DOMTAR CORPORATION
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 endedDecember 31, 2018 compared to the year endedDecember 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 endedDecember 31, 2018 (filed with theSEC onFebruary 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.
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
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
respectively related to our margin improvement plan
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• We repurchased
dividends
• Non-cash pension settlement charge of
settlement from annuity buy-out contracts
Twelve months ended
December 31, December 31, Variance 2019 vs. 2018
FINANCIAL HIGHLIGHTS 2019 2018 $ %
(In millions of dollars, unless
otherwise noted)
Sales $ 5,220 $ 5,455 $ (235 ) -4 %
Operating income 1 163 386 (223 ) -58 %
Net earnings 84 283 (199 ) -70 %Net earnings per common share
(in dollars) 2: Basic $ 1.37$ 4.50 $ (3.13 ) Diluted $ 1.37$ 4.48 $ (3.11 ) At December 31, At December 31, 2019 2018 Total assets $ 4,903 $ 4,925 Total long-term debt, including current portion $ 939 $ 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
and
charges and accelerated depreciation and impairment of operating lease
right-of-use assets under Impairment of long-lived assets of
Personal Care segment (2018 -
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.
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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
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 OFNET SALES By Business Segment Twelve months ended December 31, December 31, Variance 2019 vs. 2018 2019 2018 $ % Pulp and Paper $ 4,332 $ 4,523 (191 ) -4 % Personal Care 953 1,000 (47 ) -5 % Total for reportable segments 5,285 5,523 (238 ) -4 % Intersegment sales (65 ) (68 ) 3 Consolidated 5,220 5,455 (235 ) -4 % Shipments Paper - manufactured (in thousands of ST) 2,745 2,971 (226 ) -8 % Communication Papers 2,299 2,446 (147 ) -6 % Specialty and Packaging papers 446 525 (79 ) -15 % Paper - sourced from third parties (in thousands of ST) 93 109 (16 ) -15 % Paper - total (in thousands of ST) 2,838 3,080 (242 ) -8 % Pulp (in thousands of ADMT) 1,539 1,536 3 - % ANALYSIS OF CHANGE IN SALES 2019 vs. 2018 % Change in Net Sales due to Volume / Net Price Mix Currency Total Pulp and Paper 1 % -5 % - % -4 % Personal Care - % -3 % -2 % -5 % Consolidated sales 1 % -5 % - % -4 %
ANALYSIS OF OPERATING INCOME (LOSS)
Twelve months ended
By Business Segment December 31, December 31, 2019 vs. 2018 Variance
2019 (a) 2018 (b) $ %
Operating income (loss)
Pulp and Paper $ 225 $ 438 (213 ) -49 %
Personal Care $ (15 ) $ (5 ) (10 ) -200 %
Corporate $ (47 ) $ (47 ) - - %
Consolidated operating income (loss) $ 163 $ 386 (223 ) -58 %
(a) Includes closure and restructuring charges as well as accelerateddepreciation under Impairment of long-lived assets, related to our paper
machine closures within our Pulp and Paper segment, of
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
$26 million , respectively. (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
$7 million , respectively. 31
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2019 VS. 2018
$ Change in Segmented Operating Income (Loss) due to
Volume/ Operating (b) Depreciation/ Other Income/
Mix Net Price Input Costs (a) Expenses Currency Impairment (c) Restructuring (d) Expense (e) Total
Pulp and Paper (43 ) 52 (46 ) (128 ) 8 (23 ) (22 ) (11 ) (213 )
Personal Care (3 ) 3 16 3 (1 ) (16 ) (12 ) - (10 )
Corporate - - - (6 ) - - - 6 -
Consolidated operating
income (loss) (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
currency impact. In our Pulp and Paper segment, we recorded
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 accelerateddepreciation 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: 2018 restructuring charges relate to:
-Severance and termination costs (
-Severance and termination costs ($3 million )
-Inventory write-down ($6 million ) -Other costs ($1 million )
-Asset relocation and other costs ($15
million )
(e)
2019 operating expenses/income includes: 2018 operating expenses/income includes:
- Foreign exchange loss ($3 million ) - Net gain on sale of property, plant
- Environmental provision ($4 million ) and equipment
- Bad debt expense ($2 million ) ($4 million )
- Other income ($4 million ) - Foreign exchange gain ($2 million )
- Environmental provision ($5 million )
- Bad debt expense ($2 million )
- Other income ($1 million )
Commentary - 2019 vs. 2018
Interest Expense, net
We incurred
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. 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 . OnDecember 22, 2017 , theU.S. Tax Reform was signed into law. TheU.S. Tax Reform significantly changedU.S. tax law for businesses by, among other things, lowering the maximum federal corporate income tax rate from 35% to 21% effectiveJanuary 1 , 32
-------------------------------------------------------------------------------- 2018, implementing a territorial tax system, and imposing a one-time deemed repatriation tax on accumulated foreign earnings. As a result of theU.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 theU.S. Tax Reform. The end of the measurement period forSAB 118 purposes wasDecember 22, 2018 . We completed our analysis, including currently available legislative updates, and recorded an additional tax benefit of$13 million for the year endedDecember 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 theU.S. Tax Reform, we have taxed our undistributed foreign earnings as ofDecember 31, 2017 , at reduced tax rates. After completing our evaluation of theU.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 afterDecember 31, 2017 . Therefore, as ofDecember 31, 2019 , we have recorded a deferred tax liability of$12 million ($10 million asDecember 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. TheU.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 ourU.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. 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 (
well as higher maintenance and fixed costs due to timing of major
maintenance
• Higher input costs (
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 (
partially offset by higher volume of pulp
• Higher depreciation/impairment charges (
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 (
• 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
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second half of 2019 by adding approximately
Paper machine closures
On
OurAshdown 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 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
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
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
Personal Care 2019 vs. 2018
Sales in our Personal Care segment decreased by
Operating income decreased by
• Higher depreciation/impairment charges (
margin improvement plan
• Higher closure and restructuring charges (
margin improvement plan
• Lower volume partially offset by favorable mix ($3 million )
• Unfavorable foreign exchange (
These decreases were partially offset by:
• Lower input costs (
• Favorable average net selling prices ($3 million )
• Lower operating expenses mostly due to favorable SG&A expenses (
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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
OnNovember 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 ourWaco, Texas manufacturing and distribution facility, the relocation of certain of our manufacturing assets and a workforce reduction across the division. TheWaco, 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 theHuman 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 endedDecember 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.
LIQUIDITY AND CAPITAL RESOURCES
Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our contractually committed$700 million credit facility, of which$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
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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 inPrisma 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
Financing Activities
Cash flows used for financing activities totaled
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
Revolving Credit Facility InAugust 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 fromAugust 18, 2021 toAugust 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.
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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
AtDecember 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. AtDecember 31, 2019 , we had$25 million unused and available under this facility.
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 ofDomtar 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 onApril 15, 2019 ,July 16, 2019 ,October 15, 2019 andJanuary 15, 2020 , respectively, to shareholders of record as ofApril 2, 2019 ,July 2, 2019 ,October 2, 2019 andJanuary 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 onApril 16, 2018 ,July 16, 2018 ,October 15, 2018 andJanuary 15, 2019 , respectively, to shareholders of record as ofApril 2, 2018 ,July 3, 2018 ,October 2, 2018 andJanuary 2, 2019 , respectively. OnFebruary 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 onApril 15, 2020 to shareholders of record onApril 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. AtDecember 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. AtDecember 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. 37
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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 atDecember 31, 2019 : CONTRACT TYPE 2020 2021 2022 2023 2024 THEREAFTER TOTAL (in millions of dollars) Long-term debt (excluding interest) - 55 300 80 -$ 500 $ 935 Finance leases and other (including interest) 1 2 2 2 2 6 15 Operating leases 29 24 19 14 8 14 108 Long-term income taxes payable (1) 3 3 3 6 8 10 33 Total obligations$ 33 $ 84 $ 324 $ 102 $ 18 $ 530 1,091 COMMITMENT TYPE 2020 2021 2022 2023 2024 THEREAFTER TOTAL (in millions of dollars) Other commercial commitments (2)$ 117 $ 16 $ 9 6 5 2$ 155
(1) In connection with the
million in repatriation tax to pay through 2025. See Note 10 "Income Taxes"
for additional information on the
(2) Includes commitments to purchase property, plant and equipment, roundwood,
wood chips, gas and certain chemicals. Purchase orders in the normal course
of business are excluded.
In addition, we expect to contribute a minimum total amount of$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 inthe 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, impairment and useful lives of long-lived assets, closure and 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.
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".
38
-------------------------------------------------------------------------------- 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 atDecember 31, 2019 , we had an asset retirement obligation provision of$13 million for 12 locations (2018 -$12 million ). As atDecember 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 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 39
-------------------------------------------------------------------------------- 2018. AtDecember 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 ourAshdown, Arkansas pulp and paper mill and ourPort 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 ourWaco, 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.
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 theAshdown 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 ourWaco, 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. 40 -------------------------------------------------------------------------------- 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 ofDecember 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.
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 endedDecember 31, 2019 (2018 -$50 million ). We sponsor both contributory and non-contributoryU.S. and non-U.S. defined benefit pension plans. We also sponsor a number of other post-retirement benefit plans for eligibleU.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. EffectiveJanuary 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 atDecember 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. 41 -------------------------------------------------------------------------------- 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 andU.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 Other Post-Retirement Benefit
PENSION AND OTHER POST-RETIREMENT Projected Projected
BENEFIT PLANS Benefit Net Periodic Benefit Net Periodic
Obligation Benefit Cost Obligation Benefit Cost
(In millions of dollars)
Expected rate of return on assets
Impact of:
1% increase N/A (15 ) N/A N/A
1% decrease N/A 16 N/A N/A
Discount rate
Impact of:
1% increase (169 ) (8 ) (7 ) -
1% decrease 209 17 9 -
Assumed overall health care cost
trend
Impact of:
1% increase N/A N/A 3 -
1% decrease N/A N/A (3 ) -
42
-------------------------------------------------------------------------------- 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 ).
Benefit obligations and fair values of plan assets as of
December 31, 2019 December 31, 2018
Other Other
Pension post-retirement Pension post-retirement
plans benefit plans plans benefit plans
$ $ $ $
Projected benefit obligation at end of year (1,439 ) (63 ) (1,569 ) (62 )
Fair value of assets at end of year 1,475 - 1,588 -
Funded status 36 (63 ) 19 (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 atDecember 31, 2019 , and certain foreign loss carryforwards for which a valuation allowance of$10 million exists atDecember 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 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 43 -------------------------------------------------------------------------------- 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. AtDecember 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 ofDecember 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 theU.S. Tax Reform, enacted in 2017. Finally, foreign governments may enact tax laws in response to theU.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. TheU.S. Tax Reform significantly changes how theU.S. taxes corporations. TheU.S. Tax Reform requires complex computations to be performed that were not previously required inU.S. tax law, significant judgments to be made in interpretation of the provision of theU.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 , theIRS , and other standard-setting bodies could interpret or issue guidance on how provisions of theU.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". 44 --------------------------------------------------------------------------------
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".
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