# Sylvamo Corp (SLVM) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Sylvamo Corp's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1856485/000185648522000010/syl-20211231.htm
Accession: 0001856485-22-000010
Filing date: 2022-03-02
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SLVM/
All MD&A years: /company/SLVM/mda/
Next year: /company/SLVM/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated and combined financial statements and related notes included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K (this “Form 10-K”). In addition to historical consolidated and combined financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs that involve significant risks and uncertainties. Our actual results could differ materially from those stated and implied in any forward-looking statements. Factors that could cause or contribute to those differences include those discussed below and elsewhere in this Form 10-K, particularly under the headings “Risk Factors” and “Forward-Looking Statements.”

The following generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussion of historical items in 2019, and year-to-year comparisons between 2020 and 2019, can be found in the Company’s registration statement on Form 10, as amended (File No. 001-40718) (the “Form 10”) for the three years ended December 31, 2020, 2019 and 2018.

SPIN-OFF

Prior to the spin-off on October 1, 2021, we historically operated as part of International Paper and not as a standalone company. These consolidated and combined financial statements reflect the combined historical financial position, results of operations and cash flows of the Company as historically managed within International Paper for the periods prior to the completion of the spin-off and reflect our consolidated financial position, results of operations and cash flows for the period after the completion of the spin-off. The consolidated and combined financial statements have been prepared in United States (“U.S.”) dollars and in conformity with accounting principles generally accepted in the United States (‘‘U.S. GAAP’’). The consolidated and combined financial statements may not be indicative of the Company’s future performance and do not necessarily reflect what the results of operations, financial position and cash flows would have been had it operated as an independent company during all periods presented.

EXECUTIVE SUMMARY

Full-year 2021 net income was $331 million ($7.53 per diluted share) compared with $170 million ($3.85 per diluted share) for full-year 2020. Net sales increased 16% to $3.5 billion in 2021 compared with $3 billion in 2020 and adjusted EBITDA improved by nearly 60% to $594 million in 2021 compared to $373 million in 2020. See Item. 7. Management’s Discussion and Analysis and Results of Operations - Non-GAAP Financial Measures for the definition of Adjusted EBITDA.

Comparing our performance in 2021 to 2020, we realized the benefit of price increases, as price and mix improvement outpaced input costs that increased throughout the year. Volume was favorable as global uncoated freesheet demand recovered from the impact of the COVID-19 pandemic as schools and offices began to reopen. In addition, operations benefited from improved fixed cost absorption on higher volume. Our production facilities ran full in all three regions and we improved our sales mix by selling more profitable products as our commercial teams maximize opportunities across geographies, segments, and channels.

Looking ahead to the first quarter of 2022, we remain committed to generating cash and have positive momentum as global uncoated free sheet industry conditions are expected to remain favorable. Demand is expected to continue improving in all three of our regions, while industry supply is shrinking in Europe and North America as competitors have shut down their machines or converted capacity. We expect costs for fiber, chemicals, and transportation to continue to increase. However, we will continue to realize prior price increases throughout the first quarter of 2022.

COVID-19

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. Many of these restrictive measures have been lifted or reduced as the number of COVID-19 cases has declined in the United States and various other countries in comparison to earlier levels at the height of the pandemic, and economic conditions have improved. At the current time all of our facilities are open and operating. Demand for printing papers products, which account for the majority of our net sales, initially was significantly impacted by the pandemic, but has seen a steady increase over 2021. Our operations have continued to experience higher supply chain costs and constrained transportation due in part to the impacts of COVID-19.

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Russian Actions In Ukraine

On February 24, 2022, the Russian Federation commenced a military invasion of Ukraine. Russian actions with respect to Ukraine have resulted in certain sanctions being imposed by the United States, the European Union, the United Kingdom and other jurisdictions. Neither the Company, nor any of its Russian subsidiaries or other operations or assets, are a target of current sanctions, and our mill is located near the Finnish border and is not near the conflict in Ukraine. However, we cannot predict the impact of Russian actions in Ukraine and any heightened military conflict or geopolitical instability that may follow, including heightened operating risks and production disruptions in Russia and Europe, additional sanctions or counter-sanctions, heightened inflation, cyber disruptions or attacks, higher energy costs, higher manufacturing costs, disruptions in raw materials supplies, increased raw material costs and higher supply chain costs.

For example, demand for our products from the paper mill in Svetogorsk, Russia could be materially adversely affected by additional sanctions or counter-sanctions that impact the mill, or by customers in other countries voluntarily choosing not to purchase products from the mill because of its location in Russia.

Any significant disruption in operations at our mill in Svetogorsk, Russia, including as a result of supply-chain constraints, could adversely affect our ability to produce our products at that mill at historical levels and costs, or at all. A determination by one or more of our suppliers not to do business in Russia, whether as a result of sanctions or on a voluntary basis, could increase the Svetogorsk mill’s costs for inputs secured from alternative suppliers, could prevent or slow the mill’s ability to obtain necessary inputs to make products, and could cause the mill to cease operating for an indeterminate period of time.

One of our suppliers to the Svetogorsk mill has already announced that it would discontinue deliveries to Russia until further notice in light of the Russian actions in Ukraine. We are therefore facing inadequate supplies of critical raw materials and are currently in the process of curtailing production at the Svetogorsk mill, and may need to temporarily shut down pulp and paper production at the mill. The mill is currently operating in a slowed-back condition while we take steps to mitigate the issues and possibly continue production. It is too early to estimate the impact this curtailment or a possible shut down could have on our business, results of operations and financial condition.

RESULTS OF OPERATIONS

When reading our financial statements and the information included in this Annual Report, it should be considered that we have experienced, and continue to experience, several material trends and uncertainties that have affected our financial condition and results of operations and that could affect future performance. We believe that the following material trends and uncertainties are important to understanding our business.

Macroeconomic Conditions

The Company’s operating results are typically closely tied to changes in the general economic conditions in Europe, Latin America and North America, as well as general global economic conditions. The Company’s profitability and operating results are dependent on the price of our products and the market price of raw materials (primarily wood fiber and chemicals), energy sources and third-party transport of our goods.

Consumer Behavior

Factors that impact the demand for our products include consumer preferences, movements in currency exchange rates, consumer spending, commercial printing and advertising activity, adoption of electronic mediums, white-collar employment, including the shift to work-from-home during the COVID-19 pandemic, and remote schooling.

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The following summarizes our results of operations for the periods presented:

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31","2021","","2020"],["NET SALES","$","3,502","","","$","3,009"],["COSTS AND EXPENSES"],["Cost of products sold (exclusive of depreciation, amortization and cost of timber harvested shown separately below)","2,298","","","2,101"],["Selling and administrative expenses","213","","","209"],["Depreciation, amortization and cost of timber harvested","143","","","154"],["Distribution expenses","363","","","321"],["Taxes other than payroll and income taxes","27","","","30"],["Interest (income) expense, net","(2)","","","(4)"],["INCOME (LOSS) BEFORE INCOME TAXES","460","","","198"],["Income tax provision (benefit)","129","","","28"],["NET INCOME (LOSS)","$","331","","","$","170"]]
[[/GREPCENT_TABLE]]

Net Sales

For the year ended December 31, 2021, the Company reported net sales of $3.5 billion, compared with $3.0 billion for the year ended December 31, 2020. The net sales increase was primarily driven by an increase in sales volume of uncoated freesheet and increased average sales prices of our products, reflecting recovery from the negative demand impact of the COVID-19 pandemic. International net sales (based on the location of the seller) totaled $1.8 billion, or 51%, of total sales for the year ended December 31, 2021. This compares with international net sales of $1.5 billion, or 50% of total sales for the year ended December 31, 2020. Additional details on net sales are provided in the section titled “Business Segment Results.”

Cost of Products Sold

Cost of products sold increased by $197 million, primarily due to the increase in net sales activity, resulting in an increase of our consumption of raw materials and cost inflation. The increased consumption was partially offset by the net benefit of two Brazilian VAT items ($35 million) that decreased our cost of products sold. Additional details regarding the Brazilian VAT items are provided in Note 11 Commitments and Contingent Liabilities to our consolidated and combined financial statements included elsewhere in this Form 10-K.

Distribution Expenses

The $42 million increase in distribution expenses was the result of the increase in net sales activity as well as higher freight costs.

Interest (Income) Expense, net

The change in net interest income was driven by the recognition of $20 million of net interest income related to two Brazilian VAT items recorded during the year ended December 31, 2021, which was offset by interest expense related to the $1.5 billion of debt we incurred in conjunction with our spin-off from International Paper. Additional details regarding the Brazilian VAT items and debt incurred are provided in Note 11 Commitments and Contingent Liabilities and Note 12 Long-Term Debt, respectively, to our consolidated and combined financial statements included elsewhere in this Form 10-K.

Income Taxes

A net income tax provision of $129 million was recorded for the year ended December 31, 2021. A net income tax provision of $28 million was recorded for the year ended December 31, 2020. The effective income tax rate was 28% for the year ended December 31, 2021, compared to 14% for the year ended December 31, 2020. The income tax provision and effective income tax rate increased for the year ended December 31, 2021 by approximately $101 million and 14%, respectively, primarily due to the mix of earnings in the U.S. and various income tax rates in non-US jurisdictions and a $10 million tax benefit in 2020 relating to a tax audit settlement.

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DESCRIPTION OF BUSINESS SEGMENTS

The Company’s reportable business segments, Europe, Latin America and North America, are consistent with the internal structure used to manage these businesses. The following summary describes the products and services offered in each of the segments:

Europe

Our Europe segment produces a broad portfolio of uncoated freesheet papers for numerous uses and applications as well as liquid packaging board, coated unbleached kraft and market pulp. We operate two paper, pulp and board mills in the region: Saillat, France and Svetogorsk, Russia. Located in the Limousin region of France, the Company’s Saillat mill produces both paper and market pulp. It is the only mill in France to cover the entire production process from wood harvesting to paper, and is one of the leading cutsize producers in France and Western Europe. The Saillat mill produces UFS papers, such as copy paper, and value-added products such as tinted paper and colored laser printing paper under leading brands such as REY Adagio and Pro-Design. We also produce graphic and high-speed inkjet printing papers under the brand Jetstar. The Saillat mill has some of the highest environmental credentials for our products and mill in Europe. Our Svetogorsk mill is one of Russia’s leading producers of high-quality uncoated freesheet papers under brands Ballet Brilliant, Ballet Premier, Ballet Classic, Ballet Universal and SvetoCopy, and pulp products such as Bleached Chemical Thermo-Mechanical Pulp (“BCTMP”), with industry-leading technology and equipment. It covers more than 434 acres on the Karelian Isthmus, and comprises three pulp mills, two papermaking machines, and A3 and A4 cutsize finishing.

Latin America

Our Latin American operations focus on uncoated freesheet paper as well as market pulp through the ownership or management of approximately 250,000 acres of forestlands in Brazil and consists of three mills: two integrated mills in the State of São Paulo and one non-integrated mill in Mato Grosso do Sul. Our Brazilian uncoated freesheet brands include Chamex, Chamequinho and Chambril. We also produce the HP papers line in Brazil. All of our products are produced exclusively from planted and sustainable certified eucalyptus.

North America

The North American paper business manufactures uncoated freesheet papers at its mills in Eastover, South Carolina and Ticonderoga, New York and has offtake agreements to purchase the uncoated papers produced by International Paper’s Riverdale and Georgetown mills in Selma, Alabama and Georgetown, South Carolina. The North American papers business comprises three sub-segments, Imaging Papers, Commercial Printing Papers and Converting Papers. The imaging papers business, which comprises roughly half of the North American segment’s volume, produces copy paper for use in copiers, desktop and laser printers and digital imaging. These products are important for office use, home office use and in businesses such as education, healthcare and financial services. The commercial printing business comprises about 18% of the North American segment’s volume, and end-use applications in the commercial printing business include advertising and promotional materials such as brochures, pamphlets, greeting cards, books, annual reports and direct mail. The converting business manufactures a variety of grades that are converted by our customers into envelopes, tablets, business forms, file folders and several specialty grades. Uncoated papers are sold under private label and brand names that include Hammermill®, Springhill®, Williamsburg, Accent®, DRM® and Postmark®.

BUSINESS SEGMENT RESULTS

Management provides Total operating profit, a non-GAAP financial measure, to supplement our GAAP financial information, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Management believes that Total operating profit provides investors and analysts useful insights into our operating performance. Total operating profit is reconciled to Income (loss) before income taxes, the most directly comparable GAAP measure. Total operating profit may be determined or calculated differently by other companies and therefore may not be comparable among companies.

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The following table presents a comparison of income (loss) before income taxes to Total operating profit:

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31","","2021","","2020"],["Income (Loss) Before Income Taxes","","$","460","","","$","198"],["Interest (income) expense, net","","(2)","","","(4)"],["Other special items, net (b)","","(29)","","","10"],["Total Operating Profit (a)","","$","429","","","$","204"],["Europe","","$","98","","","$","77"],["Latin America","","195","","","84"],["North America","","136","","","43"],["Total Operating Profit (a)","","$","429","","","$","204"]]
[[/GREPCENT_TABLE]]

(a)    We define Total operating profit as our income (loss) before income taxes calculated in accordance with GAAP, excluding net interest (income) expense and net business special items which includes net corporate special items. We believe that Total operating profit is an important indicator of operating performance as it is a measure reported to our management for purposes of making decisions about allocating resources to our business segments and assessing the performance of our business segments and is presented in our financial statements footnotes in accordance with ASC 280.

(b)    Special items represent income or expenses that are incurred periodically, rather than on a regular basis. Other special items in the periods presented primarily include abandoned property removal costs, an environmental remediation reserve adjustment, foreign VAT expense and refunds and one-time costs.

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The following tables present Net sales and Operating profit (loss), which is the Company’s measure of segment profitability, for each of the Company’s segments. See Note 15 Financial Information by Business Segment and Geographic Area to our consolidated and combined financial statements included elsewhere in this Form 10-K for more information on the Company’s segments.

Europe

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31","","2021","","2020"],["Net Sales","","$","1,040","","","$","921"],["Operating Profit (Loss)","","$","98","","","$","77"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, our Europe segment net sales increased $119 million compared to the same period in 2020, primarily due to a recovery from the negative demand impact of the COVID-19 pandemic, resulting in an increase in the market price for uncoated freesheet, pulp and coated paperboard.

Europe operating profit for the year ended December 31, 2021 was $21 million higher than the same period in 2020 as the impact of higher planned maintenance outages in France ($22 million) and higher input costs, primarily energy ($28 million), were more than offset by higher sales price and mix ($49 million) and lower operating costs ($16 million).

Latin America

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31","","2021","","2020"],["Net Sales","","$","786","","","$","632"],["Operating Profit (Loss)","","$","195","","","$","84"]]
[[/GREPCENT_TABLE]]

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For the year ended December 31, 2021, our Latin America segment net sales increased $154 million compared to the same period in 2020, primarily reflecting recovery from the negative demand impact of the COVID-19 pandemic, resulting in an increase in the market price and sales volume of uncoated freesheet.

Operating profit for Latin America for the year ended December 31, 2021 was $111 million higher than the same period in 2020, primarily driven by increased sales price and mix ($94 million) and volume ($33 million). Lower operating costs ($47 million) were offset by increased input costs ($64 million) primarily for purchased pulp, chemicals, and energy.

North America

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31","","2021","","2020"],["Net Sales","","$","1,718","","","$","1,490"],["Operating Profit (Loss)","","$","136","","","$","43"]]
[[/GREPCENT_TABLE]]

For the year ended December 31, 2021, our North America segment net sales increased $228 million, compared to the same period in 2020, primarily reflecting recovery from the negative impact on demand of the COVID-19 pandemic, resulting in an increase in the market price and sales volume of uncoated freesheet.

Operating profit for North America for the year ended December 31, 2021 was $93 million higher than the same period in 2020 as increased sales price ($78 million) and volume ($29 million) increased across all grades of uncoated freesheet, reflecting continued demand recovery from the COVID-19 pandemic. The benefit of lower planned maintenance outages ($12 million) and lower operating costs ($56 million) were offset by increased input costs ($76 million) primarily for wood, energy and distribution.

NON-GAAP FINANCIAL MEASURES

Management provides Adjusted EBITDA, a non-GAAP financial measure, to supplement our GAAP financial information, and it should be considered in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Management believes that Adjusted EBITDA provides investors and analysts meaningful insights into our operating performance and is a relevant metric for the third-party debt. Adjusted EBITDA is reconciled to Net income (loss), the most directly comparable GAAP measure. Adjusted EBITDA may be determined or calculated differently by other companies and therefore may not be comparable among companies.

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31,","2021","","2020","","2019"],["Net Income (Loss)","$","331","","","$","170","","","$","377"],["Income tax provision (benefit)","129","","","28","","","125"],["Interest (income) expense, net","(2)","","","(4)","","","(9)"],["Depreciation, amortization and cost of timber harvested","143","","","154","","","192"],["Stock-based compensation","14","","","15","","","19"],["Transition service agreement expense","8","","","\u2014","","","\u2014"],["Net special items expense (income) (a)","(29)","","","10","","","5"],["Adjusted EBITDA (b)","$","594","","","$","373","","","$","709"],["Net Sales","$","3,502","","","$","3,009","","","$","4,017"],["Adjusted EBITDA Margin","17.0","%","","12.4","%","","17.6","%"]]
[[/GREPCENT_TABLE]]

(a) Special items represent income or expenses that are incurred periodically, rather than on a regular basis. Net special items in the periods presented primarily include adjustments to the accrual for foreign VAT expense and one-time costs associated with the spin-off.

(b)     We define Adjusted EBITDA (non-GAAP) as net income (loss) (GAAP) excluding the sum of income taxes, net interest (income) expense, depreciation, amortization and cost of timber harvested, transition service agreement expense, stock-based compensation, and, when applicable for the periods reported, special items.

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Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operations. Management believes that free cash flow is useful to investors as a liquidity measure because it measures the amount of cash generated that is available, after reinvesting in the business, to maintain a strong balance sheet and service debt, and potentially return cash to shareowners in the future. It should not be inferred that the entire free cash flow amount is available for discretionary expenditures. By adjusting for certain items that are not indicative of the Company’s ongoing performance, free cash flow also enables investors to perform meaningful comparisons between past and present periods.

The following are reconciliations of cash provided by operations to free cash flow:

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31","","2021","","2020","","2019"],["Cash provided by (used for) operating activities","","$","549","","","$","359","","","$","524"],["Adjustments:"],["Cash invested in capital projects","","(76)","","","(75)","","","(118)"],["Free Cash Flow","","$","473","","","$","284","","","$","406"]]
[[/GREPCENT_TABLE]]

The non-GAAP financial measures presented in this Form 10-K as referenced above have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our results calculated in accordance with GAAP. In addition, because not all companies utilize identical calculations, the Company’s presentation of non-GAAP measures in this Form 10-K may not be comparable to similarly titled measures disclosed by other companies, including companies in the same industry as the Company.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Historically, we have generated strong annual cash flow from operating activities. However, prior to our spin-off, we were a part of International Paper’s operating structure. Following the completion of the spin-off on October 1, 2021, our capital structure and sources of liquidity changed significantly from our historical capital structure. We no longer participate in cash management and funding arrangements with International Paper. Instead, our ability to fund the Company’s cash needs depends on our ongoing ability to generate cash from operations and obtain financing on acceptable terms. Based upon our history of generating strong operating cash flow, we believe we will be able to meet our short-term liquidity needs. We believe we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances and available borrowings through the issuance of third-party debt, as needed.

A major factor in our liquidity and capital resource planning is our generation of operating cash flow, which is highly sensitive to changes in the pricing and demand for our products. While changes in key operating cash costs, such as raw materials, energy, mill outages and distribution expenses do have an effect on operating cash generation, we believe that our focus on commercial and operational excellence, as well as our ability to manage costs and working capital, will provide sufficient cash flow generation.

During the third quarter of 2021, we entered into a series of financing transactions under which we incurred $1.5 billion of debt in conjunction with our spin-off from International Paper, consisting of two term loan facilities, the 2029 Senior Notes and borrowings from our cash flow-based revolving credit facility. The aggregate amount outstanding on this debt as of December 31, 2021, was $1.4 billion. See Note 12 Long-Term Debt to the consolidated and combined financial statements for further discussion. The proceeds of the debt were used primarily to fund a special payment to International Paper and to pay related fees and expenses. The Company’s cash flow-based revolving credit facility has a total borrowing capacity of $450 million, of which approximately $420 million was available as of December 31, 2021.

The terms of the agreements governing our debt contain customary limitations for the financing as well as other provisions. These provisions may also restrict our business and, in the event we cannot meet the terms of those provisions, may adversely impact our financial condition, results of operations or cash flows.

Operating Activities

Cash provided by operating activities totaled $549 million for the year ended December 31, 2021, compared with cash provided by operating activities of $359 million for the year ended December 31, 2020. The increase in cash provided by operating

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activities in 2021 corresponds to the significant increase in our earnings reflecting our recovery from the negative demand impact of the COVID-19 pandemic.

Cash provided by working capital components and other operating activities (accounts and notes receivable and inventories less accounts payable and accrued liabilities and other) was $67 million for the year ended December 31, 2021, compared with cash provided by working capital components and other operating activities of $69 million for the year ended December 31, 2020. Working capital components for the year ended December 31, 2021 primarily reflect $210 million of cash provided by accounts payable and accrued liabilities balances, including $77 million related to inventory purchased on the date of spin-off pursuant to the terms of the supply and offtake agreements between the Company and International Paper, and $19 million of cash provided by inventory. This activity was partially offset by $118 million of cash outflows related to accounts and notes receivable and $44 million of cash outflows related to other operating activities.

Investment Activities

The total cash inflow from investing activities for the year ended December 31, 2021 increased from the year ended December 31, 2020, primarily due to the impact of cash pooling arrangements with International Paper which were terminated prior to the spin-off.

The following table shows capital spending by business segment, which represents the most significant portion of our recurring investment activities.

[[GREPCENT_TABLE]]
[["In millions for the years ended December 31","","2021","","2020"],["Europe","","$","13","","","$","15"],["Latin America","","39","","","45"],["North America","","24","","","15"],["Total","","$","76","","","$","75"]]
[[/GREPCENT_TABLE]]

Capital spending primarily consists of purchases of machinery and equipment and reforestation related to our global mill operations. Capital spending was $76 million and $75 million for the years ended December 31, 2021 and 2020, respectively. As a percentage of depreciation, amortization and cost of timber harvested, capital spending totaled 53% and 49% for the years ended December 31, 2021 and 2020, respectively.

Financing Activities

Cash used in financing activities for the year ended December 31, 2021 primarily reflects the special payment of $1.5 billion we made to International Paper on September 29, 2021, as part of our separation from International Paper. We repaid $80 million, $40 million and $4 million on our revolving line of credit, Term Loan B and Term Loan F, respectively. Payments of debt issuance costs of $21 million and a $5 million discount on the debt were incurred in connection with our third-party debt transactions in the year ended December 31, 2021. Cash used in financing activities for the year ended December 31, 2020, primarily represented transactions between us and International Paper. These transactions are considered to be effectively settled for cash at the time the transaction is recorded. The components of these transactions (or transfers) include (i) constructive cash transfers from us to International Paper, (ii) cash transfers from International Paper to fund our requirements for working capital commitments and (iii) an allocation of International Paper’s corporate expenses.

Contractual Obligations

Contractual obligations for future payments at December 31, 2021 primarily relate to lease commitments, raw material purchase obligations, and principal debt payments. Operating and financing leases represent minimum required lease payments during the noncancelable lease term. Most real estate leases also require payment of related operating expenses such as taxes, insurance, utilities, and maintenance, which are not included in our estimated capital lease obligation. Our total estimated finance lease obligations total $4 million in 2022, an average of $3 million from 2023 to 2026 and $13 million thereafter.

Purchase obligations for commercial commitments include inventory obligations to purchase raw materials, including starch, electricity, fuel oil, corrugated boxes, wood and Precipitated Calcium Carbonate (“PCC”). Our total estimated commercial commitments include $141 million in 2022, $68 million in 2023 and average $33 million annually from 2024 to 2026, with $30 million thereafter.

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At December 31, 2021, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 8 Leases) by calendar year were as follows: 2022 - $20 million, $2023 - $30 million; 2024 - $50 million; 2025 - $51 million; 2026 - $51 million; thereafter - $1.2 billion.

As part of our separation from International Paper, the Company purchased inventory from certain mills of International Paper on October 1, 2021, pursuant to the terms of the supply and offtake agreements between the Company and International Paper. As a result of this inventory purchase, the Company recorded accounts payable to International Paper in the amount of $77 million which will be paid throughout the first six months of 2022.

Capital Expenditures

For the year ended December 31, 2021, we have invested approximately $76 million, or 2.2% of net sales in total capital expenditures. Over that period, we spent approximately $41 million, or 1.2% of net sales, in maintenance capital expenditures, and approximately $35 million, or 1.0% of net sales, in strategic capital expenditures and reforestation. Our annual maintenance, regulatory and reforestation capital expenditures are expected to be in the range of approximately $130 to $150 million per year for the next several years, which we believe will be sufficient to maintain our operations and productivity. In addition, we expect to spend approximately $18 million on cost reduction capital in 2022. As of the date of this report, the only major capital expenditure anticipated in the next three years is replacing the two recovery boilers at our Svetogorsk mill with one new recovery boiler, which we estimate will cost $220 million over that period. Approximately $15 million is expected to be spent in 2022, with the remainder estimated to be spent in 2023 and 2024.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with U.S. GAAP requires the Company to establish accounting policies and to make estimates that affect both the amounts and timing of the recording of assets, liabilities, revenues and expenses. Some of these estimates require subjective judgments about matters that are inherently uncertain.

Accounting policies whose application may have a significant effect on the reported results of operations and financial position of the Company, and that can require judgments by management that affect their application, include the accounting for impairment or disposal of long-lived assets and goodwill, income taxes and commitments and contingencies.

Impairment of Long-Lived Assets and Goodwill

An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value and is recorded when the carrying amount is not recoverable through undiscounted cash flows from future operations or disposals. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, evaluation for possible impairment of goodwill is required annually. The amount and timing of any impairment charges based on these assessments may require the estimation of future cash flows or the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, various other projected operating economic factors and other intended uses of the assets. As these key factors change in future periods, the Company will update its impairment analysis to reflect its latest estimates and projections.

Our policy around goodwill impairment testing permits us to perform a qualitative assessment before performing the quantitative goodwill impairment test. If a qualitative assessment is performed, an entity is not required to perform the quantitative goodwill impairment test unless the entity determines that, based on that qualitative assessment, it is more likely than not that its fair value is less than its carrying value.

The Company performed annual testing of its reporting units for possible impairments by performing a qualitative impairment assessment for each of its reporting units as of October 1, 2021. Based upon this analysis, we concluded that it is not more likely than not that the fair value of any of the reporting units is less than its carrying value.

In addition, the Company considered whether there were any events or circumstances outside of the annual evaluation that would reduce the fair value of its reporting units below their carrying amounts and necessitate a goodwill impairment evaluation. In consideration of all relevant factors, there were no indicators that would require goodwill impairment subsequent to October 1, 2021.

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No goodwill impairment charges were recorded in 2021, 2020 or 2019.

Income Taxes

The Company was included in the consolidated tax returns of International Paper prior to the spin-off on October 1, 2021. Accordingly, for the periods prior to the spin-off, we calculated the provision for income taxes by using a separate-return method. Under this method, we are assumed to file a separate return with the tax authority, thereby reporting our taxable income or loss and paying the applicable tax to or receiving the appropriate refund from International Paper. We provided deferred taxes on temporary differences and on any carryforwards that we could claim on our hypothetical return and assessed the need for a valuation allowance on the basis of our projected separate-return results. Any difference between the tax provision (or benefit) allocated to us under the separate-return method and payments to be made to (or received from) International Paper for tax expense is treated as either dividends or capital contributions.

For periods subsequent to the spin-off, we calculate the provision for income taxes for Sylvamo Corporation on a standalone basis. Tax attributes which were recognized under the separate return method but not conveyed to the Company were released through an adjustment to parent company investment effective on the spin-off date.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax balances on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax balances is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if permitted under the tax law and results of recent operations.

We record uncertain tax positions in accordance with ASC 740. Significant judgment is required in evaluating the need for and magnitude of appropriate uncertain tax positions. We estimate uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

While we believe that these judgments and estimates are appropriate and reasonable under the circumstances, actual resolution of these matters may differ from recorded estimates and amounts.

Commitments and Contingent Liabilities

Accruals for contingent liabilities, including personal injury, product liability, environmental, asbestos, value-added tax and other legal matters, are recorded when it is probable that a liability has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. Liabilities accrued for value-added tax and other legal matters require judgments regarding projected outcomes and range of loss based on historical litigation and settlement experience and recommendations of legal counsel and, if applicable, other experts. Liabilities for environmental matters require evaluations of relevant environmental regulations and estimates of future remediation alternatives and costs. Liabilities for asbestos-related matters require review of recent and historical claims data. The Company utilizes its in-house legal and environmental experts to develop estimates of its legal, environmental and asbestos obligations, supplemented as needed by third-party specialists to analyze its most complex contingent liabilities.

RECENT ACCOUNTING DEVELOPMENTS

See Note 3 Recent Accounting Developments in Item 8. Financial Statements and Supplementary Data for a discussion of new accounting pronouncements.

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FOREIGN CURRENCY EFFECTS

The Company has operations in a number of countries. Its operations in those countries also export to, and compete with, imports from other regions. As such, currency movements can have a number of direct and indirect impacts on the Company’s financial statements. Direct impacts include the translation of international operations’ local currency financial statements into U.S. dollars and the remeasurement impact associated with non-functional currency financial assets and liabilities. Indirect impacts include the change in competitiveness of imports into, and exports out of, the countries in which we operate due to the local currency pricing of products. The currencies that have the most impact are the Euro, the Brazilian real, and the Russian ruble.

MARKET RISK

We use financial instruments, including fixed and variable rate debt for capital spending programs. We do not use financial instruments for trading purposes. Additionally, various derivative contracts are used to hedge exposures to interest rate and foreign currency risks.

Interest Rate Risk

Sylvamo is subject to interest rate risk in connection with the issuance of debt. Our exposure to interest rate risk arises primarily from changes in LIBOR. As of December 31, 2021, Sylvamo had floating rate debt of $947 million comprised of Term Loan F, Term Loan B and amounts drawn on the Revolving Credit Facility. At December 31, 2021, the applicable one-month LIBOR rate was 0.10%. Based on the amounts outstanding, a 100-basis point increase in market interest rates would result in a change to annual interest expense of approximately $4 million at December 31, 2021. For more information about our term loans and Revolving Credit Facility, see Note 12 Long-Term Debt to our consolidated and combined financial statements included elsewhere in this Form 10-K

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Foreign Currency Risk

The Company transacts business in many currencies and is also subject to currency exchange rate risk through investments and businesses owned and operated outside the United States. Our objective in managing the associated foreign currency risks is to minimize the effect of adverse exchange rate fluctuations on our after-tax cash flows. We address these risks on a limited basis by entering into cross-currency interest rate swaps or foreign exchange contracts. At December 31, 2021 and 2020, the net fair value of financial instruments with exposure to foreign currency risk was approximately a $2 million liability and a $2 million asset, respectively. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would have been approximately $8 million and $7 million at December 31, 2021 and 2020.