0001564590-19-017559.txt : 20190509 0001564590-19-017559.hdr.sgml : 20190509 20190509070224 ACCESSION NUMBER: 0001564590-19-017559 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 87 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190509 DATE AS OF CHANGE: 20190509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Domtar CORP CENTRAL INDEX KEY: 0001381531 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 205901152 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33164 FILM NUMBER: 19808726 BUSINESS ADDRESS: STREET 1: 234 KINGSLEY PARK DRIVE CITY: FORT MILL STATE: SC ZIP: 29715 BUSINESS PHONE: (803) 802-7500 MAIL ADDRESS: STREET 1: 234 KINGSLEY PARK DRIVE CITY: FORT MILL STATE: SC ZIP: 29715 10-Q 1 ufs-10q_20190331.htm 10-Q ufs-10q_20190331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 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

 

20-5901152

(State of Incorporation)

 

(I.R.S. Employer

Identification No.)

234 Kingsley Park Drive, Fort Mill, SC 29715

(Address of principal executive offices)

(zip code)

(803) 802-7500

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common stock traded on the New York Stock Exchange; trading symbol UFS.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

At April 30, 2019, 63,100,572 shares of the issuer’s common stock were outstanding.

 

 

 


DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2019

INDEX

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

3

 

 

 

 

CONSOLIDATED BALANCE SHEETS

4

 

 

 

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

5

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

6

 

 

 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

 

 

 

ITEM 2.

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

37

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

45

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

45

 

 

 

PART II

OTHER INFORMATION

45

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

45

 

 

 

ITEM 1A.

RISK FACTORS

46

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

46

 

 

 

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

46

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

46

 

 

 

ITEM 5.

OTHER INFORMATION

46

 

 

 

ITEM 6.

EXHIBITS

47

 

 

 

 

 


PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME  

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

Three months ended

 

 

Three months ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Sales

 

 

1,376

 

 

 

1,345

 

Operating expenses

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

1,052

 

 

 

1,084

 

Depreciation and amortization

 

 

73

 

 

 

79

 

Selling, general and administrative

 

 

123

 

 

 

110

 

Impairment of property, plant and equipment (NOTE 11)

 

 

10

 

 

 

 

Closure and restructuring costs (NOTE 11)

 

 

4

 

 

 

 

Other operating income, net (NOTE 6)

 

 

(1

)

 

 

(5

)

 

 

 

1,261

 

 

 

1,268

 

Operating income

 

 

115

 

 

 

77

 

Interest expense, net

 

 

13

 

 

 

16

 

Non-service components of net periodic benefit cost (NOTE 5)

 

 

(3

)

 

 

(4

)

Earnings before income taxes and equity loss

 

 

105

 

 

 

65

 

Income tax expense (NOTE 7)

 

 

24

 

 

 

11

 

Equity loss, net of taxes

 

 

1

 

 

 

 

Net earnings

 

 

80

 

 

 

54

 

Per common share (in dollars) (NOTE 4)

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

 

Basic

 

 

1.27

 

 

 

0.86

 

Diluted

 

 

1.27

 

 

 

0.86

 

Weighted average number of common shares

   outstanding (millions)

 

 

 

 

 

 

 

 

Basic

 

 

63.0

 

 

 

62.7

 

Diluted

 

 

63.2

 

 

 

62.9

 

Cash dividends per common share

 

 

0.44

 

 

 

0.42

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

80

 

 

 

54

 

Other comprehensive income (loss) (NOTE 12):

 

 

 

 

 

 

 

 

Net derivative gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

 

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

   $(4) (2018 – $3)

 

 

11

 

 

 

(9

)

Less: Reclassification adjustment for losses (gains) included

   in net earnings, net of tax of nil (2018 – $1)

 

 

1

 

 

 

(2

)

Foreign currency translation adjustments

 

 

2

 

 

 

(11

)

Change in unrecognized gains and prior service cost related to

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

   $(1) (2018 – $(1))

 

 

3

 

 

 

2

 

Other comprehensive income (loss)

 

 

17

 

 

 

(20

)

Comprehensive income

 

 

97

 

 

 

34

 

 

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

 

 

3

 


DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

At

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

94

 

 

 

111

 

Receivables, less allowances of $7 and $6

 

 

699

 

 

 

670

 

Inventories (NOTE 8)

 

 

813

 

 

 

762

 

Prepaid expenses

 

 

25

 

 

 

24

 

Income and other taxes receivable

 

 

21

 

 

 

22

 

Total current assets

 

 

1,652

 

 

 

1,589

 

Property, plant and equipment, net

 

 

2,564

 

 

 

2,605

 

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

 

 

81

 

 

 

 

Intangible assets, net (NOTE 10)

 

 

587

 

 

 

597

 

Other assets

 

 

138

 

 

 

134

 

Total assets

 

 

5,022

 

 

 

4,925

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

3

 

 

 

 

Trade and other payables

 

 

675

 

 

 

757

 

Income and other taxes payable

 

 

49

 

 

 

25

 

Operating lease liabilities due within one year (NOTE 9)

 

 

25

 

 

 

 

Long-term debt due within one year

 

 

1

 

 

 

1

 

Total current liabilities

 

 

753

 

 

 

783

 

Long-term debt

 

 

853

 

 

 

853

 

Operating lease liabilities (NOTE 9)

 

 

65

 

 

 

 

Deferred income taxes and other

 

 

477

 

 

 

476

 

Other liabilities and deferred credits

 

 

266

 

 

 

275

 

Commitments and contingencies (NOTE 14)

 

 

 

 

 

 

 

 

Shareholders' equity (NOTE 13)

 

 

 

 

 

 

 

 

Common stock $0.01 par value; authorized 2,000,000,000 shares; issued:

   65,001,104 and 65,001,104 shares

 

 

1

 

 

 

1

 

Treasury stock $0.01 par value; 1,900,532 and 2,086,535 shares

 

 

 

 

 

 

Additional paid-in capital

 

 

1,982

 

 

 

1,981

 

Retained earnings

 

 

1,075

 

 

 

1,023

 

Accumulated other comprehensive loss

 

 

(450

)

 

 

(467

)

Total shareholders' equity

 

 

2,608

 

 

 

2,538

 

Total liabilities and shareholders' equity

 

 

5,022

 

 

 

4,925

 

 

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

 

 

 

4

 


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

 

 

 

(Unaudited)

 

 

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Balance at December 31, 2018

 

 

62.9

 

 

 

1

 

 

 

1,981

 

 

 

1,023

 

 

 

(467

)

 

 

2,538

 

Stock-based compensation, net of tax

 

 

0.2

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

80

 

Net derivative gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains arising during the period,

   net of tax of $(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

Less: Reclassification adjustment for losses

   included in net earnings, net of tax of nil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

Change in unrecognized gains and prior service cost

   related to pension and post-retirement benefit

   plans, net of tax of $(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(28

)

 

 

 

 

 

(28

)

Balance at March 31, 2019

 

 

63.1

 

 

 

1

 

 

 

1,982

 

 

 

1,075

 

 

 

(450

)

 

 

2,608

 

 

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

 

 

 

5

 


DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

 

 

For the three months ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

Net earnings

 

 

80

 

 

 

54

 

Adjustments to reconcile net earnings to cash flows from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

73

 

 

 

79

 

Deferred income taxes and tax uncertainties

 

 

(3

)

 

 

(3

)

Impairment of property, plant and equipment

 

 

10

 

 

 

 

Net gains on disposals of property, plant and equipment

 

 

 

 

 

(1

)

Stock-based compensation expense

 

 

2

 

 

 

3

 

Equity loss, net

 

 

1

 

 

 

 

Other

 

 

 

 

 

(1

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Receivables

 

 

(30

)

 

 

(2

)

Inventories

 

 

(49

)

 

 

(13

)

Prepaid expenses

 

 

 

 

 

(2

)

Trade and other payables

 

 

(69

)

 

 

(37

)

Income and other taxes

 

 

26

 

 

 

16

 

Difference between employer pension and other post-retirement

   contributions and pension and other post-retirement expense

 

 

1

 

 

 

 

Other assets and other liabilities

 

 

13

 

 

 

(3

)

Cash flows from operating activities

 

 

55

 

 

 

90

 

Investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(46

)

 

 

(25

)

Proceeds from disposals of property, plant and equipment

 

 

 

 

 

1

 

Other

 

 

 

 

 

(4

)

Cash flows used for investing activities

 

 

(46

)

 

 

(28

)

Financing activities

 

 

 

 

 

 

 

 

Dividend payments

 

 

(27

)

 

 

(26

)

Net change in bank indebtedness

 

 

3

 

 

 

 

Proceeds from receivables securitization facility

 

 

20

 

 

 

 

Repayments of receivables securitization facility

 

 

(20

)

 

 

(25

)

Other

 

 

(1

)

 

 

 

Cash flows used for financing activities

 

 

(25

)

 

 

(51

)

Net (decrease) increase in cash and cash equivalents

 

 

(16

)

 

 

11

 

Impact of foreign exchange on cash

 

 

(1

)

 

 

2

 

Cash and cash equivalents at beginning of period

 

 

111

 

 

 

139

 

Cash and cash equivalents at end of period

 

 

94

 

 

 

152

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Net cash payments for:

 

 

 

 

 

 

 

 

Interest

 

 

16

 

 

 

19

 

Income taxes

 

 

6

 

 

 

4

 

 

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

 

 

6

 


 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1

BASIS OF PRESENTATION

8

 

 

 

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

9

 

 

 

NOTE 3

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

11

 

 

 

NOTE 4

EARNINGS PER COMMON SHARE

15

 

 

 

NOTE 5

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

16

 

 

 

NOTE 6

OTHER OPERATING INCOME, NET

17

 

 

 

NOTE 7

INCOME TAXES

18

 

 

 

NOTE 8

INVENTORIES

19

 

 

 

NOTE 9

LEASES

20

 

 

 

NOTE 10

INTANGIBLE ASSETS

23

 

 

 

NOTE 11

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

24

 

 

 

NOTE 12

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

25

 

 

 

NOTE 13

SHAREHOLDERS’ EQUITY

27

 

 

 

NOTE 14

COMMITMENTS AND CONTINGENCIES

28

 

 

 

NOTE 15

SEGMENT DISCLOSURES

30

 

 

 

NOTE 16

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

31

 

 

 

7

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 1.

_________________

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first three months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission. The December 31, 2018 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

On January 1, 2019, upon the adoption of ASU 2016-02, “Leases”, the Company’s accounting policy related to leases became as follows:

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 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 rate implicit in the lease when readily determined or, in most cases, 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 and Comprehensive Income 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 exclude previously recognized liabilities relating to unfavorable terms of leases acquired as part of a business combination.

For operating lease arrangements with lease and non-lease components, the Company accounts for the lease and non-lease components as a single lease component.

 

 

8

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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 and Comprehensive Income 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.

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, we 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 comprehensive income (loss) in response to the 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.

 

9

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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.

While the Company is still evaluating the impact of adopting the new standard, it does not expect this new guidance to have a material impact on the consolidated financial statements.

 

10

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3.

_________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, and interest rates. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The ineffective portion of the qualifying instrument is immediately recognized to earnings. The amount of ineffectiveness recognized was immaterial for all periods presented. The Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of March 31, 2019, two of Domtar’s Pulp and Paper segment customers located in the U.S. represented 13% or $93 million, and 10% or $73 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 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 45 months.

 

11

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of March 31, 2019 to hedge forecasted purchases:

 

Commodity

 

Notional contractual quantity

under derivative contracts

MMBTu(2)

 

 

Notional contractual value

under derivative contracts

(in millions of dollars)

 

Percentage of forecasted

purchases under

derivative contracts

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019 (1)

 

 

9,030,000

 

 

 

$

27

 

 

 

45%

 

2020

 

 

11,165,000

 

 

 

$

34

 

 

 

40%

 

2021

 

 

9,270,000

 

 

 

$

27

 

 

 

33%

 

2022

 

 

9,270,000

 

 

 

$

25

 

 

 

33%

 

 

(1)

Represents the remaining nine months of 2019

(2)

MMBTu: Millions of British thermal units

The natural gas derivative contracts were fully effective as of March 31, 2019. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income for the three months ended March 31, 2019 resulting from hedge ineffectiveness (three months ended March 31, 2018 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States, Canada and Europe. As a result, it is exposed to movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and European currencies. The Company’s European subsidiaries are also exposed to movements in foreign currency exchange rates on transactions denominated in a currency other than their Euro functional currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates.

Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian subsidiary over the next 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 March 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

 

2019 (1)

 

526 CAD

 

78%

 

 

1 USD = 1.2914

 

1 USD = 1.3176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2020

 

405 CAD

 

67%

 

 

1 USD = 1.2944

 

1 USD = 1.3028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAD/USD

 

Pulp and Paper

 

2021

 

76 CAD

 

13%

 

 

1 USD = 1.3124

 

1 USD = 1.3124

 

(1)

Represents the remaining nine months of 2019

 

12

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2019

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

The foreign exchange derivative contracts were fully effective as of March 31, 2019. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income for the three months ended March 31, 2019 resulting from hedge ineffectiveness (three months ended March 31, 2018 – nil).

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements and disclosures, establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.

 

Level 1

Quoted prices in active markets for identical assets or liabilities.

 

Level 2

Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3

Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

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 March 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:

 

March 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

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

Derivatives designated as

   hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Other assets

Total Assets

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

11

 

 

 

 

 

 

11

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

1

 

 

 

 

 

 

1

 

 

 

 

(a)

Trade and other payables

Currency derivatives

 

 

4