOTAL INJURY
FREQUENCY RATES
0.73
0.73
0.64
2017
2018
2019
Infant, child and youth products
We design and make baby diapers,
training, youth pants and bed mats.
Our brand names include Comfees®,
ChelinoTM, NeneTM and BambinoTM. We
also work closely with major retailers
supplying partner brand diapers for their
own stores. In 2019, we shipped nearly
1.5 billion units of baby diapers, which
was lower than in 2018 largely due to the
planned exit of unprofitable customers.
Engineered absorbent materials
We are also innovators in producing
ultrathin, disposable absorbent
c o m p o s i te s fo r m a n u f a c t u r i n g
companies worldwide. Some of the
world's largest branded and private
label manufacturers – including
Domtar – incorporate our NovaThin®
and NovaZorb® brand cores into a
wide range of consumer products.
These include feminine hygiene, adult
incontinence, baby diapers, medical
and healthcare applications, and food
packaging.
POSITIONING FOR SUCCESS
In 2019, our personal care business
was focused on margin improvement
in a challenging global market. We
consolidated our manufacturing
footprint with the closure of our Waco,
Texas, facility in the second quarter
of 2019, and further optimized our
production lines and capabilities across
the network. We made solid progress
in our asset repositioning and start-up
activities in North America.
We also continued to adjust our
product and customer mix in order to
reduce complexity and align ourselves
with strategic, long-term customers.
This has enabled us to lower our cost
position and create opportunities for
future growth and profitability. While
executing our margin improvement
plan, we achieved some important
customer wins in our infant diaper
business that will scale up in 2020.
MARKET DYNAMICS
The adult incontinence category
continues to show solid growth,
estimated at 3% to 5% annually, as the
world’s population ages. It is expected
that in 10 years’ time over 12% of the
projected total world population will
be 65 or older. Lower pricing in this
product category is in large part driven
by pressure to reduce public spending
on healthcare costs and on the
availability of reimbursement programs.
This category represents about two-
thirds of Personal Care’s total sales,
and our strategy for 2020 is to focus
on higher margin segments, install
and ramp-up new capacity to support
growth and capture insource savings.
The infant diaper market is currently
experiencing flat to declining demand
due to low bir th rates, but the
importance of this category to key
retailers is expected to remain strong
given the purchasing power of the
infant diaper shopper. Oversupply is
also driving pricing pressure. We are
focused on growing our partner
branded opportunities and expanding
our relationships with major retailers
that are committed to this space.
In 2020, we will remain focused on
developing and scaling strategic
customer, channel and supplier
par tnerships both in the adult
incontinence and infant categories to
capture opportunities for growth.
DOMTAR 2019 ANNUAL REPORT 15
Domtar-AR2019_ENG_MAR15_CORR.indd 15
3/18/20 4:48 PM
PERSONAL CARE SEGMENT
KEY FIGURES
PERSONAL CARE SEGME
FOOTPRINT
NT
Years ended December 31
2017
2018
2019
(In millions of dollars)
Sales
Operating income (loss)
Depreciation and amortization
Capital expenditures
Total assets
996
(527)
67
48
1,000
(5)
70
37
953
(15)
65
41
1,406
1,331
1,258
SALES BY PRODUCT CATEGORY
Adult Incontinence 69%
Infant 23%
Other 8%
SALES BY REGION
U.S. 52%
Europe 46%
Asia 1%
Other 1%
SALES BY CHANNEL
Healthcare 51%
Retail 37%
Direct-to-consumer 9%
Other 3%
16 DOMTAR 2019 ANNUAL REPORT
CORPORATE OFFICES
Fort Mill, South Carolina
Montreal, Quebec
DIVISION HEADQUARTERS
Raleigh, North Carolina
MANUFACTURING AND
DISTRIBUTION FACILITIES
Aneby, Sweden
Delaware, Ohio
Greenville, North Carolina
Jesup, Georgia
Toledo, Spain
SALES OFFICES
Bodö, Norway
Bourgoin Jallieu, France
Daytona Beach, Florida
Tuitjenhorn, The Netherlands
Olivette, Missouri
Oslo, Norway
Linz, Austria
Madrid, Spain
Rheinfelden, Switzerland
Schwalbach am Taunus, Germany
Stockholm, Sweden
Texarkana, Arkansas
Wakefield, United Kingdom
Domtar-AR2019_ENG_MAR15_CORR.indd 16
3/18/20 4:50 PM
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, 2019
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; trading symbol UFS.
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, 2019, was $2,801,211,465.
The number of shares of Registrant’s Common Stock outstanding as of February 17, 2020 was 56,273,429.
Portions of the Registrant’s Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 6,
2020, are incorporated by reference into Part III of this Report.
DOMTAR CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2019
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Results of Operations and Segment Review . . . . . . . . . . . . . . . . . . . . . . .
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Accounting Pronouncements and Critical Accounting Estimates and
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAGE
4
4
4
4
4
6
10
11
12
13
13
14
14
15
16
17
26
27
28
28
29
29
29
30
31
32
32
33
33
34
40
43
2
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
51
53
53
54
57
58
59
60
61
132
132
132
133
133
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . .
133
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
134
135
138
139
140
3
PART I
ITEM 1. BUSINESS
GENERAL
We design, manufacture, market and distribute a wide variety of
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.
fiber-based products,
We operate the following business segments: Pulp and Paper and Personal Care. We had revenues of
$5.2 billion in 2019, 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, 2019, Domtar Corporation had a total of 56,880,910 shares of common stock issued and
outstanding.
Our common stock is traded on the New York Stock Exchange and the Toronto Stock Exchange under the
symbol “UFS”.
Information regarding our common stock is included in Item 8, Financial Statements and Supplementary
Data under Note 21 “Shareholders’ Equity”.
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 24 “Segment Disclosures”. Geographic information is also included under
Note 24 of the Financial Statements and Supplementary Data.
5
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 2.9 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 76% of our
paper production capacity is in the United States and 24% 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 1.9 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 46% is located in Canada.
The table below lists our operating pulp and paper mills and their annual production capacity:
Production Facility
Fiberline Pulp Capacity
Saleable
Paper (1)
# lines
(‘000 ADMT) (2)
# machines
Category (3)
(‘000 ST) (2)
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
—
300
2,938
408
327
390
1,125
4,063
1,922
1
2
2
1
1
2
3
1
3
2
18
—
—
—
—
18
(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.
6
200
642
596
426
274
344
168
131
95
69
2,945
—
—
—
—
2,945
(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 U.S. 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 U.S., contracts with Quebec wood producers’
marketing boards, public land where we have wood supply allocations and from Domtar’s private lands. The
softwood and hardwood fiber for our Espanola pulp and paper mill and the softwood fiber for our Dryden pulp
mill, are obtained from third parties, directly or indirectly from public lands and through designated wood supply
allocations. The fiber used at our Kamloops pulp mill is all softwood, originating mostly from third-party
sawmill operations in the southern-interior part of British Columbia.
Cutting rights on public lands related to our pulp and paper mills in Canada represent about
1.5 million cubic meters of softwood and 1.0 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 2019,
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 2019, the cost of chemicals relating to our Pulp and Paper segment comprised approximately 11% 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
7
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 have 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 67% 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 2019, 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 300 trucking companies in the U.S. and Canada. Service
agreements are typically negotiated on an annual basis. We pay diesel fuel surcharges which vary depending on
the mode of transportation used and the cost of diesel fuel.
During 2019, outbound transportation costs relating to our Pulp and Paper segment comprised
approximately 10% of the total consolidated cost of sales.
Our Product Offering and Go-to-Market Strategy
Paper
Our uncoated freesheet papers are categorized into 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
papers. These products
accounted for
approximately 51% of our shipments of paper products in 2019.
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 converting papers,
such as envelopes, tablets, business forms and data processing/computer forms. Commercial printing and
publishing papers accounted for approximately 33% of our shipments of paper products in 2019.
Our specialty and packaging papers include papers used for thermal printing, flexible packaging, food
packaging, medical packaging, medical gowns and drapes, sandpaper backing, carbonless printing, labels and
8
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 16% of our
shipments of paper products in 2019. These grades of papers require a certain amount of innovation and agility in
the manufacturing system.
The chart below illustrates our main uncoated freesheet paper 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
Offset
Colors
Index
Tag
Bristol
Opaques
Premium opaques
Lightweight
Tradebook
Thermal papers
Food packaging
Bag stock
Security papers
Imaging papers
Label papers
Medical disposables
Commercial
printing
Direct mail
Pamphlets
Brochures
Cards
Posters
Stationery
Brochures
Annual reports
Books
Catalogs
Forms &
Envelopes
Food & candy packaging
Fast food takeout bag stock
Check and security papers
Surgical gowns
Our 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 sell 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
Office
Equipment
Manufacturers
/ Stationers
↓
Retailers /
Stationers /
End-users
Merchants
↓
Converters
↓
End-Users
Converters
↓
Printers /
Converters /
End-users
Merchants
/ Retailers
9
End-users
Pulp
Our pulp products are comprised of softwood, fluff and hardwood kraft. These grades are sold to customers
in over 50 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 46% of our Pulp and Paper segment sales
or approximately 37% of our total sales in 2019. In 2019, Staples, a customer of our Pulp and Paper segment,
represented approximately 11% of our total sales. The majority of our customers purchase products through
individual purchase orders. In 2019, approximately 75% of our Pulp and Paper segment sales were in the United
States, 10% were in Canada, and 15% were in other countries.
PERSONAL CARE
Our Operations
Our Personal Care business consists of the design, manufacturing, marketing and distribution of absorbent
hygiene products, including adult incontinence and infant diaper products. We are one of the leading suppliers of
adult incontinence and infant diaper products sold into North America and Europe, servicing institutional and
consumer channels, marketed primarily under our Attends®, IncoPack®, Indasec®, Reassure®, Chelino and
Comfees® brands, in addition to our customers’ brands.
We operate five manufacturing facilities located in the U.S. and Europe, with the ability to produce multiple
product categories including our Jesup, Georgia facility, which manufactures high quality airlaid and ultrathin
laminated absorbent cores. We have research and development capabilities across our manufacturing footprint to
maintain quality assurance and drive product innovation. Our operations are supported by our divisional
headquarters located in Raleigh, North Carolina.
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.
10
Infant products
We compete mainly within the competitive store brand segment of infant diapers and training pants. Future
unit demand growth based on birth rate and demographic trends is forecasted to be limited in North America and
Europe. The focus is on driving category value by offering new benefits and by marketing to shift product mix to
higher priced segments. 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
leading to intense
competition with other manufacturers in the industry.
the majority of volume,
Our focus on insight and innovation provides our customers with competitive products and services at a
scale required to meet their national distribution requirements.
Our Raw Materials
The primary raw materials used in our manufacturing process are fluff pulp, nonwovens and super absorbent
polymers. A significant portion of the fluff pulp used in our Personal Care business is supplied internally from
our Pulp and Paper business. The majority of our nonwoven and super absorbent polymers are purchased
centrally based on multiyear contracts with pricing that fluctuates with market conditions. Other raw materials
used in our manufacturing process include polypropylene film, elastics and adhesives which are also purchased
with multiyear contracts.
Our Product Offering and Go-to-Market Strategy
We supply a variety of products, which include branded and private label briefs, bladder control pads,
protective underwear, underpads and washcloths, as well as baby diapers, change mats, youth pants and training
pants. They are available in a variety of sizes, differing performance levels and product attributes. Our broad
product portfolio covers most price points across each category.
Our Product Development
We currently offer a comprehensive, full line of products, and we continue to focus on product development
to improve comfort, dryness and leakage protection for our consumers. We continue to explore new materials,
designs and processes that will allow us to improve future performance and value to meet global market needs.
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 our 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.
11
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
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 U.S. or in Canada where we
sell approximately 85% of our products. The five largest manufacturers of uncoated freesheet papers in North
America (including Domtar) represent approximately 82% of 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
12
engineered pulp grades with a pre-determined mix of wood species. Our softwood and hardwood pulps are sold
to customers who make a variety of products for specialty paper, packaging, tissue and industrial applications,
and customers who make printing and writing grades. We also seek product differentiation through the
certification of our pulp mills to the FSC chain-of-custody standard and the procurement of FSC-certified virgin
fiber. All of our market pulp production capacity is located in the U.S. or in Canada, and we sell
approximately 58% of our pulp to other countries.
In 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, drug stores, dollar stores, supermarkets, warehouse clubs), and emerging direct to consumer channels.
In North America, the market is split equally between retail and institutional/healthcare sectors. In Europe,
approximately 68% of market demand is served through institutional/reimbursed channels, with the retail sector
delivering lower sales through a more fragmented mix of players than in North America.
In the infant business, competition is primarily across three major product categories: diapers, training pants
and youth pants with customers served through the retail (mass retailers, hypermarkets, drug stores, 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 half of the demand with branded labels, and the remainder is
represented by private label and niche lifestyle brands.
In both the adult incontinence and infant diaper industries, the principal levers of competition remain brand
loyalty, product innovation, quality, price and marketing and distribution capabilities. Competitive market
pressures in both the healthcare and retail sectors have increased in recent years, including increased competition
in the private label category, excess industry capacity and the pressure to limit public healthcare spending.
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 2020 and others will
expire between 2021 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
13
vice-president position to help lead this effort, allowing the company’s organizational structure to better reflect
the priority the company places on sustainable performance. We believe that weaving sustainability into our
business better positions Domtar for the future.
OUR ENVIRONMENTAL COMPLIANCE
Our business is subject to a wide range of general and industry-specific laws and regulations in the U.S. and
other countries where we have operations, relating to the protection of the environment, including those
governing wood harvesting, air emissions, climate change, waste water discharges, storage, management and
disposal of hazardous substances and wastes, contaminated sites, landfill operation and closure obligations and
health and safety matters. Compliance with these laws and regulations is a significant factor in the operation of
our business. We may encounter situations in which our operations fail to maintain full compliance with
applicable environmental requirements, possibly leading to civil or criminal fines, penalties or enforcement
actions, including those that could result in governmental or judicial orders that stop or interrupt our operations
or require us to take corrective measures at substantial costs, such as the installation of additional pollution
control equipment or other remedial actions.
Compliance with environmental laws and regulations involves capital expenditures as well as additional
operating costs. Additional
information regarding environmental matters is included in Item 8, Financial
Statements and Supplementary Data under Note 22 “Commitments and Contingencies” and in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations under the section of
Critical accounting 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®, Ariva®, Attends®,
NovaThin®, NovaZorb®, IncoPack®, Indasec®, Reassure®, Chelino and Comfees®. These brand names and
trademarks are important to our business. Our numerous trademarks have been registered in the U.S. and/or in
other countries where our products are sold. The current registrations of these trademarks are effective for
various periods of time. These trademarks may be renewed periodically, provided that we, as the registered
owner, and/or licensee comply with all applicable renewal requirements, including the continued use of the
trademarks in connection with similar goods.
We own U.S. and foreign patents and have several pending patent applications. Our management regards
these patents and patent applications as important but does not consider any single patent or group of patents to
be materially important to our business as a whole.
14
OUR EXECUTIVE OFFICERS (“MANAGEMENT COMMITTEE”)
Name
Age
Position and Business Experience
John D. Williams
65
President and Chief Executive Officer of the Company since January 2009. He is
also a member of the Board of Directors.
Daniel Buron
56
Michael D. Garcia
55
Michael Fagan
58
Zygmunt Jablonski
66
Patrick Loulou
51
Previously, Mr. Williams served as President of SCA Packaging Europe between
2005 and 2008. Prior to assuming his leadership position with SCA Packaging
Europe, Mr. Williams held increasingly senior management and operational roles
in the packaging business and related industries.
Mr. Williams is Lead Independent Director of the Board of Directors of Owens
Corning and the 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 and also serves on the Board of Directors of
Semafo Inc. and Nouveau Monde Graphite Inc.
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. He also serves on the Board of Directors of Alliant
Energy Corp.
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,
business transformation and business development.
15
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements relating to trends in, or representing
management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance and
business prospects and opportunities. These forward-looking statements are generally denoted by the use of
words such as “anticipate,” “believe,” “expect,” “intend,” “aim,” “target,” “plan,” “continue,” “estimate,”
“project,” “may,” “will,” “should” and similar expressions. These statements reflect management’s current
beliefs and are based on information currently available to management. Forward-looking statements are
necessarily based upon a number of estimates and assumptions that, while considered reasonable by
management, are inherently subject to known and unknown risks and uncertainties and other factors that could
cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances
can be given that any of the events anticipated by the forward-looking statements will occur, or if any occur,
what effect they will have on our results of operations or financial condition. These factors include, but are not
limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
continued decline in usage of fine paper products in our core 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 our 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.
16
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.
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, European and Asian 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.
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.
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 16 “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 U.S., 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 11% of the Company’s sales in 2019. 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 11% of the Company’s sales in 2019. 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 2019, the
Company’s total capital expenditures were $255 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 19 “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 2019, the Company paid approximately $47 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 U.S. 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 $71 million of operating expenses and $19 million of capital expenditures in connection
with environmental compliance and remediation in 2019. As of December 31, 2019, the Company had a
provision of $35 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 22
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 U.S. and Canada as well as other jurisdictions in which the Company operates,
including antitrust and competition laws, occupational health and safety laws, healthcare reimbursement laws,
such as Medicare and Medicaid, and employment laws. Many of these laws and regulations are complex and
subject to evolving and differing interpretation. If the Company is determined to have violated any such laws or
regulations, whether inadvertently or willfully, it may be subject to civil and criminal penalties, including
substantial fines, loss of authorizations to participate in or exclusion from government programs, claims for
damages by third parties or fines or monetary penalties which may have a material adverse effect on the
Company’s financial position, results of operations or cash flows. For additional information, refer to Item 8,
Financial Statements and Supplementary Data under Note 22 “Commitments and Contingencies.”
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. International tax norms governing each country’s jurisdiction to tax cross-
border international trade have evolved partly due to the Base Erosion and Profit Shifting project led by the
21
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 provisions 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, 2019, has a reserve for liabilities relating to
uncertain tax positions of $29 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 2019. 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 U.S. 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 biomass, natural gas and
electricity. 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.
Employees at 17 of the Company’s facilities, representing approximately 44% 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.
A material disruption in the Company supply chain, manufacturing or distribution operations could prevent it
from meeting customer demand, reduce its sales and/or negatively impact its results of operations.
The Company’s ability to manufacture, distribute and sell products is critical to its operations. These
activities are subject to inherent risks such as:
•
unscheduled maintenance outages;
23
•
•
•
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 disputes;
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;
failure of our IT systems, including any failure of our current systems and/or as a result of transitioning
to additional or replacement IT system;
public health crises that impact trade or the general economy, including the COVID-19 and other
viruses, diseases or illnesses;
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 could disrupt the Company’s supply chain and impair its ability to
manufacture or sell its products and have resulted in operating losses in the past. Any interruption or facility
damage could prevent the Company from meeting customer demand for its products as well as require additional
resources and/or require unplanned 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 failure of the Company’s IT systems, including any failure
of the Company’s current systems and/or as a result of transitioning to additional or replacement IT systems, as
the case may be, to perform as the Company anticipates could disrupt the Company’s business and could result
in, among other things, transactions errors, processing inefficiencies, disruption of production and/or deliveries,
loss of data and the loss of sales and customers, which could have a material adverse effect on the Company’s
business, financial position and results of operations and the effectiveness of our internal control over financial
reporting could be negatively impact.
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
the Company’s information technology systems may be
of unintentional events. Like most companies,
vulnerable to interruption due to a variety of events beyond the Company’s control, including, but not limited to,
24
natural disasters, terrorist attacks, power and/or telecommunications failures, computer viruses, hackers and other
security issues. The Company has technology security initiatives and disaster recovery plans in place to mitigate
the Company’s risk to these vulnerabilities, including protection of confidential or personal information, but
these measures may not be adequate or implemented properly to ensure that the Company’s operations are not
disrupted. The Company’s IT systems have been, and will likely continue to be, subject to computer viruses or
other malicious codes, unauthorized access attempts, phishing and other cyber-incidents. The Company cannot
guarantee that its security efforts will prevent breaches or breakdowns to its IT systems or those of its third party
providers. Potential consequences of a material cyber incident, which could result in confidential or personal
information being accessed, obtained, damaged or used by unauthorized or improper persons, include damage to
the Company’s reputation, litigation,
inefficiencies or production downtimes and increased cyber security
protection and remediation costs. Such consequences could have a negative impact on the Company’s ability to
meet customers’ orders, resulting in a delay or decrease to its revenue and a reduction to its operating margins.
The Company could encounter difficulties restructuring operations or closing or disposing of facilities.
The Company is continuously seeking the most cost-effective means and structure to serve our customers
and to respond to changes in our markets. Accordingly, from time to time, the Company has, and is likely to
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. 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, 2019, the Company’s defined benefit plans had a surplus of
$141 million on certain plans and a deficit of $105 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, 2019, the Company’s defined benefit pension plans
held assets with a fair value of $1,475 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 U.S. 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 U.S. 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 U.S. 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
25
patent or trademark applications will be approved by the applicable governmental authorities and, even if the
applications are approved, third parties may seek to oppose or otherwise challenge these registrations. The failure
to secure any pending patent or trademark applications may limit the Company’s ability to protect the intellectual
property rights that these applications were intended to cover.
If the Company is unable to successfully retain and develop executive leadership and other key personnel, it may
be unable to fully realize critical organizational strategies, goals and objectives.
The success of the Company is substantially dependent on the efforts and abilities of its key personnel,
including its executive management team, to develop and implement its business strategies and manage its
operations. The failure to retain key personnel or to develop successors with appropriate skills and experience for
key positions in the Company could adversely affect the development and achievement of critical organizational
strategies, goals and objectives. There can be no assurance that the Company will be able to retain or develop the
key personnel it needs and the failure to do so may adversely affect its financial condition and results of
operations.
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, 2019, the Company’s balance sheet included
intangible assets of $573 million, of which $290 million related to definite-lived intangible assets subject to
amortization and $283 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 evaluated. 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 evaluation performed in the fourth quarter of 2019,
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. One Personal Care segment indefinite-lived intangible asset is
considered to be at risk for future impairment given its respective fair values exceeded its respective carrying
value by 18% at the time the test was performed. As of December 31, 2019, the carrying value of these
indefinite-lived intangible assets was $115 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.
26
ITEM 2. PROPERTIES
A description of our mills and related properties is included in Item I, Business.
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.
Forestlands
We efficiently manage approximately 5 million acres of forestlands that are directly licensed or owned by
Domtar in Canada, through the application of certified sustainable forest management practices. We also have
access to fiber from an additional 25 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
Denver, Colorado
Des Moines, Iowa
Houston, Texas
Kansas City, Kansas
Minneapolis, Minnesota
Omaha, Nebraska
Phoenix, Arizona
Plain City, Ohio
27
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
Charlotte, North Carolina
Chicago, Illinois
Dallas, Texas
Delran, New Jersey
Indianapolis, Indiana
Jacksonville, Florida
Mira Loma, California
Seattle, Washington
Regional Replenishment
Centers—Canada
Richmond, Quebec
Toronto, Ontario
Winnipeg, Manitoba
Representative Office—
International
Hong Kong, China
Tuitjenhorn, The Netherlands
Wakefield, United Kingdom
Ariva—Canada
Halifax, Nova Scotia
Montreal, Quebec
Mount Pearl, Newfoundland and
Labrador
Ottawa, Ontario
Quebec City, Quebec
Toronto, Ontario
PERSONAL CARE
DIVISION HEADQUARTERS
Raleigh, North Carolina
Personal Care—Manufacturing
and Distribution
NORTH AMERICA
Delaware, Ohio
Jesup, Georgia
Greenville, North Carolina
ITEM 3. LEGAL PROCEEDINGS
EUROPE
Aneby, Sweden
Toledo, Spain
Personal Care—
Sales offices
Bodö, Norway
Bourgoin Jallieu, France
Daytona Beach, Florida
Linz, Austria
Madrid, Spain
Olivette, Missouri
Oslo, Norway
Rheinfelden, Switzerland
Schwalbach am Taunus,
Germany
Stockholm, Sweden
Texarkana, Arkansas
In the normal course of operations, the Company becomes involved in various legal actions mostly related
to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. The
Company periodically reviews the status of these proceedings and assesses the likelihood of any adverse
judgments or outcomes of these legal proceedings, as well as analyzes probable losses. Although the final
outcome of any legal proceeding is subject to a number of variables and cannot be predicted with any degree of
certainty, management currently believes that the ultimate outcome of current legal proceedings will not have a
material adverse effect on the Company’s long-term results of operations, cash flow or financial position.
However, an adverse outcome in one or more of the significant legal proceedings could have a material adverse
effect on the Company’s results, financial condition or cash flow in a given quarter or year.
For a discussion of commitments, legal proceedings and related contingencies, refer to Item 8, Financial
Statements and Supplementary Data under Note 22 “Commitments and Contingencies” for more details.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Domtar Corporation’s common stock is traded on the New York Stock Exchange and the Toronto Stock
Exchange under the symbol “UFS”.
HOLDERS
At December 31, 2019, the number of shareholders of record (registered and non-registered) of Domtar
Corporation common stock was approximately 27,362.
DIVIDENDS AND STOCK REPURCHASE PROGRAM
During 2019, the Company declared one quarterly dividend of $0.435 and three quarterly dividends of
$0.455 per share, to holders of the Company’s common stock. Dividends aggregating $28 million, $28 million,
$27 million and $26 million were paid on April 15, 2019, July 16, 2019, October 15, 2019 and January 15, 2020,
respectively, to shareholders of record as of April 2, 2019, July 2, 2019, October 2, 2019 and January 2, 2020,
respectively.
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.
On February 18, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.455 per
share, to be paid to holders of the Company’s common stock. This dividend is to be paid on April 15, 2020 to
shareholders of record on April 2, 2020.
The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to
$1.3 billion. On November 5, 2019, the Company’s Board of Directors approved an increase to the Program from
$1.3 billion to $1.6 billion. At December 31, 2019, the Company had approximately $403 million of remaining
availability under the Program. 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 our stock options, awards, and to improve shareholders’ returns.
The Company makes open market purchases of its common stock using general corporate funds.
the Company may enter into structured stock repurchase agreements with large financial
Additionally,
institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements
would require the Company to make up-front payments to the counterparty financial institutions which would
result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment
at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements,
depending upon the price of the stock.
During 2019, the Company repurchased 6,220,658 shares at an average price of $35.29 for a total cost of
$219 million.
During 2018, there were no shares repurchased under the Program.
29
Share repurchase activity under our share repurchase program was as follows during the year ended
December 31, 2019:
Period
January 1 through March 31, 2019
April 1 through June 30, 2019
July 1 through September 30, 2019
October 1 through October 31, 2019
November 1 through November 30, 2019
December 1 through December 31, 2019
(a) Total Number
of Shares
Purchased
(b) Average
Price Paid
per Share
(c) Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
(d) Approximate
Dollar Value of
Shares that May
Yet be Purchased
under the Plans
or Programs
(in 000s)
—
194,407
3,882,316
1,751,643
391,792
500
6,220,658
$ —
$42.26
$35.13
$34.27
$37.98
$38.01
$35.29
—
194,407
3,882,316
1,751,643
391,792
500
6,220,658
$322,572
$314,356
$177,968
$117,942
$403,061
$403,042
PERFORMANCE GRAPH
This graph compares the return on a $100 investment in the Company’s common stock on December 31,
2014 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
2014
2015
2016
2017
2018
2019
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.
30
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected historical financial data of the Company for the periods and as of the dates
indicated. The selected financial data as of and for the fiscal years then ended have been derived from the audited
financial statements of Domtar Corporation.
The following table should be read in conjunction with Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data.
FIVE YEAR FINANCIAL SUMMARY
(In millions of dollars, except per share figures)
Statement of Income Data:
Sales
Closure and restructuring costs and
impairment of long-lived assets
and goodwill 1,2
Depreciation and amortization
Operating income (loss) 1,2
Net earnings (loss) 3
Net earnings (loss) per common
share—Basic
Net earnings (loss) per common
share—Diluted
Cash dividends paid per common
share
Balance Sheet Data:
December 31,
2019
December 31,
2018
December 31,
2017
December 31,
2016
December 31,
2015
Year ended
$5,220
$5,455
$5,148
$5,090
$5,257
100
293
163
84
15
308
386
283
580
321
(328)
(258)
61
348
208
128
81
359
276
142
$ 1.37
$ 4.50
$ (4.11)
$ 2.04
$ 2.24
$ 1.37
$ 4.48
$ (4.11)
$ 2.04
$ 2.24
$ 1.78
$ 1.72
$ 1.66
$ 1.63
$ 1.58
Cash and cash equivalents
Property, plant and equipment, net
Total assets
Long-term debt due within one year
Long-term debt
Total shareholders’ equity
$
61
2,567
4,903
1
938
2,376
$ 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
2,825
5,654
41
1,210
2,652
1
2
3
In 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets related
to our decision to permanently close two paper machines in our Pulp and Paper segment and $26 million of
accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of long-
lived assets, related to our margin improvement plan in our Personal Care segment. In addition, we recorded
$42 million of Closure and restructuring costs in 2019 related to the aforementioned. For additional
information, refer to Item 8, Financial Statement and Supplementary Data under Note 4 “Impairment of
Long-Lived Assets” and Note 16 “Closure and Restructuring Costs and Liability.”
In 2017, we recorded a non-cash goodwill impairment charge associated with our Personal Care segment of
$578 million. For additional information, refer to Item 8, Financial Statement and Supplementary Data
under Note 4 “Impairment of Long-Lived Assets.”
In 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 2018 included a tax expense of $10 million related
to the U.S. Tax Reform. For additional information, refer to Item 8, Financial Statement and Supplementary
Data under Note 10 “Income Taxes.”
31
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
should be read in conjunction with Domtar Corporation’s audited consolidated financial statements and notes
thereto included in Item 8, Financial Statements and Supplementary Data. Throughout this MD&A, unless
otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers to Domtar
Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange
and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is
determined on the basis of accounting principles generally accepted in the United States.
The information contained on our website, www.domtar.com, is not incorporated by reference into this
Form 10-K and should in no way be construed as a part of this or any other report that we file with or furnish to
the SEC.
In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton,
an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT”
refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in
U.S. dollars, and the term “dollars” and the symbol “$” 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, 2019 and
2018. The twelve month periods are also referred to as 2019 and 2018. References to notes refer 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
•
2019 Highlights
• Outlook
• Consolidated Results of Operations and Segment Review
• Liquidity and Capital Resources
• Recent Accounting Pronouncements and Critical Accounting Estimates and Policies
For a discussion of the year ended December 31, 2018 compared to the year ended December 31, 2017,
please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018 (filed with the SEC on
February 22, 2019).
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.
32
Personal Care: Our Personal Care segment consists of the design, manufacturing, marketing and
distribution of absorbent hygiene products.
2019 HIGHLIGHTS
• Operating income and net earnings decreased by 58% and 70%, respectively from 2018
•
Sales decreased by 4% from 2018. Net average selling prices for pulp were down while net average
selling prices for paper were up from 2018. Our manufactured paper volume was down and our
Personal Care business had lower volume when compared to 2018
• Recognition of a closure and restructuring charge and accelerated depreciation associated with our
decision to permanently close two paper machines within our Pulp and Paper segment of $22 million
and $32 million, respectively. Recognition of a closure and restructuring charge and accelerated
depreciation and impairment of operating lease right-of-use assets within our Personal Care segment of
$20 million and $26 million, respectively related to our margin improvement plan
• We repurchased $219 million of our common stock and paid $110 million in dividends
• Non-cash pension settlement charge of $30 million related to partial settlement from annuity buy-out
contracts
FINANCIAL HIGHLIGHTS
(In millions of dollars, unless otherwise noted)
Sales
Operating income 1
Net earnings
Net earnings per common share (in dollars) 2:
Basic
Diluted
Total assets
Total long-term debt, including current portion
Twelve months ended
December 31,
2019
December 31,
2018
Variance 2019 vs. 2018
$
%
$5,220
163
84
$ 1.37
$ 1.37
$5,455
386
283
$ 4.50
$ 4.48
$ (235)
(223)
(199)
$ (3.13)
$ (3.11)
-4%
-58%
-70%
At December 31,
2019
At December 31,
2018
$4,903
$ 939
$4,925
$ 854
1
As a result of our decision to permanently close two paper machines within our Pulp and Paper segment, we
recognized closure and restructuring charges and accelerated depreciation under Impairment of long-lived
assets of $22 million and $32 million, respectively. We also recognized closure and restructuring charges
and accelerated depreciation and impairment of operating lease right-of-use assets under Impairment of
long-lived assets of $20 million and $26 million, respectively related to the margin improvement plan within
our Personal Care segment (2018 – $8 million and $7 million, respectively). See Item 8, Financial
Statements and Supplementary Data under Note 16 “Closure and Restructuring Costs and Liability” and
Note 4 “Impairment of Long-lived Assets”, for more information.
2
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 2020, our paper volumes are expected to trend with market demand while pulp volumes will increase due
to higher pulp productivity at our Espanola and Ashdown mills. Our Pulp and Paper business will benefit from
lower planned maintenance costs. Personal Care is expected to benefit from their margin improvement plan and
higher sales following new customer wins. Overall, we anticipate costs, including freight, labor and raw
materials, to marginally increase.
33
CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW
This section presents a discussion and analysis of our 2019 and 2018 sales, operating income (loss) and
other information relevant to the understanding of our results of operations.
ANALYSIS OF NET SALES
By Business Segment
Pulp and Paper
Personal Care
Total for reportable segments
Intersegment sales
Consolidated
Shipments
Paper—manufactured (in thousands of ST)
Communication Papers
Specialty and Packaging papers
Paper—sourced from third parties (in thousands of ST)
Paper—total (in thousands of ST)
Pulp (in thousands of ADMT)
ANALYSIS OF CHANGE IN SALES
Pulp and Paper
Personal Care
Consolidated sales
ANALYSIS OF OPERATING INCOME (LOSS)
By Business Segment
Operating income (loss)
Pulp and Paper
Personal Care
Corporate
Consolidated operating income (loss)
Twelve months ended
December 31,
2019
December 31,
2018
$4,332
953
5,285
(65)
5,220
2,745
2,299
446
93
2,838
1,539
$4,523
1,000
5,523
(68)
5,455
2,971
2,446
525
109
3,080
1,536
Variance 2019 vs. 2018
$
(191)
(47)
(238)
3
(235)
(226)
(147)
(79)
(16)
(242)
3
%
-4%
-5%
-4%
-4%
-8%
-6%
-15%
-15%
-8%
— %
2019 vs. 2018
% Change in Net Sales due to
Net Price
Volume /
Mix
Currency Total
1%
— %
1%
-5%
-3%
-5%
— % -4%
-2% -5%
— % -4%
Twelve months ended
December 31,
2019 (a)
December 31,
2018 (b)
2019 vs. 2018 Variance
$
%
$225
$ (15)
$ (47)
$163
$438
$ (5)
$ (47)
$386
(213)
(10)
—
(223)
-49%
-200%
— %
-58%
(a)
Includes closure and restructuring charges as well as accelerated depreciation under Impairment of long-
lived assets, related to our paper machine closures within our Pulp and Paper segment, of $22 million and
$32 million, respectively. Includes closure and restructuring charges as well as accelerated depreciation and
impairment of operating lease right-of-use assets under Impairment of long-lived assets, related to our
announced margin improvement plan within our Personal Care segment, of $20 million and $26 million,
respectively.
34
(b)
Includes closure and restructuring charges as well as accelerated depreciation under Impairment of long-
lived asset, related to our announced margin improvement plan within our Personal Care segment of
$8 million and $7 million, respectively.
2019 VS. 2018
Pulp and Paper
Personal Care
Corporate
Consolidated
operating income
(loss)
Volume/
Operating (b)
Mix Net Price Input Costs (a)
Expenses Currency
Depreciation/
Impairment (c) Restructuring (d)
Other Income/
Expense (e)
$ Change in Segmented Operating Income (Loss) due to
(43)
(3)
—
52
3
—
(46)
16
—
(128)
3
(6)
8
(1)
—
(23)
(16)
—
(22)
(12)
—
(11)
—
6
Total
(213)
(10)
—
(46)
55
(30)
(131)
7
(39)
(34)
(5)
(223)
(a)
Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy
costs.
(b)
Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs.
(c) Depreciation charges were lower by $12 million in 2019, excluding foreign currency impact. In our Pulp
and Paper segment, we recorded $32 million of accelerated depreciation under Impairment of long-lived
assets related to our decision to permanently close two paper machines (2018 – nil). In our Personal Care
segment, in 2019, we recorded $26 million of accelerated depreciation and impairment of operating lease
right-of-use assets under Impairment of long-lived assets, related to our margin improvement plan (2018 –
$7 million).
(d)
2019 restructuring charges relate to:
—Severance and termination costs ($21 million)
—Inventory write-down ($6 million)
—Asset relocation and other costs ($15 million)
2018 restructuring charges relate to:
—Inventory write-down ($4 million)
—Severance and termination costs ($3 million)
—Other costs ($1 million)
(e)
2019 operating expenses/income includes:
—Foreign exchange loss ($3 million)
—Environmental provision ($4 million)
—Bad debt expense ($2 million)
—Other income ($4 million)
Commentary—2019 vs. 2018
Interest Expense, net
2018 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)
We incurred $52 million of net interest expense in 2019, a decrease of $10 million compared to net interest
expense of $62 million in 2018. The net interest expense was impacted by the repayment of the $300 million
Term Loan in the fourth quarter of 2018.
Income Taxes
We recorded an income tax expense of $2 million in 2019 compared to an income tax expense of
$57 million in 2018, which yielded an effective tax rate of 2% and 17% for 2019 and 2018, respectively.
35
During 2019, we recorded $20 million of tax credits, mainly research and experimentation credits, which
impacted the effective tax rate. Arkansas legislation changes were passed in 2019 which reduced the state tax rate
and changed how the apportionment factor is calculated. This resulted in a deferred state tax benefit of
$4 million. Additionally, a valuation allowance of $5 million was recorded on state attributes we do not expect to
utilize before they expire.
During 2018, we recorded $19 million of tax credits, mainly research and experimentation credits, which
impacted our 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 movement 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, we recorded a net
tax benefit of $140 million in 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
completed our 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 our 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, 2019, we have recorded a deferred tax liability of $12 million ($10 million as
December 31, 2018) for foreign withholding tax and various state income taxes associated with future
repatriation of these earnings. This additional $2 million of tax expense impacted the effective tax rate for 2019.
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 2019 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.
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.
36
Commentary—Segment Review
Pulp and Paper Segment
2019 vs. 2018
Sales in our Pulp and Paper segment decreased by $191 million, or 4% when compared to sales in 2018.
This decrease in sales is mostly due to a decrease in our paper sales volumes and a decrease in net average selling
price for pulp. This decrease was partially offset by an increase in net average selling price for paper as well as
an increase in our pulp sales volumes.
Operating income in our Pulp and Paper segment amounted to $225 million in 2019, a decrease of
$213 million, when compared to operating income of $438 million in 2018. Our results were negatively impacted
by:
• Higher operating expenses ($128 million) mostly due to lower production as well as higher
maintenance and fixed costs due to timing of major maintenance
• Higher input costs ($46 million) mostly related to higher costs of fiber due mostly to severe weather
conditions as well as unfavorable market conditions, partially offset by lower costs of chemicals and
energy
• Lower volume and mix ($43 million) mostly related to lower volume of paper, partially offset by
higher volume of pulp
• Higher depreciation/impairment charges ($23 million) mostly due to our decision to permanently close
two paper machines
• Higher restructuring charges ($22 million) due to our decision to permanently close two paper
machines
• Higher other income/expense ($11 million)
These decreases were partially offset by:
• Higher average selling prices for paper partially offset by lower average selling prices for pulp ($52
million)
•
Positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our
hedging program ($8 million)
Our Espanola pulp and specialty paper mill underwent an extensive audit and inspection of major
components during its outage in June 2019. Following the inspection and given the cyclically low pulp prices, we
made the decision to fast-track some maintenance work that was originally planned for 2020 in order to address
some reliability risks. This extended shutdown impacted mostly our second half of 2019 by adding
approximately $36 million of maintenance costs and lowering our
total production by approximately
60,000 tonnes.
Paper machine closures
On September 27, 2019, our Board of Directors approved the decision to permanently shut down two paper
machines, which was announced on October 3, 2019. The closures took place at our Ashdown, Arkansas pulp
and paper mill and at our Port Huron, Michigan paper mill. These measures reduced our annual uncoated
freesheet paper capacity by approximately 204,000 short
tons, and resulted in a workforce reduction of
approximately 100 employees.
Our Ashdown mill continues to operate one paper machine with an annual uncoated freesheet paper
production capacity of 200,000 ST. Additionally, the mill operates a fluff pulp machine with the flexibility to
37
produce softwood pulp depending on market conditions. As a result of the closure of the paper machine, the mill
will produce an incremental 70,000 ADMT of softwood and fluff pulp, which will ramp up over the course of
2020.
The Port Huron mill continues to produce a variety of technical and specialty papers for a broad range of
customers utilizing three machines with a total annual production capacity of 95,000 ST.
During 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets
and $1 million of accelerated depreciation under Depreciation and amortization, on the Consolidated Statement
of Earnings (Loss) and Comprehensive Income (Loss). Additionally, we recorded $3 million of severance and
termination costs, $4 million of inventory obsolescence and $2 million of other costs, under Closure and
restructuring costs in relation to the paper machine closures.
Concurrently, with the Ashdown paper machine closure and related workforce reduction, management
negotiated a voluntary early retirement program to reduce costs and put the mill in a stronger cost position in the
long-term. We additionally recorded $13 million of severance and termination costs under Closure and
restructuring costs.
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.
In 2020, our paper volumes are expected to trend with market demand while pulp volumes will increase due
to higher pulp productivity at our Espanola and Ashdown mills. Our Pulp and Paper business will benefit from
lower planned maintenance costs.
Personal Care
2019 vs. 2018
Sales in our Personal Care segment decreased by $47 million, or 5% when compared to sales in 2018. This
decrease in sales was driven by lower volume and unfavorable foreign currency exchange, partly offset by
favorable mix.
Operating income decreased by $10 million compared to 2018. Our results were negatively impacted by:
• Higher depreciation/impairment charges ($16 million) mostly related to our margin improvement plan
• Higher closure and restructuring charges ($12 million) related to our margin improvement plan
• Lower volume partially offset by favorable mix ($3 million)
• Unfavorable foreign exchange ($1 million), mostly between the Euro and the U.S. dollar, net of our
hedging program
These decreases were partially offset by:
• Lower input costs ($16 million) mostly due to lower raw materials pricing
38
•
Favorable average net selling prices ($3 million)
• Lower operating expenses mostly due to favorable SG&A expenses ($3 million)
In our absorbent hygiene products business, we compete in an industry with fundamental drivers for long-
term growth; however, competitive market pressures in the healthcare and retail markets have grown
significantly in recent years.
While we are expected to benefit from the overall increase in healthcare spending due to an aging
population, the pressures to limit public 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 that were historically almost
absent in our markets have increased their presence in such markets.
The principal levers of competition remain brand loyalty, product innovation, quality, price and marketing
and distribution capabilities.
In 2020, we expect to benefit from our margin improvement plan and higher sales following new customer
wins.
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 ceased operations during the second quarter of 2019.
In 2019, we recorded $26 million of accelerated depreciation and impairment of operating lease
right-of-use, under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) and
Comprehensive Income (Loss) compared to $7 million of accelerated depreciation in 2018. We also recorded
$5 million of severance and termination costs (2018 – $3 million); $2 million of inventory obsolescence (2018 –
$4 million); $13 million of asset relocation and other costs (2018 – $1 million of other costs), under Closure and
restructuring costs.
STOCK-BASED COMPENSATION EXPENSE
Under the Omnibus 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, 2019, stock-based compensation expense recognized in our results of
operations was $22 million (2018 – $10 million) for all of the outstanding awards. Compensation costs not yet
recognized amounted to $16 million (2018 – $17 million) and will be recognized over the remaining service
period of approximately 14 months. The aggregate value of liability awards settled in 2019 was $12 million
(2018 – $8 million). The total fair value of equity awards settled in 2019 was $11 million (2018 – $6 million),
representing the fair value at the time of settlement. The fair value at the grant date for these settled equity
awards was $6 million (2018 – $7 million). Compensation costs for performance awards are based on
management’s best estimate of the final performance measurement.
39
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
through borrowings under our contractually committed $700 million credit facility, of which
necessary,
$620 million is currently undrawn and available, or through our $150 million receivables securitization facility,
of which $25 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 2017 and adjusted by $7 million in 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 $442 million in 2019, a $112 million decrease compared to cash
flows from operating activities of $554 million in 2018. This decrease in cash flows from operating activities is
primarily due to a decrease in profitability as well as an increase in cash flow from working capital elements in
2019 when compared to 2018. We made income tax payments, net of refunds, of $59 million in 2019 compared
to income tax payments, net of refunds of $71 million in 2018. We paid $1 million of employer pension and
other post-retirement contributions in excess of pension and other post-retirement expense when excluding our
non-cash pension settlement loss of $30 million in 2019 compared to 2018 when we paid $46 million of
employer pension and other post-retirement contributions in excess of pension and other post-retirement expense.
Investing Activities
Cash flows used for investing activities in 2019 amounted to $254 million, a $58 million increase compared
to cash flows used for investing activities of $196 million in 2018.
The use of cash in 2019 was attributable to additions to property, plant and equipment of $255 million. This
use of cash was partially offset by the proceeds from disposal of property, plant and equipment of $1 million.
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.
Our annual capital expenditures for 2020 are expected to be between $230 million and $260 million.
40
Financing Activities
Cash flows used for financing activities totaled $237 million in 2019 compared to cash flows used for
financing activities of $382 million in 2018.
The use of cash in 2019 was primarily the result of the repurchase of our common stock ($219 million) and
dividend payments ($110 million). This was partially offset by the net increase of borrowings under our credit
facilities (revolver and receivables securitization) ($85 million).
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).
Capital Resources
Net indebtedness, consisting of long-term debt, net of cash and cash equivalents, was $887 million as of
December 31, 2019 compared to $743 million as of December 31, 2018.
Revolving Credit Facility
In August 2018, we amended and restated our unsecured $700 million 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.
Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic
subsidiaries. Borrowings by certain foreign subsidiaries 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, 2019, we were in compliance with these financial covenants, and borrowings under
the Credit Agreement amounted to $80 million (December 31, 2018 – nil). At December 31, 2019, we had no
outstanding letters of credit (December 31, 2018 – nil), leaving $620 million unused and available under this
facility.
Receivables Securitization
We have a $150 million receivables securitization facility that matures in November 2021.
At December 31, 2019, borrowings under the receivables securitization facility amounted to $55 million and
we had $53 million of letters of credit under the program (December 31, 2018 – $50 million and $52 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, 2019, we had $25 million unused and available under this
facility.
41
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.
Common Stock
During 2019, we declared one quarterly dividend of $0.435 and three quarterly dividends of $0.455 per
share, to holders of our common stock. Dividends aggregating $28 million, $28 million, $27 million and
$26 million were paid on April 15, 2019, July 16, 2019, October 15, 2019 and January 15, 2020, respectively, to
shareholders of record as of April 2, 2019, July 2, 2019, October 2, 2019 and January 2, 2020, respectively.
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.
On February 18, 2020, our Board of Directors approved a quarterly dividend of $0.455 per share, to be paid
to holders of our common stock. This dividend is to be paid on April 15, 2020 to shareholders of record on
April 2, 2020.
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, 2019, 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, 2019, we have not recorded a
liability associated with these indemnifications, as we do not expect to make any payments pertaining to these
indemnifications.
42
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, 2019:
CONTRACT TYPE
2020
2021
2022
2023
2024
THEREAFTER TOTAL
(in millions of dollars)
Long-term debt (excluding interest)
Finance leases and other (including interest)
Operating leases
Long-term income taxes payable (1)
Total obligations
—
1
29
3
55
2
24
3
300
2
19
3
80 —
2
2
8
14
8
6
$ 33
$84
$324
$102
$ 18
$500
6
14
10
$530
$ 935
15
108
33
1,091
COMMITMENT TYPE
(in millions of dollars)
Other commercial commitments (2)
2020
2021
2022
2023
2024
THEREAFTER TOTAL
$117
$16
$
9
6
5
2
$ 155
(1)
(2)
In connection with the U.S. Tax Reform, we have remaining liabilities of $33 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 $11 million to the pension plans in 2020 and
a minimum total amount of $4 million in 2020 to the other post-retirement benefits plans.
For 2020 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.
43
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.
Additional
information regarding environmental matters is available in Note 22 “Commitments and
Contingencies”.
While we believe that we have determined the costs for environmental matters likely to be incurred, based
on known information, our ongoing efforts to identify potential environmental concerns that may be associated
with the properties may lead to future environmental investigations. These efforts may result in the determination
of additional environmental costs and liabilities, which cannot be reasonably estimated at this time. In addition,
environmental laws and regulations and interpretation by regulatory authorities could change which could result
in significant changes to our estimates. For further details on “Climate change regulation” and other
environmental matters refer to Note 22 “Commitments and Contingencies”.
Asset retirement obligations are mainly associated with landfill operation and closure, dredging of settling
ponds 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, 2019, we had an asset retirement obligation provision of $13 million for 12 locations (2018 – $12
million).
As at December 31, 2019, we had a total provision of $35 million for environmental matters and asset
retirement obligations (2018 – $37 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, Operating lease right-of-use assets and Definite-Lived
Intangible Assets
Property, plant and equipment, operating lease right-of-use assets 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, operating lease right-of-use assets and definite-lived
intangible assets are impaired. In the event the estimated undiscounted future cash flows are lower than the net
book value of the assets, a Step II impairment test must be carried out to determine the impairment charge. In
Step II, the assets are written down to their estimated fair values. Given that there is generally no readily
44
available quoted value for our property, plant, operating lease right-of-use assets 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, operating lease right-of use assets 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 2019, we recorded depreciation
and amortization expense of $293 million compared to $308 million in 2018. At December 31, 2019, we had
property, plant and equipment with a net book value of $2,567 million (2018 – $2,605 million) and definite-lived
intangible assets, net of amortization, of $290 million (2018 – $311 million).
In the third quarter of 2019, we announced the permanent closure of two paper machines. These closures
took place at our Ashdown, Arkansas pulp and paper mill and our Port Huron, Michigan paper mill. As a result,
we recognized $32 million of accelerated depreciation in 2019 (2018 – nil).
In the fourth quarter of 2018, we announced the permanent 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 $26 million of accelerated depreciation in 2019 (2018 –
$7 million).
Closure and Restructuring Costs
Closure and restructuring costs are recognized as liabilities in the period when they are incurred and are
measured at their fair value. For such recognition to occur, management, with the appropriate level of authority,
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. 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.
45
During 2019, we recorded $32 million of accelerated depreciation under Impairment of long-lived assets
and $1 million of accelerated depreciation under Depreciation and amortization, on the Consolidated Statement
of Earnings (Loss) and Comprehensive Income (Loss). Additionally, we recorded $3 million of severance and
termination costs, $4 million of inventory obsolescence and $2 million of other costs, under Closure and
restructuring costs in relation to the paper machine closures. Concurrently, with the Ashdown paper machine
closure and related workforce reduction, management negotiated a voluntary early retirement program to reduce
costs and put the mill in a stronger cost position in the long-term. We additionally recorded $13 million of
severance and termination costs under Closure and restructuring costs. In 2019, in connection with our 2018
announced plan to permanently close our Waco, Texas Personal Care manufacturing and distribution facility, we
recognized a $2 million of inventory obsolescence (2018 – $4 million), $5 million of severance and termination
costs (2018 – $3 million) and $13 million of assets relocation and other costs (2018 – $1 million of other costs)
under Closure and restructuring costs.
Additional information can be found under Note 16 “Closure and Restructuring Costs and Liability”.
Indefinite-lived intangible assets impairment assessment
Indefinite-lived intangible assets consist of trade names ($235 million) and catalog rights ($38 million)
following the business acquisitions in the Personal Care segment, 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 connection with the Company’s annual impairment testing in the
fourth quarter of 2019, we performed a quantitative assessment for each indefinite-lived intangible asset (trade
names and catalog rights) of the Personal Care segment.
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 (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 estimates of revenue growth rates, royalty rates and tax rates. Financial forecasts are consistent with
our operating plans and are prepared for each indefinite-lived intangible asset assessment.
The discount rate assumptions used are 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
respective fair values, an impairment loss is recognized in an amount equal to that excess.
The quantitative assessments performed in the fourth quarter of 2019 indicated that the indefinite-lived
intangible assets had fair values that exceeded their carrying amounts. One Personal Care segment indefinite-
lived intangible asset is considered to be at risk for future impairment given its respective fair value exceeded its
respective carrying value by 18% at the time the test was performed. As of December 31, 2019, the carrying
value of this indefinite-lived intangible asset was $115 million.
Variations in our assumptions and estimates, particularly in the expected growth rates and royalty rates
embedded in our cash flow projections, and the discount rate could have a significant impact on fair value.
Specifically, regarding the indefinite-lived intangible asset noted above with a carrying value of $115 million and
a fair value that exceeded the carrying value by 18%, either a 418 basis points (“bps”) decrease in expected
growth rates, a 83 bps decrease in royalty rate or a 141 bps increase in the discount rate would have the effect of
making the fair value equal to the carrying value. A significant reduction in the estimated fair values could result
in significant non-cash impairment charges in the future.
46
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 $42 million for the year ended
December 31, 2019 (2018 – $50 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 ten years of the active
employee group covered by the pension plans, and 12 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 2019. Effective January 1, 2020, we will use 4.8% as the expected return
on plan assets, which reflects the current view of long-term investment returns. The overall expected long-term
rate of return on plan assets is based on management’s best estimate of the long-term returns of the major asset
classes (cash and cash equivalents, equities and bonds) weighted by the actual allocation of assets at the
measurement date, net of expenses. This rate includes an equity risk premium over government bond returns for
equity investments and a value-added premium for the contribution to returns from active management. The
sources used to determine management’s best estimate of long-term returns are numerous and include country
specific bond yields, which may be derived from the market using local bond indices or by analysis of the local
bond market, and country-specific inflation and investment market expectations derived from market data and
analysts’ or governments’ expectations, as applicable.
We set our discount rate assumption annually to reflect the rates available on high-quality, fixed income
debt instruments, with a duration that is expected to match the timing and amount of expected benefit payments.
High-quality debt
instruments are corporate bonds with a rating of AA or better. The discount rates at
December 31, 2019 for pension plans were estimated at 3.1% for the projected benefit obligation and 3.8% for
the net periodic benefit cost for 2019 and for post-retirement benefit plans were estimated at 3.1% for the
projected benefit obligation and 3.7% for the net periodic benefit cost for 2019.
47
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 2.6% 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 3.4% weighted average annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2019.
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 2019. 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
N/A
N/A
(169)
209
N/A
N/A
(15)
16
(8)
17
N/A
N/A
N/A
N/A
(7)
9
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 $11 million in 2020 compared to $18 million in 2019
(2018 – $57 million) to the pension plans. We expect to contribute a minimum total amount of $4 million in 2020
compared to $4 million in 2019 to the other post-retirement benefit plans (2018 – $4 million).
48
Benefit obligations and fair values of plan assets as of December 31, 2019 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, 2019
December 31, 2018
Pension
plans
$
(1,439)
1,475
36
Other
post-retirement
benefit plans
$
(63)
—
(63)
Pension
plans
$
(1,569)
1,588
19
Other
post-retirement
benefit plans
$
(62)
—
(62)
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 $11 million exists
at December 31, 2019, and certain foreign loss carryforwards for which a valuation allowance of $10 million
exists at December 31, 2019. Of this amount, $5 million unfavorably impacted tax expense and the effective tax
rate for 2019 (2018 – ($8) million).
Our deferred tax assets are mainly composed of temporary differences related to various accruals,
accounting provisions, pension and post-retirement benefit liabilities, net operating loss carryforwards, and
available tax credits. Our deferred tax liabilities are mainly composed of temporary differences pertaining to
property, plant and equipment, intangible assets, leases 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
49
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, 2019, we had gross unrecognized tax benefits of $29 million (2018 – $32 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, 2019, we believe it is
reasonably possible that up to $6 million of our unrecognized tax benefits may be recognized in 2020, 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 22
“Commitments and Contingencies”, we are subject to various legal proceedings and claims that arise in the
ordinary course of business. We record a liability when it is probable that a loss has been incurred, and the
amount is reasonably estimable. The most likely cost to be incurred is accrued based on an evaluation of the then
available facts with respect to each matter. When no amount within a range of estimates is more likely, the
minimum is accrued. There is significant judgment required in both the probability determination and as to
whether an exposure can be reasonably estimated. For further details on “Contingencies” and legal claims refer
to Note 22 “Commitments and Contingencies”.
50
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 products 1:
Papers
Business Papers
Commercial Print & Publishing Papers
Specialty & Packaging Papers
Pulp—net position
Softwood
Fluff
Hardwood
Foreign exchange
(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
$14
9
5
$11
7
1
11
2
6
1
2
Based on estimated 2020 capacity (ST or ADMT).
Based on estimated 2020 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 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, 2019, two of our Pulp and Paper segment customers located in the U.S.
represented 11% or $66 million, and 11% or $65 million, respectively, of our receivables (December 31, 2018 –
one Pulp and Paper segment customer located in the U.S. represented 10% or $67 million).
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
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.
51
The Financial Conduct Authority in the United Kingdom plans to phase out LIBOR by the end of 2021. We
do not anticipate a significant impact to our financial position from the planned phase out of LIBOR.
COST RISK
Cash flow hedges
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 48 months.
FOREIGN CURRENCY RISK
Cash flow hedges
We have manufacturing operations in the U.S., Canada and Europe. As a result, we are exposed to
movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and liabilities are
denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements.
Accordingly, our earnings are affected by increases or decreases in the value of the Canadian dollar and
European currencies. Our European subsidiaries are also exposed to movements in foreign currency exchange
rates on transactions denominated in a currency other than their Euro functional currency. Our risk management
policy allows us to hedge a significant portion of the exposure to fluctuations in foreign currency exchange rates
for periods up to three years. We may use derivative financial instruments (currency options and foreign
exchange forward contracts) to mitigate our exposure to fluctuations in foreign currency exchange rates.
Derivatives are used to hedge forecasted purchases in Canadian dollars by our Canadian subsidiary over the
next 24 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying
instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into
Sales or Cost of sales in the period during which the hedged transaction affects earnings.
52
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. Management has evaluated the effectiveness of internal control over financial reporting, 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 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, 2019, 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, 2019 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report, which is included herein.
53
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, 2019 and 2018, and the related consolidated statements of earnings (loss) and
comprehensive income (loss), of shareholders’ equity and of cash flows for each of the three years in the period
ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each
of the three years in the period ended December 31, 2019 appearing after the list of exhibits under Item 15(a)(3)
(collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control –
the Treadway
Integrated Framework (2013)
Commission (COSO).
issued by the Committee of Sponsoring Organizations of
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, 2019 and 2018, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2019 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, 2019, 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 leases in 2019.
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.
54
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,
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the
consolidated financial statements that was communicated or required to be communicated to the audit committee
and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and
(ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
Indefinite-Lived Intangible Assets Impairment Assessment – Personal Care Segment
As described in Notes 1 and 14 to the consolidated financial statements, the Company’s consolidated indefinite-
lived intangible assets balance was $283 million as of December 31, 2019, and the indefinite-lived intangible
assets associated with the Personal Care segment was $273 million, which includes trade names and catalog
rights. Management evaluates indefinite-lived intangible assets for impairment at the beginning of the fourth
impairment exist. Management performed a
quarter, or more frequently whenever indicators of potential
quantitative impairment
test for each Personal Care indefinite-lived intangible asset, which consisted of
comparing the fair value of the indefinite-lived intangible asset to its carrying amount. If the carrying amount of
the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess. As disclosed by management, fair value of the indefinite-lived trade names and catalog rights
intangible assets is derived using an income approach that is a relief from royalty model. 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, tax rates and discount rates.
The principal considerations for our determination that performing procedures relating to the indefinite-lived
intangible assets impairment assessment for the Personal Care segment is a critical audit matter are (i) there was
a high degree of auditor judgment and subjectivity in applying our procedures relating to the fair value of the
indefinite-lived intangible assets due to the significant amount of judgment required by management when
developing these estimates, (ii) significant audit effort was required in evaluating the significant assumptions
relating to the indefinite-lived intangible assets, such as revenue growth rates, royalty rates, tax rates and
discount rates, and (iii) our audit effort included the involvement of professionals with specialized skill and
knowledge to assist in performing procedures and evaluating the audit evidence obtained.
55
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming
our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness
of controls relating to the Company’s determination of the fair value of the indefinite-lived intangible assets and
evaluation for potential impairment. These procedures also included, among others, testing management’s
process for developing the fair value estimates of the Personal Care segment indefinite-lived intangible assets,
ensuring the completeness and accuracy of the underlying data supporting the cash flow projections, and
evaluating the appropriateness of the model and the significant assumptions, including revenue growth rates,
royalty rates, tax rates and discount rates used by management in developing the fair value estimates of the
Personal Care segment indefinite-lived intangible assets. Evaluating the reasonableness of the assumptions
related to revenue growth rates and royalty rates involved considering the Company’s past performance and
whether these assumptions were consistent with evidence obtained in other areas of the audit. Evaluating the
reasonableness of the tax rates involved considering the respective jurisdictions in which the Company conducts
business and whether the tax rates were consistent throughout the model and with evidence obtained in other
areas of the audit. Evaluating the reasonableness of the discount rates involved considering current economic
conditions and certain Company-specific factors. In addition, professionals with specialized skill and knowledge
assisted in evaluating the Company’s relief from royalty model and certain assumptions, including the royalty
rates and discount rates.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 25, 2020
We have served as the Company’s auditor since 2007.
56
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
Sales
Operating expenses
Cost of sales, excluding depreciation and amortization
Depreciation and amortization
Selling, general and administrative
Impairment of long-lived assets (NOTE 4)
Closure and restructuring costs (NOTE 16)
Other operating loss (income), 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 income (loss):
Net derivative gains (losses) on cash flow hedges:
Net gains (losses) arising during the period, net of tax $(3)
(2018 – $10; 2017 – $(5))
Less: Reclassification adjustment for losses (gains) included in
net earnings (loss), net of tax of $(3) (2018 – $1; 2017 – $5)
Foreign currency translation adjustments
Change in unrecognized gains (losses) and prior service cost related to
pension and post-retirement benefit plans, net of tax of $(13)
(2018 – $3; 2017 – $(5))
Other comprehensive income (loss)
Comprehensive income (loss)
$
5,220
4,225
293
434
58
42
5
5,057
163
52
23
88
2
2
84
1.37
1.37
61.2
61.4
1.78
84
11
8
21
34
74
158
$
5,455
4,303
308
443
7
8
—
5,069
386
62
(18)
342
57
2
283
4.50
4.48
62.9
63.1
1.72
283
(30)
(2)
(91)
(8)
(131)
152
$
5,148
4,145
321
444
578
2
(14)
5,476
(328)
66
(11)
(383)
(125)
—
(258)
(4.11)
(4.11)
62.7
62.7
1.66
(258)
6
(9)
146
20
163
(95)
The accompanying notes are an integral part of the consolidated financial statements.
57
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 $6
Inventories (NOTE 11)
Prepaid expenses
Income and other taxes receivable
Total current assets
Property, plant and equipment, net (NOTE 12)
Operating lease right-of-use assets (NOTE 13)
Intangible assets, net (NOTE 14)
Other assets (NOTE 15)
Total assets
Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness
Trade and other payables (NOTE 17)
Income and other taxes payable
Operating lease liabilities due within one year (NOTE 13)
Long-term debt due within one year (NOTE 19)
Total current liabilities
Long-term debt (NOTE 19)
Operating lease liabilities (NOTE 13)
Deferred income taxes and other (NOTE 10)
Other liabilities and deferred credits (NOTE 20)
Commitments and contingencies (NOTE 22)
Shareholders’ equity (NOTE 21)
Common stock $0.01 par value; authorized 2,000,000,000 shares; issued
65,001,104 and 65,001,104 shares
Treasury stock $0.01 par value; 8,120,194 and 2,086,535 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
At
December 31,
2019
December 31,
2018
$
$
61
577
786
33
61
1,518
2,567
81
573
164
4,903
9
705
23
28
1
766
938
69
479
275
1
—
1,770
998
(393)
2,376
4,903
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
The accompanying notes are an integral part of the consolidated financial statements.
58
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, 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 adjustment 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 adjustment 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
Balance at December 31, 2018
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 $(3)
Less: Reclassification adjustment for
losses included in net earnings, net of
tax of $(3)
Foreign currency translation adjustments
Change in unrecognized gains and prior
service cost related to pension and post-
retirement benefit plans, net of tax of $(13)
Stock repurchase
Cash dividends declared
Balance at December 31, 2019
62.6
0.1
—
—
—
—
—
—
62.7
0.2
—
—
—
—
—
—
62.9
0.2
—
—
—
—
—
(6.2)
—
56.9
$
1
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
1
$
1,963
6
—
—
—
—
—
—
1,969
12
—
—
—
—
—
—
1,981
8
—
—
—
—
—
(219)
—
1,770
$
1,211
—
(258)
—
—
—
—
(104)
849
—
283
—
—
—
—
(109)
1,023
—
84
—
—
—
—
—
(109)
998
$
(499)
—
—
6
(9)
146
20
—
(336)
—
—
(30)
(2)
(91)
(8)
—
(467)
—
—
11
8
21
34
—
—
(393)
$
2,676
6
(258)
6
(9)
146
20
(104)
2,483
12
283
(30)
(2)
(91)
(8)
(109)
2,538
8
84
11
8
21
34
(219)
(109)
2,376
The accompanying notes are an integral part of the consolidated financial statements
59
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
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 long-lived assets (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 acquisition of business
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 business, 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
$
84
293
(16)
58
—
9
2
—
96
(16)
2
(67)
(43)
29
11
442
(255)
1
—
—
(254)
(110)
(219)
9
80
205
(200)
(1)
(1)
(237)
(49)
(1)
111
61
46
59
$
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
The accompanying notes are an integral part of the consolidated financial statements.
60
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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 BUSINESS
NOTE 4
IMPAIRMENT OF LONG-LIVED ASSETS
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 LOSS (INCOME), NET
NOTE 9
INTEREST EXPENSE, NET
NOTE 10
INCOME TAXES
NOTE 11
INVENTORIES
NOTE 12 PROPERTY, PLANT AND EQUIPMENT
NOTE 13 LEASES
NOTE 14
INTANGIBLE ASSETS
NOTE 15 OTHER ASSETS
NOTE 16 CLOSURE AND RESTRUCTURING COSTS AND LIABILITY
NOTE 17 TRADE AND OTHER PAYABLES
NOTE 18 CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
NOTE 19 LONG-TERM DEBT
NOTE 20 OTHER LIABILITIES AND DEFERRED CREDITS
NOTE 21 SHAREHOLDERS’ EQUITY
NOTE 22 COMMITMENTS AND CONTINGENCIES
NOTE 23 DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
NOTE 24 SEGMENT DISCLOSURES
NOTE 25 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
62
69
72
73
74
79
80
90
90
91
96
97
97
100
101
101
104
105
107
109
110
111
115
120
123
61
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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
62
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
currency. The effect of this remeasurement process is recognized in the Consolidated Statements of Earnings
(Loss) and Comprehensive Income (Loss) and is partially offset by the Company’s hedging program (refer to
Note 23 “Derivatives and hedging activities and fair value measurement”).
At December 31, 2019, the accumulated translation adjustment accounts amounted to $(202) million
(2018 – $(223) 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,
63
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
pension and related curtailments, environmental remediation and may also include expenses related to demolition
and outplacement. Actions taken may also require an evaluation of any remaining assets to determine required
impairments, if any, and a review of estimated remaining useful lives which may lead to accelerated depreciation
expense.
Estimates of cash flows and fair value relating to closures and restructurings require judgment. Closure and
restructuring liabilities are based on management’s best estimates of future events. 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 income (loss) in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss). Deferred tax assets and liabilities are
measured using enacted tax rates and laws expected to apply in the years in which the assets and liabilities are
expected to be recovered or settled. Uncertain tax positions are recorded based upon the Company’s evaluation of
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
64
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to the securitization of receivables are recognized in earnings as a component of Interest expense, net in the
Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost includes labor, materials and
production overhead. The last-in, first-out (“LIFO”) method is used to account for certain domestic raw
materials, in process and finished goods inventories. LIFO inventories were $242 million and $227 million at
December 31, 2019 and 2018, 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 $69 million and $61 million greater at
December 31, 2019 and 2018, 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 long-lived assets”).
LEASES
At inception of an arrangement, the Company determines whether the arrangement contains a lease. A lease
conveys the right to control the use of identified property, plant, or equipment (asset) for a period of time in
exchange for consideration. Control over the use of the identified asset means that the Company has both the
right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of
the asset.
For each lease arrangement that has an original lease term of more than 12 months, a right-of-use asset and a
lease liability are recorded in the Consolidated Balance Sheets. The right-of-use asset represents the Company’s
right to use an underlying asset for the lease term while the lease liability represents the obligation to make lease
65
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
payments arising from the lease. The right-of-use asset and the lease liability are initially recorded at the same
amount at the lease commencement date based on the present value of the remaining lease payments discounted
using the Company’s incremental borrowing rate. Lease terms may include options to extend or terminate the
lease when it is reasonably certain that the Company will exercise that option. The right-of-use asset is tested for
impairment in accordance with ASC 360 – “Property, Plant and Equipment”.
The terms of a lease arrangement determine how a lease is classified (operating or finance), the resulting
recognition pattern in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) and the
classification in the Consolidated Balance Sheets.
Finance lease expense is represented by the interest on the lease liability determined using the effective
interest method and the amortization of the finance lease right-of-use asset calculated using the straight-line
method over the estimated useful life of the identified asset. Finance lease related balances are included in the
Consolidated Balance Sheets in Property, plant and equipment, net, Long-term debt due within one year and
Long-term debt.
Operating lease expense is recorded on a straight-line basis over the lease term by adding interest expense
determined using the effective interest method to the amortization of the right-of-use asset. Operating lease
related balances are included in the Consolidated Balance Sheets in Operating lease right-of-use assets,
Operating lease liabilities due within one year and Operating lease liabilities. Operating lease right-of-use assets
are reduced by previously recognized liabilities relating to unfavorable terms of leases acquired as part of a
business combination and impairments.
INTANGIBLE ASSETS
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. 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 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, 2019
(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 long-lived assets.
rights, customer
relationships,
Amortization is based on the following useful lives:
Water rights
Customer relationships
Technology
Non-Compete agreements
Licence rights
DEBT ISSUANCE COSTS
Useful life
40 years
10 to 40 years
7 to 20 years
9 years
12 years
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 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
67
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 1,112,295 shares are reserved for issuance in connection with awards to be granted.
DERIVATIVE INSTRUMENTS
Derivative instruments may be utilized by Domtar as part of the overall strategy to manage exposure to
fluctuations in foreign currency, interest rate and commodity price on certain purchases. As a matter of policy,
derivatives are not used for trading or speculative purposes. All derivatives are recorded at fair value either as
assets or liabilities. When derivative instruments have been designated within a hedge relationship and are highly
effective in offsetting the identified risk characteristics of specific financial assets and liabilities or group of
financial assets and liabilities, hedge accounting is applied. In a fair value hedge, changes in fair value of
derivatives are recognized in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).
The change in fair value of the hedged item attributable to the hedged risk is also recorded in the Consolidated
Statements of Earnings (Loss) and Comprehensive Income (Loss) by way of a corresponding adjustment of the
carrying amount of the hedged item recognized in the Consolidated Balance Sheets. In a cash flow hedge,
changes in fair value of derivative instruments are recorded in Other comprehensive income (loss). These
amounts are reclassified in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) in
the periods in which results are affected by the cash flows of the hedged item within the same line item.
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,
68
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
• The interest cost of pension obligations,
• The expected long-term return on pension fund assets based on a market value of pension fund assets,
• Gains or losses on settlements and curtailments,
• The straight-line amortization of past service costs and plan amendments over the average remaining
service period of approximately ten 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 ten 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
The Company recognizes the unfunded status of other post-retirement benefit plans (other
than
multiemployer plans) as a liability in the Consolidated Balance Sheets. These benefits, which are funded by
Domtar as they become due, include life insurance programs, medical and dental benefits and short-term and
long-term disability programs. The Company amortizes the cumulative net actuarial gains and losses in excess of
10% of the greater of the projected benefit obligation and the market value of assets over the average remaining
service period of approximately 12 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
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
previous accounting standards. Under the new 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.
69
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
The Company elected to initially apply the new leases standard as of January 1, 2019 with certain available
practical expedients which are discussed below. No cumulative-effect adjustments on retained earnings were
necessary as of January 1, 2019. The most significant impact of adopting the new standard was the recognition of
right-of-use assets and lease liabilities for operating leases. The accounting for finance leases remains
substantially unchanged.
In transitioning to the new standard,
the Company elected to use the practical expedient package.
Accordingly, the Company did not reassess the following:
• Whether existing or expired contracts are, or contained, a lease (including executory contracts).
• The lease classification of existing or expired leases previously made by management.
• Whether initial direct costs for existing leases would qualify under the new standard.
Furthermore, the Company elected to use the hindsight practical expedient in determining the lease term and
assessing impairment of the right-of-use assets.
For all comparative periods prior to the adoption of the new leases standard, the Company will continue to
report operating leases in the consolidated financial statements under ASC 840 “Leases” and provide the related
required disclosures.
COMPREHENSIVE INCOME
In February 2018,
the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income”, regarding the reclassification of certain income tax effects reported
in accumulated other comprehensive income (loss) in response to the U.S. Tax Cuts and Jobs Acts (“U.S. Tax
Reform”) enacted on December 22, 2017. For businesses, one of the main provisions of the U.S. Tax Reform was
the reduction in the corporate federal income tax rate to 21% from 35%. Under current income tax accounting
requirements, an entity was required to remeasure applicable U.S. deferred tax assets and deferred tax liabilities
at the 21% tax rate effective on the U.S. Tax Reform enactment date. This remeasurement was required to be
recognized in an entity’s income tax provision in its income statement. However, certain of these deferred tax
assets and deferred tax liabilities relate to income tax effects initially recognized at the 35% tax rate through
other comprehensive income (loss) on items reported within accumulated other comprehensive income (loss) on
an entity’s balance sheet. Consequently, an entity’s financial statements will reflect an inconsistency between the
deferred tax assets and deferred tax liabilities measured at 21% and the related income tax effects in accumulated
other comprehensive income (loss) recorded at 35%. Accordingly, this guidance provides a one-time option to
remeasure the income tax effects within accumulated other comprehensive income (loss) at the 21% income tax
rate. The impact from this remeasurement is to be recorded directly in retained earnings on an entity’s balance
sheet.
This guidance became effective for the Company on January 1, 2019. The Company has decided not to elect
this option, as permitted in the new guidance.
70
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
FUTURE ACCOUNTING CHANGES
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.
The Company does not expect this new guidance to have a material impact on the consolidated financial
statements.
RECEIVABLES
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses”. This ASU added a
new impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected
losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of
expected credit losses and applies to most debt instruments, trade receivables, lease receivables, financial
guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for
recognition of impairment losses and entities will need to measure expected credit losses on assets that have a
low risk of loss. These changes become effective on January 1, 2020.
The Company does not expect a material impact from the adoption of this guidance, as the current loss
models used by the Company incorporate both historic and forward-looking information.
71
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 3.
ACQUISITION OF BUSINESS
Acquisition of Home Delivery Incontinent Supplies Co.
On October 1, 2016, Domtar completed the acquisition of 100% of the outstanding shares of Home Delivery
Incontinent Supplies Co. (“HDIS”). HDIS is a leading national direct-to-consumer provider of adult incontinence
and related products. Based in Olivette, Missouri, HDIS provides customers with high-quality products and a
personalized service for all of their incontinence needs. HDIS operates a distribution center in Olivette, Missouri,
as well as two retail locations, in Texarkana, Arkansas and Daytona Beach, Florida and has approximately 240
employees. The results of HDIS’s operations are included in the Personal Care reportable segment starting on
October 1, 2016. The purchase price was $52 million, net of cash acquired of $3 million and included a potential
earn-out payment of up to $10 million to be settled after the first anniversary of the acquisition. The final amount
of the earn-out was $8 million and was paid in the last quarter of 2017.
The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed
based on the Company’s estimates of their fair value, which were based on information available at that time.
The table below illustrates the purchase price allocation:
Fair value of net assets acquired at the date of acquisition
Receivables
Inventory
Property, plant and equipment
Intangible assets
Customer relationships (1)
Trade names (2)
Goodwill
Deferred income tax assets
Total assets
Less: Liabilities
Trade and other payables
Total liabilities
Fair value of net assets acquired at the date of acquisition
21
13
$ 4
4
1
34
17
2
62
10
10
52
(1) The useful life of the Customer relationships acquired is estimated at 10 years (as of the date of acquisition).
(2)
Indefinite useful life.
72
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 4.
IMPAIRMENT OF LONG-LIVED ASSETS
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT, AND OPERATING LEASE
RIGHT-OF-USE ASSETS
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 facility
On November 1, 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, the relocation of certain of its manufacturing assets and a
workforce reduction across the division. The Waco, Texas facility ceased operations during the second quarter of
2019.
For the year ended December 31, 2019, the Company recorded $26 million of accelerated depreciation and
impairment of operating lease right-of-use assets under Impairment of long-lived assets on the Consolidated
Statement of Earnings (Loss) and Comprehensive Income (Loss) (2018 – $7 million of accelerated depreciation).
Ashdown, Arkansas mill and Port Huron, Michigan mill
On September 27, 2019, the Company’s Board of Directors approved the decision to permanently shut down
two paper machines, which was announced on October 3, 2019. The closures took place at the Ashdown,
Arkansas pulp and paper mill and the Port Huron, Michigan paper mill. These measures will reduce the
Company’s annual uncoated freesheet paper capacity by approximately 204,000 short tons, and will result in a
workforce reduction of approximately 100 employees.
The closure of the Ashdown paper machine took effect immediately. The Ashdown mill will continue to
operate one paper machine with an annual uncoated freesheet paper production capacity of 200,000 short tons.
Additionally, the mill operates a fluff pulp machine with the flexibility to produce softwood pulp depending on
market conditions. As a result of the closure of the paper machine, the mill will produce an incremental
70,000 ADMT of softwood and fluff pulp, which will ramp up over the course of 2020.
The closure of the Port Huron paper machine took effect mid-November. The Port Huron mill will continue
to produce a variety of technical and specialty papers for a broad range of customers utilizing three machines
with a total annual production capacity of 95,000 short tons.
73
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 4. IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
For the year ended December 31, 2019, the Company recorded $32 million of accelerated depreciation
under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) and Comprehensive
Income (Loss).
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
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.
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.
74
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
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 19, 2022.
PSUs
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
Granted
Forfeited
Cancelled
Vested and settled
Vested and non-vested at December 31, 2019
Number of units
Weighted average
grant date fair value
517,281
256,078
(24,581)
(75,710)
(50,600)
622,468
238,537
(36,932)
52,563
(154,178)
722,458
192,261
(24,980)
(41,399)
(222,019)
626,321
$
38.98
39.04
37.59
38.78
54.95
37.78
41.39
38.09
41.05
44.22
37.82
61.46
45.54
57.09
32.39
45.42
The fair value of PSUs granted in 2019, 2018 and 2017 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:
2019
2018
2017
Dividend yield
Expected volatility 1 year
Expected volatility 3 years
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
Risk-free interest rate December 31, 2021
75
29%
28%
—
—
4.707% 3.800%
22%
26%
—
2.233%
2.849% 2.461%
2.646% 2.607%
2.561%
—
4.130%
28%
28%
1.614%
1.606%
1.751%
—
—
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
At December 31, 2019, of the total vested and non-vested PSUs, 316,468 are expected to be settled in shares
and 309,853 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, 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
Granted/issued
Forfeited
Vested and settled
Non-vested at December 31, 2019
Number of units
Weighted average
grant date fair value
418,670
182,937
(19,194)
(121,750)
460,663
157,502
(27,251)
(135,323)
455,591
156,417
(21,203)
(174,353)
416,452
$
40.90
39.83
37.97
48.72
38.56
44.04
39.91
42.54
39.16
51.07
42.86
34.96
45.20
At December 31, 2019, of the total non-vested RSUs, 187,322 are expected to be settled in shares and
229,130 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.
76
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
Management Committee members may elect to defer awards earned under another program into DSUs. In
2019, no vested awards were deferred to DSUs (2018 – nil; 2017 – nil).
DSUs
Vested at December 31, 2016
Granted/issued
Settled
Vested at December 31, 2017
Granted/issued
Settled
Vested at December 31, 2018
Granted/issued
Settled
Vested at December 31, 2019
Number of units
Weighted average
grant date fair value
321,074
36,215
(85,055)
272,234
31,691
(9,752)
294,173
35,596
(12,606)
317,163
$
29.01
40.68
32.27
29.55
44.64
40.95
30.79
41.32
43.90
31.45
NON-QUALIFIED 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. The options expire at various
dates no later than seven years from the date of grant. In 2019, no stock options were granted.
The fair value of the stock options granted in 2018 and 2017 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
3.27%
29%
2.62%
4.5 years
43.66
$
3.48%
28%
1.86%
4.5 years
39.81
$
77
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
The grant date fair value of the non-qualified options granted in 2018 and 2017 was $8.65 and $7.05,
respectively.
OPTIONS
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
Outstanding at December 31, 2018
Exercised
Forfeited/expired
Outstanding at December 31, 2019
Options exercisable at December 31, 2019
Number
of
options
Weighted
average
exercise
price
Weighted
average
remaining life
(in years)
Aggregate
intrinsic
value
(in millions)
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
513,652
(88,682)
(3,616)
421,354
45.68
39.46
53.13
46.92
316,530
48.44
4.5
6.2
—
4.1
3.2
4.1
6.2
—
—
3.6
2.3
3.6
—
—
2.5
1.8
$
0.7
—
—
3.6
1.3
3.6
—
—
—
0.1
—
0.1
—
—
0.1
0.1
The total intrinsic value of options exercised in 2019 was $1 million (2018 – $1 million; 2017 – nil). Based
on the Company’s closing year-end stock price of $38.24 (2018 – $35.13; 2017 – $49.52), the aggregate intrinsic
value of options outstanding and options exercisable is nil.
For the year ended December 31, 2019, stock-based compensation expense recognized in the Company’s
results of operations was $22 million (2018 – $10 million; 2017 – $20 million) for all of the outstanding awards.
Compensation costs not yet recognized amounted to $16 million (2018 – $17 million; 2017 – $20 million) and
will be recognized over the remaining service period of approximately 14 months. The aggregate value of
liability awards settled in 2019 was $12 million (2018 – $8 million; 2017 –$7 million). The total fair value of
equity awards settled in 2019 was $11 million (2018 – $6 million), representing the fair value at the time of
settlement. The fair value at the grant date for these settled equity awards was $6 million (2018 – $7 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
78
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 5. STOCK-BASED COMPENSATION (CONTINUED)
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)
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$ 84
61.2
0.2
61.4
$1.37
$1.37
$ 283
62.9
0.2
63.1
$4.50
$4.48
$ (258)
62.7
—
62.7
$(4.11)
$(4.11)
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 to purchase common shares
December 31,
2019
December 31,
2018
December 31,
2017
324,413
227,221
312,893
79
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
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, 2019, the related pension
expense was $42 million (2018 – $50 million; 2017 – $39 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 $11 million in 2020 compared to
$18 million in 2019 (2018 – $57 million; 2017 – $47 million) to the pension plans. The Company expects to
contribute a minimum total amount of $4 million in 2020 compared to $4 million in 2019 (2018 – $4 million;
2017 – $3 million) to the other post-retirement benefit plans.
80
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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, 2019 and
December 31, 2018, the measurement date for each year:
Projected benefit obligation at beginning of year
Service cost for the year
Interest expense
Plan participants’ contributions
Actuarial loss (gain)
Benefits paid
Direct benefit payments
Settlement (1)
Effect of foreign currency exchange rate change
Projected benefit obligation at end of year
CHANGE IN FAIR VALUE OF ASSETS
December 31, 2019
December 31, 2018
Pension
plans
$
1,569
29
57
6
171
(96)
(4)
(348)
55
1,439
Other
post-retirement
benefit plans
$
62
1
2
—
(1)
—
(4)
—
3
63
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
The following table represents the change in the fair value of assets, as of December 31, 2019 and
December 31, 2018, reflecting the actual return on plan assets, the contributions and the benefits paid for each
year:
December 31, 2019 December 31, 2018
Pension plans
Fair value of assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Settlement (1)
Effect of foreign currency exchange rate change
Fair value of assets at end of year
$
1,588
253
18
6
(100)
(348)
58
1,475
Pension plans
$
1,765
(27)
57
6
(104)
—
(109)
1,588
(1) On November 26, 2019, the Company entered into agreements with Sun Life Assurance Company of
Canada to purchase group annuity buy-out contracts and transfer approximately $272 million (CDN $360
million) of its Ontario, Canada defined benefit plans’ projected benefit obligations. The transactions closed
on December 5, 2019 and were funded with pension plan assets. Additionally, the Company entered into
agreements with existing insurers to convert $76 million (CDN $101 million) of existing buy-in annuity
contracts to buy-out annuity contracts to complete the full transfer of these obligations. These annuity
81
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
buy-out transactions transferred responsibility for pension benefits for approximately 1,265 retirees and
their beneficiaries. Settlement accounting rules required a remeasurement of the plans as of November 26,
2019 and the Company recognized a non-cash pension settlement charge of $30 million before tax in the
fourth quarter of 2019.
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
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.
82
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
The following table shows the allocation of the plan assets, based on the fair value of the assets held and the
target allocation for 2019:
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,
2019
Percentage of
plan assets at
December 31,
2018
Target allocation
0% - 9%
49% - 58%
1%
3% - 10%
9% - 19%
18% - 29%
2%
53%
1%
6%
15%
23%
100%
2%
52%
5%
6%
13%
22%
100%
(1) Approximately 71% of the pension plans’ assets relate to Canadian plans, 28% relate to U.S. plans and 1%
relate to European plans.
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, 2019
December 31, 2018
Pension
plans
$
(1,439)
1,475
36
Other
post-retirement
benefit plans
$
(63)
—
(63)
Pension
plans
$
(1,569)
1,588
19
Other
post-retirement
benefit plans
$
(62)
—
(62)
83
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
The funded status includes $55 million of projected benefit obligation ($49 million at December 31, 2018)
related to supplemental unfunded defined benefit and defined contribution plans.
Trade and other payables (Note 17)
Other liabilities and deferred credits (Note 20)
Other assets (Note 15)
Net amount recognized in the Consolidated Balance Sheets
December 31, 2019
December 31, 2018
Pension
plans
$
—
(105)
141
36
Other
post-retirement
benefit plans
Pension
plans
Other
post-retirement
benefit plans
$
(5)
(58)
—
(63)
$
—
(88)
107
19
$
(5)
(57)
—
(62)
The following table presents the pre-tax amounts included in Other comprehensive income (loss):
Prior service (cost) credit
Amortization of prior year service cost (credit)
Net gain (loss)
Amortization of net actuarial loss (gain) (1)
Net amount recognized in other comprehensive
income (loss) (pre-tax)
Year ended
December 31, 2019
Year ended
December 31, 2018
Year ended
December 31, 2017
Pension
plans
Other
post-retirement
benefit plans
Pension
plans
Other
post-retirement
benefit plans
Pension
plans
Other
post-retirement
benefit plans
$
—
5
3
40
48
$
—
(1)
1
(1)
(1)
$
—
5
(31)
8
(18)
$
—
—
8
(1)
7
$
(1)
5
(10)
9
3
$
5
—
17
—
22
An estimated gain of $10 million for pension plans and loss of $2 million for other post-retirement benefit
plans will be amortized from Accumulated other comprehensive loss into net periodic benefit cost in 2020.
(1)
Includes the non-cash pension settlement charge of $30 million recognized in the fourth quarter of 2019.
At December 31, 2019, the projected benefit obligation and the fair value of plan assets with a projected
benefit obligation in excess of fair value of plan assets were $846 million and $742 million, respectively (2018 –
$731 million and $643 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
84
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$
29
57
(79)
10
30
5
52
$
34
53
(85)
8
—
5
15
$
30
52
(81)
9
—
5
15
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
Components of net periodic benefit cost for other post-retirement benefit plans
Service cost for the year
Interest expense
Amortization of net actuarial gain
Amortization of prior year service credit
Net periodic benefit cost
WEIGHTED-AVERAGE ASSUMPTIONS
Year ended
December 31,
2019
$
1
2
(1)
(1)
1
Year ended
December 31,
2018
$
Year ended
December 31,
2017
$
1
2
(1)
—
2
2
4
6
—
—
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,
2019
December 31,
2018
December 31,
2017
3.1%
2.7%
3.8%
2.6%
5.2%
3.8%
2.7%
3.5%
2.8%
5.2%
3.5%
2.7%
3.9%
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.
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 of 4.2% for U.S. unfunded plans 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.
85
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
Effective January 1, 2020, the Company will use 4.8% (2019 – 5.2%; 2018 – 5.2%) as the expected return
on plan assets, which reflects the current view of long-term investment returns. The overall expected long-term
rate of return on plan assets is based on management’s best estimate of the long-term returns of the major asset
classes (cash and cash equivalents, equities, and bonds) weighted by the actual allocation of assets at the
measurement date, net of expenses. This rate includes an equity risk premium over government bond returns for
equity investments and a value-added premium for the contribution to returns from active management. The
sources used to determine management’s best estimate of long-term returns are numerous and include country
specific bond yields, which may be derived from the market using local bond indices or by analysis of the local
bond market, and country-specific inflation and investment market expectations derived from market data and
analysts’ or governments’ expectations, as applicable.
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,
2019
December 31,
2018
December 31,
2017
3.1%
2.8%
3.7%
2.7%
3.8%
2.8%
3.5%
2.7%
3.5%
2.8%
3.8%
2.8%
For measurement purposes, a 3.4% weighted average annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2019. An increase or decrease of 1% of this rate would have the
following impact:
Impact on net periodic benefit cost for other post-retirement benefit plans
Impact on accrued benefit obligation
Increase of 1% Decrease of 1%
$
—
3
$
—
(3)
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.
86
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
The following table presents the fair value of the plan assets at December 31, 2019, by asset category:
Fair Value Measurements at
December 31, 2019
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
$
66
454
119
21
13
167
93
86
231
215
10
$
24
453
91
21
13
—
93
86
231
—
—
Total
1,475
1,012
$
42
1
28
—
—
167
—
—
—
215
—
453
$
—
—
—
—
—
—
—
—
—
—
10
10
(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.
(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 insurance contracts with a minimum guarantee rate.
87
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
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
$
23
492
100
37
9
—
94
91
233
—
—
Total
1,588
1,079
$
45
1
23
—
—
156
—
—
—
200
—
425
$
—
—
—
—
—
—
—
—
—
—
84
84
In the above presentation of the fair value of plan assets at December 31, 2018, the Company has decreased
the Level 1 cash and short-term investments by $45 million and increased the Level 2 cash and short-term
investments by a corresponding $45 million to correct the classification of these investments from what was
previously presented.
(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.
(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.
88
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
(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 changes during the period for Level 3 fair value measurements of plan assets:
Fair Value Measurements
Using Significant
Unobservable Inputs (Level 3)
Insurance
contracts Other TOTAL
Balance at December 31, 2017
Settlements
Return on plan assets
Effect of foreign currency exchange rate change
Balance at December 31, 2018
Settlements
Return on plan assets
Effect of foreign currency exchange rate change
Balance at December 31, 2019
1
(1)
$
$
94
(5)
—
2
(7) —
84
—
(83) —
—
—
7
2
10
—
$
95
(6)
2
(7)
84
(83)
7
2
10
ESTIMATED FUTURE BENEFIT PAYMENTS FROM THE PLANS
Estimated future benefit payments from the plans for the next 10 years at December 31, 2019 are as follows:
Pension
plans
Other
post-retirement
benefit plans
$
88
87
86
87
89
439
$
4
4
4
4
4
20
2020
2021
2022
2023
2024
2025 – 2029
.
89
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 8.
OTHER OPERATING LOSS (INCOME), NET
Other operating loss (income), net is an aggregate of both recurring and non-recurring loss or income items
and, as a result, can fluctuate from year to year. The Company’s other operating loss (income), net includes the
following:
Environmental provision
Foreign exchange loss (gain)
Bad debt expense
Net gain on sale of property, plant and equipment
Reversal of contingent consideration
Other
Other operating loss (income), net
NOTE 9.
The following table presents the components of interest expense, net:
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,
2019
$
4
3
2
—
—
(4)
5
Year ended
December 31,
2018
$
5
(2)
2
(4)
—
(1)
—
Year ended
December 31,
2017
$
3
1
1
(13)
(2)
(4)
(14)
Year ended
December 31,
2019
$
45
2
3
2
52
Year ended
December 31,
2018
$
56
1
2
3
Year ended
December 31,
2017
$
59
2
3
2
62
66
(1) The Company capitalized $3 million of interest expense in 2019 (2018 – $1 million; 2017 – $1 million).
90
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$
32
56
88
$
216
126
342
$
(209)
(174)
(383)
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$
11
(15)
7
(1)
2
$
32
(6)
12
19
57
$
73
(208)
9
1
(125)
91
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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%, for 2019 and 2018, (35% for December 31, 2017) 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
Nondeductible expenses
Other
Income tax expense (benefit)
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$
18
3
(2)
(20)
—
(4)
—
(3)
—
—
2
5
3
—
2
$
72
8
1
(19)
—
(9)
(7)
(4)
—
10
9
(8)
—
4
57
$
(134)
2
(16)
(24)
200
(188)
46
(6)
(4)
—
—
—
3
(4)
(125)
During 2019, the Company recorded $20 million of tax credits, mainly research and experimentation credits,
which impacted the effective tax rate. Arkansas legislation changes were passed in 2019 which reduced the state
tax rate and changed how the apportionment factor is calculated. This resulted in a deferred state tax benefit of
$4 million for the Company. Additionally, a valuation allowance of $5 million was recorded on state attributes
the Company does not expect to utilize before they expire.
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, 2019, the Company has recorded a deferred tax liability of
$12 million ($10 million at December 31, 2018) for foreign withholding tax and various state income taxes
associated with future repatriation of these earnings. This additional $2 million tax expense impacted the
effective tax rate for 2019 ($10 million for 2018).
During 2018, the Company recorded $19 million of tax credits, mainly research and experimentation credits,
which 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
92
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 10. INCOME TAXES (CONTINUED)
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 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, which the Company
elected to pay over eight years. 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 $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.
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.
As a result of the corporate tax rate reduction, from 35% to 21%, due to the U.S. Tax Reform, 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, impacted 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 impacted the 2017 tax rate.
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.
93
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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, 2019 and December 31, 2018 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 15)
Deferred income taxes and other
Total
December 31,
2019
December 31,
2018
$
31
38
17
13
24
123
(21)
102
(416)
(117)
(18)
(551)
(449)
1
(450)
(449)
$
38
36
22
10
21
127
(16)
111
(422)
(122)
(10)
(554)
(443)
1
(444)
(443)
At December 31, 2019, the Company has no federal net operating loss carryforwards remaining. The
Company has other foreign net operating losses and deduction limitations of $195 million which may be carried
forward indefinitely.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during periods in which temporary differences
become deductible.
The Company evaluates the realization of deferred tax assets on a quarterly basis. Evaluating the need for an
amount of a valuation allowance for deferred tax assets often requires significant judgment. All available
evidence, both positive and negative, is considered when determining whether, based on the weight of that
evidence, a valuation allowance is needed. Specifically, the Company evaluated the following items:
• Historical income / (losses) – particularly the most recent three-year period
• Reversals of future taxable temporary differences
94
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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 $11 million exists at December 31, 2019, and certain foreign loss carryforwards for which
a valuation allowance of $10 million exists at December 31, 2019. Of this amount, $5 million unfavorably
impacted tax expense and the effective tax rate for 2019 (2018 – $(8) million; 2017 – $3 million).
As of December 31, 2019, the Company has recorded a deferred tax liability of $12 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 the outside basis differences in its investments in its foreign subsidiaries that are unrelated
to unremitted earnings as it estimates that the deferred tax liability, in combination with the repatriation tax
amount, covers all tax liabilities with foreign investments to date. The Company remains indefinitely reinvested
in the outside basis differences of its foreign subsidiaries.
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, 2019, the Company had gross unrecognized tax benefits of approximately $29 million
($32 million and $37 million for 2018 and 2017, respectively). If recognized in 2020, 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. These amounts are
included in Deferred income taxes and other on the Consolidated Balance Sheets.
Balance at beginning of year
Additions based on tax positions related to current year
Additions 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
95
December 31,
2019
$
32
3
2
—
(9)
1
—
29
December 31,
2018
$
37
3
4
—
(12)
1
(1)
32
December 31,
2017
$
43
3
4
(1)
(13)
1
—
37
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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, 2019 ($1 million and $1 million for 2018 and 2017, 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, 2020, 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 2019, 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, 2019, the Company’s subsidiaries are subject to foreign federal income tax
examinations for the tax years 2008 through 2018, with federal years prior to 2016 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,
2019
December 31,
2018
$
401
153
232
786
$
410
126
226
762
96
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(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,
2019
December 31,
2018
$
7,872
1,060
200
178
9,310
(6,743)
2,567
$
7,655
1,043
193
131
9,022
(6,417)
2,605
(1) Amortization is calculated using the unit of production method.
Depreciation expense related to property, plant and equipment for the year ended December 31, 2019 was
$274 million (2018 – $289 million; 2017 – $302 million).
NOTE 13.
LEASES
In the normal course of business, the Company enters into operating and finance leases mainly for
manufacturing and warehousing facilities, corporate offices, motor vehicles, mobile equipment and
manufacturing equipment.
While the Company’s lease payments are generally fixed over the lease term, some leases may include price
escalation terms that are fixed at the lease commencement date.
The Company has remaining lease terms ranging from 1 year to 14 years, some of which may include
options to extend the leases for up to 10 years, and some of which may include options to terminate the leases
within 1 year.
During the year ended December 31, 2019, the Company recorded $9 million of impairment of operating
lease right-of-use assets under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss)
and Comprehensive Income (Loss).
97
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 13. LEASES (CONTINUED)
The components of lease expense were as follows:
Operating lease expense
Finance lease expense:
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease expense
Year ended
December 31,
2019
$
30
1
—
1
For the years ended December 31, 2018 and 2017, total operating lease expense amounted to $29 million
and $31 million, respectively.
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases
Finance leases
Year ended
December 31,
2019
$
32
1
1
34
—
98
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 13. LEASES (CONTINUED)
Supplemental balance sheet information related to leases was as follows:
Operating leases
Operating leases right-of-use assets
Lease liabilities due within one year
Operating lease liabilities
Finance leases
Property, plant and equipment
Accumulated depreciation
Long-term debt due within one year
Long-term debt
Weighted-average remaining lease term
Operating leases
Finance leases
Weighted-average discount rate
Operating leases
Finance leases
Maturities of lease liabilities at December 31, 2019 were as follows:
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less: Imputed interest
Total lease liabilities
99
December 31,
2019
$
81
28
69
97
15
(7)
8
1
9
10
4.9 years
10 years
4.6%
6.7%
Operating leases
$
29
24
19
14
8
14
108
11
97
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 14.
INTANGIBLE ASSETS
The following table presents the components of intangible assets:
Estimated useful lives
(in years)
December 31, 2019
December 31, 2018
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
380
8
1
29
421
4
235
6
38
704
(1)
(108)
(5)
(1)
(16)
(131)
—
—
—
—
(131)
Net
$
2
272
3
—
13
290
4
235
6
38
573
Gross carrying
amount
Accumulated
amortization
$
$
Net
$
3
384
8
1
28
424
4
238
6
38
710
2
(1)
290
(94)
(4)
4
(1) —
15
(13)
(113)
311
—
—
—
—
(113)
4
238
6
38
597
Amortization expense related to intangible assets for the year ended December 31, 2019 was $19 million
($19 million in 2018 and 2017, respectively).
Amortization expense for the next five years related to intangible assets is expected to be as follows:
Amortization expense related to intangible assets
2020
2021
2022
2023
2024
$
21
$
21
$
21
$
20
$
20
The Company performed its annual
test on its indefinite-lived intangible assets at
October 1, 2019, 2018 and 2017, 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 2019, 2018 or 2017.
impairment
100
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 15.
OTHER ASSETS
The following table presents the components of other assets:
Pension asset—defined benefit pension plans (Note 7)
Investment tax credits receivable
Unamortized debt issuance costs
Deferred income tax assets (Note 10)
Investments and advances
Other
NOTE 16.
December 31,
2019
$
141
5
3
1
5
9
164
December 31,
2018
$
107
5
4
1
6
11
134
CLOSURE AND RESTRUCTURING COSTS AND LIABILITY
At December 31, 2019,
multiemployer plans was $44 million.
the Company’s total provision for
the withdrawal
liabilities of
its U.S.
Ashdown, Arkansas mill and Port Huron, Michigan mill
On September 27, 2019, the Company’s Board of Directors approved the decision to permanently shut down
two paper machines, which was announced on October 3, 2019. The closures took place at the Ashdown,
Arkansas pulp and paper mill and the Port Huron, Michigan paper mill. These measures will reduce the
Company’s annual uncoated freesheet paper capacity by approximately 204,000 short tons, and resulted in a
workforce reduction of approximately 100 employees.
The closure of the Ashdown paper machine took effect immediately. The Ashdown mill will continue to
operate one paper machine with an annual uncoated freesheet paper production capacity of 200,000 short tons.
Additionally, the mill operates a fluff pulp machine with the flexibility to produce softwood pulp depending on
market conditions. As a result of the closure of the paper machine, the mill will produce an incremental
70,000 ADMT of softwood and fluff pulp, which will ramp up over the course of 2020.
The closure of the Port Huron paper machine took effect mid-November. The Port Huron mill will continue
to produce a variety of technical and specialty papers for a broad range of customers utilizing three machines
with a total annual production capacity of 95,000 short tons.
101
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 16. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)
For the year ended December 31, 2019, the Company recorded $32 million of accelerated depreciation
under Impairment of long-lived assets and $1 million of accelerated depreciation under Depreciation and
amortization, on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).
Additionally, the Company recorded $3 million of severance and termination costs, $4 million of inventory
obsolescence, and $2 million of other costs, under Closure and restructuring costs.
Concurrently, with the Ashdown paper machine closure and related workforce reduction, management
negotiated a voluntary early retirement program to reduce costs and put the mill in a stronger cost position in the
long-term. The Company additionally recorded $13 million of severance and termination costs under Closure and
restructuring costs.
Waco, Texas facility
On November 1, 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, the relocation of certain of its manufacturing assets and a
workforce reduction across the division. The Waco, Texas facility ceased operations during the second quarter of
2019.
For the year ended December 31, 2019, the Company recorded $26 million of accelerated depreciation and
impairment of operating lease right-of-use assets under Impairment of long-lived assets on the Consolidated
Statement of Earnings (Loss) and Comprehensive Income (Loss) (2018 – $7 million of accelerated depreciation).
For the year ended December 31, 2019, the Company also recorded $5 million of severance and termination costs
(2018 – $3 million); $2 million of inventory obsolescence (2018 – $4 million); and $13 million of asset
relocation and other costs (2018 – $1 million of other costs), under Closure and restructuring costs.
Other costs
During 2019 and 2018, there were no other costs related to previous and ongoing closures and restructuring
(severance and termination costs of $2 million in 2017).
The following tables provide the components of closure and restructuring costs by segment:
Year ended
December 31, 2019
Pulp and Paper
Personal Care Total
$
16
4
2
22
$
5
2
13
20
$
21
6
15
42
Severance and termination costs
Inventory write-down
Asset relocation and other costs
Closure and restructuring costs
102
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 16. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)
Severance and termination costs
Inventory write-down
Other
Closure and restructuring costs
Severance and termination costs
Closure and restructuring costs
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
The following table provides the activity in the closure and restructuring liability:
Balance at beginning of year
Additions
Payments
Reversal
Balance at end of year
December 31,
2019
December 31,
2018
$
6
15
(6)
(1)
14
$
7
4
(5)
—
6
The $14 million provision is comprised of severance and termination costs, of which $12 million and
$2 million relate to the Pulp and Paper segment and Personal Care segment, respectively.
Closure and restructuring costs are based on management’s best estimates at December 31, 2019. Actual
costs may differ from these estimates due to subsequent developments such as the results of environmental
studies,
to be dismantled and demolished and other business
developments. As such, additional costs and further impairment charges may be required in future periods.
the ability to find a buyer for assets set
103
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 17.
TRADE AND OTHER PAYABLES
The following table presents the components of trade and other payables:
Trade payables
Payroll-related accruals
Accrued interest
Payables on capital projects
Rebate accruals
Liability—pension and other post-retirement benefit plans (Note 7)
Liability—multiemployer plan withdrawal
Provision for environment and other asset retirement obligations (Note 22)
Closure and restructuring costs liability (Note 16)
Derivative financial instruments (Note 23)
Dividends payable (Note 21)
Stock-based compensation—liability awards (Note 23)
Other
December 31,
2019
December 31,
2018
$
406
118
16
30
58
5
2
8
14
11
26
7
4
705
$
404
173
16
21
64
5
2
10
6
21
27
6
2
757
104
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 18.
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
The following table presents the changes in Accumulated other comprehensive loss by component(1) for the
period ended December 31, 2019 and 2018.
Net derivative gains
(losses)
on cash flow
hedges
Pension
items (2)
Post-retirement
benefit items (2)
Foreign currency
items
Balance at December 31, 2017
Natural gas swap contracts
Currency options
Foreign exchange forward contracts
Net (loss) gain
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
Natural gas swap contracts
Currency options
Foreign exchange forward contracts
Net gain
Foreign currency items
Other comprehensive income
before reclassifications
Amounts reclassified from Accumulated
other comprehensive loss
Net current period other comprehensive
income
Balance at December 31, 2019
$
8
1
(12)
(19)
N/A
N/A
(30)
(2)
(32)
(24)
(10)
5
16
N/A
N/A
11
8
19
(5)
$
(218)
N/A
N/A
N/A
(23)
N/A
(23)
10
(13)
(231)
N/A
N/A
N/A
1
N/A
1
33
34
(197)
$
6
N/A
N/A
N/A
6
N/A
6
(1)
5
11
N/A
N/A
N/A
1
N/A
1
(1)
—
11
$
(132)
N/A
N/A
N/A
N/A
(91)
Total
$
(336)
1
(12)
(19)
(17)
(91)
(91)
(138)
—
7
(91)
(223)
N/A
N/A
N/A
N/A
21
21
—
21
(202)
(131)
(467)
(10)
5
16
2
21
34
40
74
(393)
(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, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 18. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY
COMPONENT (CONTINUED)
The following table presents reclassifications out of Accumulated other comprehensive loss:
Details about Accumulated other comprehensive loss components
Amount reclassified from
Accumulated other
comprehensive loss
Net derivative (losses) gains on cash flow hedge
Natural gas swap contracts (1)
Currency options and forwards (1)
Total before tax
Tax benefit (expense)
Net of tax
Amortization of defined benefit pension items
Amortization of net actuarial loss (2)(3)
Amortization of prior year service cost (2)
Total before tax
Tax benefit
Net of tax
Amortization of other post-retirement benefit items
Amortization of net actuarial gain (2)
Amortization of prior year service credit (2)
Total before tax
Tax expense
Net of tax
Year ended
December 31,
2019
$
(4)
(7)
(11)
3
(8)
(40)
(5)
(45)
12
(33)
1
1
2
(1)
1
Year ended
December 31,
2018
$
Year ended
December 31,
2017
$
2
1
3
(1)
2
(8)
(5)
(13)
3
(10)
—
—
1
1
1
—
14
14
(5)
9
(9)
(5)
(14)
5
(9)
—
—
—
—
—
(1) These amounts are included in Cost of sales in the Consolidated Statements of Earnings (Loss) and
Comprehensive Income (Loss).
(2) 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).
(3)
Includes the non-cash pension settlement charge of $30 million recognized in the fourth quarter of 2019.
106
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 19.
LONG-TERM DEBT
Maturity
Amount Currency
Par
December 31,
2019
$
300
250
250
80
55
US
US
US
US
US
2022
2042
2044
2023
2021
2020 – 2032
$
300
249
249
80
55
11
944
5
1
938
December 31,
2018
$
300
249
249
—
50
11
859
5
1
853
Unsecured notes
4.4% Notes
6.25% Notes
6.75% Notes
Revolving Credit Facility
Securitization
Finance lease obligations and other
Less: Unamortized debt issuance costs
Less: Due within one year
Principal long-term debt repayments, including finance lease obligations, in each of the next five years will
amount to:
2020
2021
2022
2023
2024
Thereafter
Less: Amounts representing interest
Total payments
UNSECURED NOTES
Long-term debt
Finance leases
and other
$
—
55
300
80
—
500
935
—
935
$
1
2
2
2
2
6
15
4
11
The Company’s 10.75% Notes, in the aggregate principal amount of $63 million, matured on June 1, 2017.
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
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.
107
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 19. LONG-TERM DEBT (CONTINUED)
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, 2019, the Company was in compliance with these financial covenants,
and had $80 million of borrowings outstanding under this facility (December 31, 2018 – nil),
leaving
$620 million available under this facility.
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, 2019, $55 million was borrowed and $53 million of letters of credit were outstanding
under this facility (2018 – $50 million and $52 million, respectively). At December 31, 2019, the Company had
$25 million unused and available under this facility.
In 2019, a net charge of $2 million (2018 – $1 million; 2017 – $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).
108
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 20.
OTHER LIABILITIES AND DEFERRED CREDITS
The following table presents the components of other liabilities and deferred credits:
Liability—other post-retirement benefit plans (Note 7)
Pension liability—defined benefit pension plans (Note 7)
Pension liability—multiemployer plan withdrawal
Long-term income taxes payable
Provision for environmental and asset retirement obligations (Note 22)
Stock-based compensation—liability awards (Note 23)
Derivative financial instruments (Note 23)
Other
December 31,
2019
$
58
105
42
9
27
18
8
8
275
December 31,
2018
$
57
88
45
9
27
17
16
16
275
ASSET RETIREMENT OBLIGATIONS
The asset retirement obligations are principally linked to landfill capping obligations and demolition of
certain abandoned buildings. At December 31, 2019, Domtar estimated the net present value of its asset
retirement obligations to be $13 million (2018 – $12 million); the present value is based on probability weighted
undiscounted cash outflows of $58 million (2018 – $59 million). The majority of the asset retirement obligations
are estimated to be settled prior to December 31, 2059. 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
December 31,
2019
$
12
—
1
—
13
December 31,
2018
$
15
(3)
1
(1)
12
109
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 21.
SHAREHOLDERS’ EQUITY
DIVIDENDS
During 2019, the Company declared one quarterly dividend of $0.435 and three quarterly dividends of
$0.455 per share, to holders of the Company’s common stock. Dividends aggregating $28 million, $28 million,
$27 million and $26 million were paid on April 15, 2019, July 16, 2019, October 15, 2019 and January 15, 2020,
respectively, to shareholders of record as of April 2, 2019, July 2, 2019, October 2, 2019 and January 2, 2020,
respectively.
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.
On February 18, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.455 per
share, to be paid to holders of the Company’s common stock. This dividend is to be paid on April 15, 2020 to
shareholders of record on April 2, 2020.
STOCK REPURCHASE PROGRAM
The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to
$1.3 billion. On November 5, 2019, the Company’s Board of Directors approved an increase to the Program from
$1.3 billion to $1.6 billion. At December 31, 2019, the Company had approximately $403 million of remaining
availability under the Program. 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 2019, the Company repurchased 6,220,658 shares at an average price of $35.29 for a total cost of
$219 million.
During 2018, there were no shares repurchased under the Program.
110
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 21. 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, 2019 or
December 31, 2018.
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, 2019 and December 31, 2018, were as follows:
Common stock
Balance at beginning of year
Shares issued
Treasury stock (1)
Balance at end of year
December 31, 2019
December 31, 2018
Number
of shares
$
Number
of shares
$
62,914,569
1 62,695,685
(6,033,659) —
218,884 —
56,880,910
1 62,914,569
1
1
(1) During 2019, the Company repurchased 6,220,658, and issued 186,999 shares out of Treasury stock in
conjunction with the exercise of stock-based compensation awards.
NOTE 22.
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.
111
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In 2019, the Company’s operating expenses for environmental matters amounted to $71 million (2018 –
$68 million; 2017 – $67 million).
The Company made capital expenditures for environmental matters of $19 million in 2019 (2018 –
$8 million; 2017 – $2 million).
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 was completed in the first quarter of 2019. The Company previously
recorded an environmental reserve to address its estimated exposure.
A former owner of the Company’s Dryden, Ontario manufacturing site (the “Dryden Property”) operated a
chlor-alkali plant during the 1960s and 1970s, during which time, mercury and other pollutants were used or
generated and discharged into the environment. In conjunction with the sale and redevelopment of the Dryden
Property, the Province of Ontario (the “Province”) provided a broad indemnity (the “Indemnity”) in 1985 to the
then purchaser of the Dryden Property and its successors and assigns with respect to the discharge of any
pollutants, including mercury, by the historical operators of the Dryden Property. This Indemnity subsequently
was assigned to Domtar in connection with its 2007 purchase of the Dryden Property.
As the current owner of the Dryden Property, Domtar is actively engaged with the Province with respect to
the management of the historical contamination.
The Province issued a Director’s order under environmental laws to certain prior owners of the Dryden
Property in connection with a nearby waste disposal site that never has been owned by Domtar. The Director’s
order required certain work to be conducted by those prior owners. The prior owners asserted that the Indemnity
covered the work required by the Director’s order. Following extensive litigation, the Supreme Court of Canada
recently found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such
as the Director’s order.
In the future, the Province may challenge whether Domtar has the benefit of the Indemnity. In addition to
the Indemnity, Domtar has other recourses relating to the historical contamination as well.
The situation involving the historical contamination is continuing to develop, and Domtar cannot predict its
outcome. While Domtar currently does not believe that it will be required to incur costs that would have a
material impact on its results of operations or financial condition, there is no certainty that this is in fact the case.
112
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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,
2019
December 31,
2018
$
37
4
(7)
1
35
$
44
4
(9)
(2)
37
(1) At December 31, 2019, $8 million is shown in Trade and other payables (see Note 17) and $27 million is
shown in Other liabilities and deferred credits (see Note 20).
At December 31, 2019, anticipated undiscounted payments in each of the next five years are as follows:
Environmental provision and asset retirement
obligations
2020
2021
2022
2023
2024
Thereafter
Total
$
8
$
2
$
1
$
2
$
6
$
61
$
80
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 has repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”)
rule. Unlike the Clean Power Plan, which would have required significant changes across the entire power sector,
ACE only requires states to develop plans for efficiency improvements at coal-fired electric utility generating
units. The rule has been challenged in the U.S. Court of Appeals for the D.C. Circuit. Regardless of the outcome
for the ACE rule, the Company does not expect to be disproportionately affected compared with other pulp and
paper producers located in the states where the Company operates.
The province of Quebec has a greenhouse gases (“GHG”) cap-and-trade systems with reduction targets.
British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company
does not expect its facilities to be disproportionately affected by these measures compared to the other pulp and
paper producers located in these provinces.
113
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Government of Canada has established a federal carbon pricing system in provinces that do not already
impose a cost on carbon emissions. The Government of Canada has imposed its carbon pricing program for
regulating GHG emissions in Ontario which took effect on January 1, 2019. To reduce GHG emissions and
recognize the unique circumstances of the province’s diverse economy, Ontario finalized its own GHG Emission
Performance Standards regulation. The Ontario Government is in discussions with the Canadian Government to
replace the federal program in Ontario with its provincial program. Additional environmental costs may result
from this effort 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, 2019, 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.
OTHER COMMERCIAL COMMITMENTS
The Company 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 other commercial commitments, determined
at December 31, 2019, were as follows:
Other commercial commitments
INDEMNIFICATIONS
2020
2021
2022
2023
2024 Thereafter Total
$
117
$
16
$
9
$
6
$
5
$
2
$
155
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,
2019, 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, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 22. 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, 2019 the Company has not
recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining
to these indemnifications.
NOTE 23.
DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT
HEDGING PROGRAMS
The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices,
interest rates and prices of the Company’s common stock with regard to the Company’s stock-based
compensation program. To the extent the Company decides to manage the volatility related to these exposures,
the Company may enter into various financial derivatives that are accounted for under the derivatives and
hedging guidance. These transactions are governed by the Company’s hedging policies which provide direction
on acceptable hedging activities, including instrument type and acceptable counterparty exposure.
Upon inception, the Company formally documents the relationship between hedging instruments and
hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial
instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair
value of the underlying exposures. The Company does not hold derivative financial instruments for trading
purposes.
CREDIT RISK
The Company is exposed to credit risk on accounts 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, 2019, two of Domtar’s Pulp and Paper segment
customers located in the U.S. represented 11% or $66 million, and 11% or $65 million, respectively, of the
Company’s receivables (December 31, 2018 – one Pulp and Paper segment customer located in the U.S.
represented 10% or $67 million).
The Company is exposed to credit risk in the event of non-performance by counterparties to its financial
instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that
are believed to be of high credit quality. Collateral or other security to support financial instruments subject to
credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.
INTEREST RATE RISK
The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash
equivalents, bank indebtedness, revolving credit facility and securitization, term loan and long-term debt. The
115
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this
interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it
agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an
agreed upon notional principal amount.
COST RISK
Cash flow hedges:
The Company is exposed to price volatility for raw materials and energy used in its manufacturing process.
The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company
purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow
and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural
gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other
comprehensive 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 48 months.
The following table presents the volumes under derivative financial instruments for natural gas contracts
outstanding as of December 31, 2019 to hedge forecasted purchases:
Commodity
Natural gas
2020
2021
2022
2023
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
11,165,000
9,270,000
9,270,000
4,210,000
$34
$27
$25
$12
44%
36%
36%
16%
(1) MMBtu: Millions of British thermal units
The natural gas derivative contracts were effective as of December 31, 2019.
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
116
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to
fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative
financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to
fluctuations in foreign currency exchange rates.
Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian
subsidiary over the next 24 months. Such derivatives are designated as cash flow hedges. The changes in the fair
value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective,
and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.
The following table presents the currency values under significant currency positions pursuant to currency
derivatives outstanding as of December 31, 2019 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
2020
653 CAD
69%
1 USD = 1.2969
1 USD = 1.3186
CAD/USD
Pulp and Paper
2021
335 CAD
35%
1 USD = 1.3201
1 USD = 1.3201
The foreign exchange derivative contracts were effective as of December 31, 2019.
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, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
The following tables present information about the Company’s financial assets and financial liabilities
measured at fair value on a recurring basis (except Long-term debt, see (b) below) at December 31, 2019 and
December 31, 2018, 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
Currency derivatives
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 compensation—
liability awards
Long-term debt
December 31,
2019
Quoted prices in
active markets for
identical assets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
$
$
Balance sheet classification
4
4
8
2
9
8
19
7
18
—
—
—
—
—
—
—
7
18
4
4
8
2
9
8
19
—
—
1,030
—
1,030
—
—
—
—
—
—
—
—
—
—
(a) Prepaid expenses
(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
The net cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts
is $17 million at December 31, 2019, of which a loss of $9 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, 2019.
118
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE
MEASUREMENT (CONTINUED)
The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and
forwards hedging forecasted purchases is $6 million at December 31, 2019, of which a gain of $2 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, 2019.
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
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
$
1
1
2
19
2
11
5
37
compensation—liability awards
Stock-based
compensation—liability awards
Long-term debt
6
17
858
$
—
—
—
—
—
—
—
—
6
17
—
$
$
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
(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, 2019
and December 31, 2018. However, fair value disclosure is required. The carrying value of the Company’s long-
term debt is $939 million and $854 million at December 31, 2019 and December 31, 2018, respectively.
119
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 23. 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 24.
SEGMENT DISCLOSURES
The Company’s two reportable segments described below also represent its two operating segments. Each
reportable segment offers different products and services and requires different manufacturing processes,
technology and/or marketing strategies. The following summary briefly describes the operations included in each
of the Company’s reportable segments:
• Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication,
specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.
• Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent
hygiene products.
The accounting policies of the reportable segments are the same as those described in Note 1. The Company
evaluates segment performance based on operating income. Transfer prices between segments are based on
market prices. Certain Corporate general and administrative costs are allocated to the segments. Corporate costs
that are not related to segment activities, as well as the mark-to-market impact on stock-based compensation
awards, are presented on the Corporate line. The Company does not allocate interest expense and income taxes to
the segments. Segment assets are those directly used in segment operations.
The Company attributes sales to customers in different geographical areas on the basis of the location of the
customer.
Long-lived assets consist of property, plant and equipment, operating lease right-of-use assets and intangible
assets used in the generation of sales in the different geographical areas.
120
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SEGMENT DISCLOSURES (CONTINUED)
An analysis and reconciliation of
the Company’s business segment
information to the respective
information in the financial statements is as follows:
SEGMENT DATA
Sales
Pulp and Paper
Personal Care
Total for reportable segments
Intersegment sales
Consolidated sales (1)
Sales by product group
Communication papers
Specialty and packaging papers
Market pulp
Absorbent hygiene products
Consolidated sales (1)
Depreciation and amortization
Pulp and Paper
Personal Care
Total for reportable segments
Impairment of long-lived assets—Pulp and Paper
Impairment of long-lived assets—Personal Care
Consolidated depreciation and amortization and impairment of long-
lived assets
Operating income (loss)
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,
2019
$
Year ended
December 31,
2018
$
Year ended
December 31,
2017
$
4,332
953
5,285
(65)
5,220
2,571
637
1,059
953
5,220
228
65
293
32
26
351
225
(15)
(47)
163
52
23
88
2
2
84
4,523
1,000
5,523
(68)
5,455
2,548
710
1,197
1,000
5,455
238
70
308
—
7
315
438
(5)
(47)
386
62
(18)
342
57
2
283
4,216
996
5,212
(64)
5,148
2,382
651
1,119
996
5,148
254
67
321
—
578
899
237
(527)
(38)
(328)
66
(11)
(383)
(125)
—
(258)
(1)
In 2019 and 2018, Staples, one of the Company’s largest customers in the Pulp and Paper segment,
represented approximately 11% (2018 – 10%) of the total sales.
121
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 24. SEGMENT DISCLOSURES (CONTINUED)
Segment assets
Pulp and Paper
Personal Care
Total for reportable segments
Corporate
Consolidated assets
Additions to property, plant and equipment
Pulp and Paper
Personal Care
Total for reportable segments
Corporate
Consolidated additions to property, plant and equipment
Add: Change in payables on capital projects
Consolidated additions to property, plant and equipment per
Consolidated Statements of Cash Flows
Geographic information
Sales
United States
Canada
Europe
Asia
Other foreign countries
Long-lived assets
United States
Canada
Europe
122
December 31,
2019
December 31,
2018
$
$
3,507
1,258
4,765
138
4,903
3,475
1,331
4,806
119
4,925
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$
220
41
261
3
264
(9)
255
$
164
37
201
2
203
(8)
195
$
128
48
176
4
180
2
182
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$
$
$
3,717
419
583
370
131
5,220
3,669
480
682
489
135
5,455
3,486
474
610
444
134
5,148
December 31,
2019
December 31,
2018
$
$
2,004
691
526
3,221
2,056
604
542
3,202
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with
the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar’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.
The following supplemental condensed consolidating financial information sets forth, on an unconsolidated
basis,
the Balance Sheets at December 31, 2019 and 2018 and the Statements of Earnings (Loss) and
Comprehensive Income (Loss) and Cash Flows for the years ended December 31, 2019, 2018 and 2017 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, 2019
Sales
Operating expenses
Cost of sales, excluding depreciation and
amortization
Depreciation and amortization
Selling, general and administrative
Impairment of long-lived assets
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 income
Comprehensive income
$
4,292
3,650
207
244
58
40
(3)
4,196
96
80
2
14
(12)
1
121
146
81
227
$
1,944
1,590
86
181
—
2
8
1,867
77
(97)
21
153
31
1
—
121
49
170
$
(1,016)
(1,016)
—
—
—
—
—
(1,016)
—
—
—
—
—
—
(267)
(267)
(130)
(397)
$
5,220
4,225
293
434
58
42
5
5,057
163
52
23
88
2
2
—
84
74
158
$
—
1
9
—
—
—
—
10
(10)
69
—
(79)
(17)
—
146
84
74
158
123
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
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 long-lived assets
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, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. 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 long-lived assets
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, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
Parent
December 31, 2019
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
Operating lease right-of-use assets
Intangible assets, net
Investments in affiliates
Intercompany long-term advances
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Bank indebtedness
Trade and other payables
Intercompany accounts
Income and other taxes payable
Operating lease liabilities due within one year
Long-term debt due within one year
Total current liabilities
Long-term debt
Operating lease liabilities
Intercompany long-term loans
Deferred income taxes and other
Other liabilities and deferred credits
Shareholders’ equity
1
—
—
5
34
538
578
—
—
—
3,627
5
14
4,224
—
57
344
1
—
—
402
873
—
541
—
32
2,376
11
146
543
17
—
547
1,264
1,689
63
245
2,493
1
30
5,785
9
390
299
12
21
—
731
—
58
946
324
99
3,627
49
431
243
11
27
237
998
878
18
328
—
1,482
131
3,835
—
258
679
10
7
1
955
65
11
1
166
144
2,493
—
—
—
—
—
(1,322)
(1,322)
—
—
—
(6,120)
(1,488)
(11)
(8,941)
—
—
(1,322)
—
—
—
(1,322)
—
—
(1,488)
(11)
—
(6,120)
61
577
786
33
61
—
1,518
2,567
81
573
—
—
164
4,903
9
705
—
23
28
1
766
938
69
—
479
275
2,376
Total liabilities and shareholders’
equity
4,224
5,785
3,835
(8,941)
4,903
126
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. 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
—
146
525
12
3
392
1,078
1,802
256
2,611
1
26
5,774
464
264
12
—
740
—
938
335
116
3,645
111
524
237
6
18
35
931
803
341
—
1,569
104
3,748
241
536
12
1
790
60
1
155
131
2,611
—
—
—
—
—
(925)
(925)
—
—
(6,256)
(1,575)
(14)
(8,770)
—
(925)
—
—
(925)
—
(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
3,748
(8,770)
4,925
The Company has revised the Receivables balance within the December 31, 2018 Guarantor Subsidiaries
column (decreased) and Non-Guarantor Subsidiaries column (increased) by $198 million, respectively, as
receivables from third parties for the Guarantor Subsidiaries were netted with intercompany receivables.
127
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF
CASH FLOWS
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
Year ended December 31, 2019
Operating activities
Net earnings
Changes in operating and intercompany assets and
liabilities and non-cash items, included in net
earnings
Cash flows provided from operating activities
Investing activities
Additions to property, plant and equipment
Proceeds from disposals of property, plant and
equipment
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 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 (used for) provided from financing
activities
Net increase (decrease) in cash and cash
equivalents
Impact of foreign exchange on cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
146
(93)
53
$
121
152
273
(137)
(118)
1
(136)
—
—
9
—
—
—
—
—
85
—
94
11
—
—
11
—
(118)
—
—
—
—
205
(200)
(1)
(220)
—
—
(216)
(61)
(1)
111
49
$
(267)
267
—
—
—
—
—
—
—
—
—
—
—
220
(220)
—
—
—
—
—
—
$
84
358
442
(255)
1
(254)
(110)
(219)
9
80
205
(200)
(1)
—
—
(1)
(237)
(49)
(1)
111
61
$
84
32
116
—
—
—
(110)
(219)
—
80
—
—
—
—
135
(1)
(115)
—
—
1
1
128
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. 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, 2019
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
NOTE 25. 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 and sale of business
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
Interim Financial Results (Unaudited)
(In millions of dollars, unless otherwise noted)
2019
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
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
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
Year
$1,376
$1,317
$1,283
$1,244
115 (a)
105
80
1.27
1.27
34 (b)
23
18
0.29
0.28
29 (c)
19
20
0.33
0.32
$5,220
163
88
84
1.37
1.37
(15) (d)
(59) (e)
(34)
(0.59)
(0.59)
1st
Quarter
2nd
Quarter
3rd
Quarter
4th
Quarter
$1,345
$1,353
77 (f)
65
54
0.86
0.86
62 (g)
51
43
0.68
0.68
$1,367
114
103
99 (h)
1.57
1.57
$1,390
133 (i)
123
87 (j)
1.38
1.38
Year
$5,455
386
342
283
4.50
4.48
(a) The operating income for the first Quarter of 2019 included closure and restructuring costs of $4 million and
impairment of long-lived assets of $10 million, both related to our Personal Care segment.
(b) The operating income for the second Quarter of 2019 included closure and restructuring costs of $8 million
and impairment of long-lived assets of $15 million, both related to our Personal Care segment.
(c) The operating income for the third Quarter of 2019 included closure and restructuring costs of $5 million
and impairment of long-lived assets of $32 million, both related to our Pulp and Paper segment.
The Company also recorded closure and restructuring costs of $6 million and impairment of long-lived
assets of $1 million, both related to our Personal Care segment.
(d) The operating loss for the fourth Quarter of 2019 included closure and restructuring costs of $17 million
related to our Pulp and Paper segment.
The Company also recorded closure and restructuring costs of $2 million related to our Personal Care
segment.
(e) The loss before income taxes and equity loss for the fourth Quarter of 2019 included a pension settlement
loss of $30 million related to our Pulp and Paper segment.
(f) 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.
(g) 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.
(h) The net earnings for the third Quarter of 2018 included a tax benefit of $7 million related to the U.S. Tax
Reform.
(i) The operating income for the fourth Quarter of 2018 included closure and restructuring costs of $8 million
and impairment of long-lived assets of $7 million, both related to our Personal Care segment.
(j) The net earnings for the fourth Quarter of 2018 included a tax expense of $10 million related to the U.S. Tax
Reform.
131
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, 2019, 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, 2019, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
The information called for by this item is incorporated herein by reference to “Management’s Report on
Internal Control Over Financial Reporting”, and the attestation regarding internal controls over financial
reporting included in the “Report of Independent Registered Public Accounting Firm” included in Item 8 of this
Report.
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, 2019.
ITEM 9B. OTHER INFORMATION
The Company has nothing to report under this item.
132
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information included under the captions “Governance of the Corporation” and “Election of Directors”
in our Proxy Statement for the 2020 Annual Meeting of Stockholders, to be filed on or about April 6, 2020, 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 2020 Annual Meeting of
Stockholders, to be filed on or about April 6, 2020, 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 2020 Annual Meeting of Stockholders, to be filed on or about
April 6, 2020, 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, 2019:
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)
1,561,152 (1)
$46.93 (2)
1,112,295 (3)
N/A
1,561,152
N/A
$46.93
N/A
1,112,295
(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, 2019 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 2020 Annual Meeting of Stockholders is incorporated
herein by reference.
133
ITEM 14. PRINCIPAL 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 2020 Annual Meeting of Stockholders is incorporated herein by reference.
134
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
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
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
135
Exhibit
Number
4.7
4.8
4.9
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10
10.11
10.12*
10.13*
10.14*
10.15*
Exhibit Description
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
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
Incorporated by reference to:
Form
Exhibit
Filing Date
S-3ASR 4.10
10/01/2013
8-K
4.1
11/26/2013
10-Q
4.1
05/05/2017
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
Non-Qualified Stock Option Agreement
Restricted Stock Unit Agreement
Performance Share Unit Agreement
8-K
10-K
10.1
10.4
05/24/2007
02/22/2019
Amended and Restated Severance Program for Management
Committee Members
Amended and Restated DB SERP for Management Committee
Members of Domtar
10-Q
10.1
08/04/2017
Amended and Restated DC SERP for Designated Executives of
Domtar
Form of Indemnification Agreement for members of Pension
Administration Committee of Domtar Corporation
10-K
10.50
02/27/2009
Amended and Restated Domtar Corporation 2007 Omnibus
Incentive Plan
Domtar Corporation Annual Incentive Plan for Members of the
Management Committee
Employment agreement of Mr. Michael Fagan
Amended and Restated Supplementary Pension Plan for
Designated Managers of Domtar Inc.
10-K
10-Q
10.48
02/28/2013
10.3
08/04/2017
Amended and Restated Employment Agreement of Mr. John D.
Williams
10-Q
10.1
08/02/2013
Amended and Restated DC SERP for Designated Executives of
Domtar Personal Care
136
Incorporated by reference to:
Form
Exhibit
Filing Date
10-Q
10-Q
10.1
10.1
08/01/2014
11/08/2018
Exhibit
Number
Exhibit Description
10.16*
Employment agreement of Mr. Michael D. Garcia
10.17
Third Amended and Restated Credit Agreement dated as of
August 22, 2018.
21
23
24.1
31.1
31.2
32.1
32.2
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—the instance document does not
appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Extension Presentation Linkbase
104
Cover Page Interactive Data File (formatted as inline XBRL and
contained in Exhibit 101)
*
Indicates management contract or compensatory arrangement
137
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
2019
2018
2017
Valuation Allowance on Deferred Tax Assets
2019
2018
2017
Balance at
beginning of year
Charged to
income
Deductions from
reserve
Balance at end
of year
$
6
7
7
$
2
2
1
$
(2)
(3)
(1)
$
6
6
7
Balance at
beginning of year
Charged to
income
Deductions from
reserve
Balance at end
of year
$
16
25
22
$
5
(8)
3
$
—
(1)
—
$
21
16
25
138
ITEM 16. FORM 10-K SUMMARY
None.
139
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 25, 2020
DOMTAR CORPORATION
by
Name:
Title:
/s/ John D. Williams
John D. Williams
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 25, 2020
Senior Vice-President and Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
February 25, 2020
Director
Director
Director
Director
Director
Director
Director
Director
140
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
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 25, 2020
/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 25, 2020
/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, 2019 (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 25, 2020
/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, 2019 (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 25, 2020
/S/ DANIEL BURON
Daniel Buron
Senior Vice-President and Chief Financial Officer
SHAREHOLDER
INFORMATION
DIVIDENDS DECLARED IN 2019
Declared
Feb. 20, 2019
May 8, 2019
Aug. 7, 2019
Nov. 6, 2019
Record Date
Payable Date
Amount
April 2, 2019
July 2, 2019
Oct. 2, 2019
Jan. 2, 2020
April 15, 2019
July 16, 2019
Oct. 15, 2019
Jan. 15, 2020
0.435
0.455
0.455
0.455
EXCHANGE LISTINGS
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
2020 EARNINGS RELEASE SCHEDULE
First Quarter 2020: Thursday, April 30, 2020
Second Quarter 2020: Thursday, July 30, 2020
Third Quarter 2020: Thursday, October 29, 2020
Fourth Quarter 2020: Thursday, February 11, 2021
Each quarterly earnings release with
accompanying financial tables will be
issued before markets open, followed by
a 10:00 a.m. ET conference call to discuss
results. The above-mentioned dates are
tentative and will be confirmed approximately
three weeks prior to the official earnings
release date.
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
ANNUAL MEETING
Wednesday, May 6, 2020, 07:45 a.m. ET
Domtar Corporate Office
234 Kingsley Park Drive
Fort Mill, SC 29715
Domtar-AR2019_ENG_MAR10.indd 17
3/11/20 5:49 PM
DOMTAR 2019 ANNUAL REPORT 17
RECONCILIATION OF NON-GAAP
FINANCIAL MEASURES
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.
(In millions of dollars, unless otherwise noted)
Reconciliation of "Earnings before items" to Net earnings (loss)
2017
2018
2019
Net earnings (loss)
(+) Pension settlement loss
(+)
Impairment of long-lived assets
(+) Closure and restructuring costs
(+) Litigation settlement
(-) Net gains on disposals of property, plant and equipment
(-) Reversal of contingent consideration
(-) 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 long-lived assets
(-) Net gains on disposals of property, plant and equipment
(=) EBITDA
(/) Sales
(=) EBITDA margin
EBITDA
(+) Pension settlement loss
(+) Closure and restructuring costs
(+) Litigation settlement
(-) Reversal of contingent consideration
(=) EBITDA before items
(/) Sales
(=) EBITDA margin before items
Reconciliation of "Free cash flow" to Cash flows from operating activities
Cash flows from operating activities
(-) Additions to property, plant and equipment
(=) Free cash flow
"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
($)
($)
($)
($)
($)
($)
($)
($)
($)
(%)
($)
($)
($)
($)
($)
($)
($)
(%)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
(%)
(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
—
1
1 129
1 130
(139)
991
2,483
3,474
991
3,474
29%
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
—
1
853
854
(111)
743
2,538
3,281
743
3,281
23%
84
22
46
32
—
—
—
—
184
61.4
3.00
84
2
2
52
293
58
—
491
5,220
9%
491
30
42
—
—
563
5,220
11%
442
(255)
187
9
1
938
948
(61)
887
2,376
3,263
887
3,263
27%
“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) 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.
18 DOMTAR 2019 ANNUAL REPORT
Domtar-AR2019_ENG_MAR10.indd 18
3/11/20 5:49 PM
RECONCILIATION OF NON-GAAP
FINANCIAL MEASURES BY SEGMENT
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.
(In millions of dollars, unless otherwise noted)
Reconciliation of Operating income (loss)
to "Operating income (loss) before items"
Operating income (loss)
(+)
Impairment of long-lived assets
(-) Net gains on disposals of property, plant
and equipment
(+) Closure and restructuring costs
(+) Litigation settlement
(-) 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
(+) Pension settlement loss
(+) Non-service components of net periodic benefit cost
(+) Depreciation and amortization
(=) EBITDA before items
(/) Sales
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
($)
Pulp and Paper
Personal Care
Corporate
2017
2018
2019
2017
2018
2019
2017
2018
2019
237
—
438
—
225
32
(527)
578
(4)
—
—
—
(4)
—
—
—
—
22
—
—
233
434
279
233
434
279
—
13
254
500
—
19
238
691
30
(20)
228
517
4,216
4,523 4,332
(5)
7
—
8
—
—
10
10
—
—
70
80
(15)
26
—
20
—
—
31
31
—
—
65
96
1,000
953
8%
10%
(38)
—
(9)
—
—
(2)
(49)
(49)
—
(2)
—
(51)
—
—
(47)
—
—
—
2
—
(45)
(45)
—
(1)
—
(46)
—
—
(47)
—
—
—
—
—
(47)
(47)
—
(3)
—
(50)
—
—
—
2
—
—
53
53
—
—
67
120
996
12%
(=) EBITDA margin before items
(%)
12%
15%
12%
“Operating income (loss) before items”, “EBITDA before items” and “EBITDA margin before items” have no standardized meaning prescribed by GAAP and are not necessarily comparable
to similar measures presented by other companies and therefore should not be considered in isolation or as a substitute for Operating income (loss) or any other earnings statement, cash
flow statement or balance sheet financial information prepared in accordance with GAAP. It is important for readers to understand that certain items may be presented in different lines
by different companies on their financial statements, thereby leading to different measures for different companies.
Domtar-AR2019_ENG_MAR10.indd 19
3/11/20 5:49 PM
DOMTAR 2019 ANNUAL REPORT 19
FORWARD-LOOKING
STATEMENTS
PRODUCTION
NOTES
ff
Statements in this document about our plans,
expectations and future performance are
“forward-looking statements.” Actual results may
differ materially from those suggested by these
statements for a number of reaso
ns, including
changes in customer demand and pricing, changes
in manufacturing costs, future acquisitions and
divestitures, including facility closings, and the
other reasons identified under “Risk Factors” in
our Form 10-K for 2019 as filed with the SEC and
as updated by subsequently filed Form 10-Qs.
Except to the extent required by law, we expressly
disclaim any obligation to update or revise these
forward-looking statements to reflect new events
or circumstances or otherwise.
Paper
Cover printed on 80 lb. Cougar® Cover, Smooth
Finish. Insert printed on 70 lb. Cougar® 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
ress extended delivery UV drying
and end-of-pff
systems.
®WWF Registered Trademark. Panda Symbol © 1986 WWF. © 1986 Panda symbol WWF-World Wide
Fund for Nature (also known as World Wildlife Fund). ®"WWF" is a WWF Registered Trademark.
Cougar® paper contains
10% post-consumer
fiber
20 DOMTAR 2019 ANNUAL REPORT
Domtar-AR2019_ENG_MAR10.indd 20
3/11/20 5:49 PM
Domtar-AR2019_ENG_MAR10.indd 3
3/11/20 5:50 PM
DOMTAR.COM
Domtar-AR2019_ENG_MAR10.indd 4
3/11/20 5:50 PM