DOMTAR CORPORATION (Exact Name of Registrant As Specified in Its Charter)
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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 September 30, 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 (I.R.S. Employer (State of Incorporation) 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 October 31, 2019, 57,273,106 shares of the issuer’s common stock were outstanding. DOMTAR CORPORATION FORM 10-Q For the Quarterly Period Ended September 30, 2019 INDEX PART I. FINANCIAL INFORMATION 3 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 3 CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS) 3 CONSOLIDATED BALANCE SHEETS 4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 7 INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 41 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 52 ITEM 4. CONTROLS AND PROCEDURES 52 PART II OTHER INFORMATION 52 ITEM 1. LEGAL PROCEEDINGS 52 ITEM 1A. RISK FACTORS 52 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 53 ITEM 3. DEFAULT UPON SENIOR SECURITIES 54 ITEM 4. MINE SAFETY DISCLOSURES 54 ITEM 5. OTHER INFORMATION 54 ITEM 6. EXHIBITS 55 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS (UNAUDITED) DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS) (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) Three months Three months Nine months ended ended ended Nine months ended September 30, September 30, September 30, September 30, 2019 2018 2019 2018 (Unaudited) $ $ $ $ Sales 1,283 1,367 3,976 4,065 Operating expenses Cost of sales, excluding depreciation and amortization 1,041 1,059 3,172 3,239 Depreciation and amortization 72 75 219 233 Selling, general and administrative 94 115 322 343 Impairment of long-lived assets (NOTE 11) 33 — 58 — Closure and restructuring costs (NOTE 11) 11 — 23 — Other operating loss (income), net (NOTE 6) 3 4 4 (3) 1,254 1,253 3,798 3,812 Operating income 29 114 178 253 Interest expense, net 12 15 38 47 Non-service components of net periodic benefit cost (NOTE 5) (2) (4) (7) (13) Earnings before income taxes and equity loss 19 103 147 219 Income tax (benefit) expense (NOTE 7) (1) 3 28 22 Equity loss, net of taxes — 1 1 1 Net earnings 20 99 118 196 Per common share (in dollars) (NOTE 4) Net earnings Basic 0.33 1.57 1.89 3.12 Diluted 0.32 1.57 1.88 3.11 Weighted average number of common shares outstanding (millions) Basic 61.5 62.9 62.5 62.8 Diluted 61.7 63.2 62.7 63.1 Cash dividends per common share 0.46 0.44 1.33 1.29 Net earnings 20 99 118 196 Other comprehensive (loss) income (NOTE 12): Net derivative (losses) gains on cash flow hedges: Net (losses) gains arising during the period, net of tax of $4 and $(1), respectively (2018 – $(2) and $3, respectively) (9) 7 5 (9) Less: Reclassification adjustment for losses (gains) included in net earnings, net of tax of $(1) and $(2), respectively (2018 – $(1) and nil, respectively) 3 — 5 (2) Foreign currency translation adjustments (34) 12 (12) (49) Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) and $(3), respectively (2018 – nil and $(2), respectively) 2 2 7 6 Other comprehensive (loss) income (38) 21 5 (54) Comprehensive (loss) income (18) 120 123 142 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 September 30, December 31, 2019 2018 (Unaudited) $ $ Assets Current assets Cash and cash equivalents 98 111 Receivables, less allowances of $8 and $6 618 670 Inventories (NOTE 8) 798 762 Prepaid expenses 33 24 Income and other taxes receivable 53 22 Total current assets 1,600 1,589 Property, plant and equipment, net 2,499 2,605 Operating lease right-of-use assets (NOTE 9) 77 — Intangible assets, net (NOTE 10) 568 597 Other assets 140 134 Total assets 4,884 4,925 Liabilities and shareholders' equity Current liabilities Bank indebtedness 1 — Trade and other payables 646 757 Income and other taxes payable 28 25 Operating lease liabilities due within one year (NOTE 9) 26 — Long-term debt due within one year 1 1 Total current liabilities 702 783 Long-term debt 938 853 Operating lease liabilities (NOTE 9) 68 — Deferred income taxes and other 479 476 Other liabilities and deferred credits 258 275 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; 5,977,255 and 2,086,535 shares — — Additional paid-in capital 1,842 1,981 Retained earnings 1,058 1,023 Accumulated other comprehensive loss (462) (467) Total shareholders' equity 2,439 2,538 Total liabilities and shareholders' equity 4,884 4,925 The accompanying notes are an integral part of the consolidated financial statements. 4 DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) For the three months ended September 30, 2019 Issued and outstanding common Accumulated shares other Total (millions of Common Additional Retained comprehensive shareholders' shares) stock, at par paid-in capital earnings loss equity (Unaudited) $ $ $ $ $ Balance at June 30, 2019 62.9 1 1,977 1,065 (424) 2,619 Stock-based compensation, net of tax — — 2 — — 2 Net earnings — — — 20 — 20 Net derivative losses on cash flow hedges: Net losses arising during the period, net of tax of $4 — — — — (9) (9) Less: Reclassification adjustment for losses included in net earnings, net of tax of $(1) — — — — 3 3 Foreign currency translation adjustments — — — — (34) (34) Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) — — — — 2 2 Stock repurchase (3.9) — (137) — — (137) Cash dividends declared — — — (27) — (27) Balance at September 30, 2019 59.0 1 1,842 1,058 (462) 2,439 For the nine months ended September 30, 2019 Issued and outstanding common Accumulated shares other Total (millions of Common Additional Retained comprehensive shareholders' shares) stock, at par paid-in capital earnings loss 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 — 6 — — 6 Net earnings — — — 118 — 118 Net derivative gains on cash flow hedges: Net gains arising during the period, net of tax of $(1) — — — — 5 5 Less: Reclassification adjustment for losses included in net earnings, net of tax of $(2) — — — — 5 5 Foreign currency translation adjustments — — — — (12) (12) Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(3) — — — — 7 7 Stock repurchase (4.1) — (145) — — (145) Cash dividends declared — — — (83) — (83) Balance at September 30, 2019 59.0 1 1,842 1,058 (462) 2,439 The accompanying notes are an integral part of the consolidated financial statements. 5 DOMTAR CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED) For the three months ended September 30, 2018 Issued and outstanding Accumulated common shares other Total (millions of Common Additional Retained comprehensive shareholders' shares) stock, at par paid-in capital