Sylvamo Corp (SLVM) FY 2024 MD&A

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 financial statements and related notes included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. In addition to historical consolidated 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 Annual Report on Form 10-K, particularly under the headings “Risk Factors” and “Forward-Looking Statements.”

The following generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussion of historical items in 2022, and year-to-year comparisons between 2023 and 2022, can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 21, 2024, under Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The consolidated 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’’) and may not be indicative of the Company’s future performance.

EXECUTIVE SUMMARY

Full-year 2024 net income was $302 million ($7.18 per diluted share) compared with $253 million ($5.93 per diluted share) for 2023. Net sales increased to $3.8 billion in the current year compared with $3.7 billion in 2023. Cash from continuing operations was $469 million in the current year compared to $504 million in the prior year. Adjusted EBITDA was $632 million in 2024, which represents an increase of $25 million from the prior year adjusted EBITDA of $607 million. Additionally, our 2024 adjusted EBITDA margin was 16.8% compared to 16.3% in the prior year and free cash flow was $248 million compared to $294 million last year.

Comparing our performance in 2024 to 2023, higher volumes were driven by stronger demand for uncoated freesheet across all three of our regions. Unabsorbed fixed costs due to economic manufacturing downtime in Europe and North America declined significantly in 2024. These factors, in addition to more favorable input costs and lower planned maintenance outages, were partially offset by lower price and mix and less favorable operations. We generated solid free cash flow again this year. We generated $248 million in free cash flow, repaid $154 million in debt, and returned $130 million in cash to shareholders. Additionally, we reinvested $221 million across our manufacturing network and our Brazil forestlands to strengthen our low-cost position. We also accelerated the development of high-return capital project investments.

Looking ahead to 2025, we remain committed to generating strong adjusted EBITDA and free cash flow while returning cash to shareowners. Our financial results for the three full years since spin-off have established a solid track record and are indicative of our ability to navigate industry conditions, geopolitical events and other uncertainty that we may face. We are confident in our ability to continue to create value for our customers and shareowners.

Acquisition of Nymölla

On January 2, 2023, the Company completed the previously announced acquisition of Stora Enso’s uncoated freesheet paper mill in Nymölla, Sweden. Sylvamo accounted for the acquisition under ASC 805, “Business Combinations” and the Nymölla mill’s results of operations are included in Sylvamo’s consolidated financial statements from the date of acquisition. See Note 7 Acquisitions to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details.

Divestiture of Russian Operations

During the second quarter of 2022, management committed to a plan to sell the Company’s Russian operations (which were sold on October 2, 2022). As a result, all historical operating results of the Company’s Russian operations have been classified as “Discontinued operations, net of taxes” in the consolidated statements of operations and the notes to the consolidated financial statements. In October 2022, the Company completed the sale of its Russian operations to Pulp Invest Limited Liability Company, a company incorporated in the Russian Federation. See Note 8 Divestiture and Impairment of Business to our financial statements included elsewhere in this Annual Report on Form 10-K for further details.

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RESULTS OF OPERATIONS

When reading our financial statements and the information included in this Annual Report on Form 10-K, 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. Historically, economic and market shifts, inflationary pressures, fluctuations in capacity and changes in foreign currency exchange rates have created changes in prices, sales volume and margins for our products.

Consumer Behavior

Factors that impact the demand for our products include general macroeconomic conditions, consumer preferences, movements in currency exchange rates, consumer spending, commercial printing and advertising activity, adoption of electronic mediums, and white-collar employment and the shift to hybrid work models.

DESCRIPTION OF BUSINESS SEGMENTS

The Company’s reportable business segments, Europe, Latin America and North America, are organized by geography and are consistent with the internal structure used to manage these businesses. Each of our segments derive their revenue from the manufacture and sale of paper and pulp products. The following summary describes the products and services offered in each of the segments as of December 31, 2024:

Europe

Our Europe segment produces a broad portfolio of uncoated freesheet papers for numerous uses and applications, and market pulp. We operate two integrated mills in the region, one in Saillat, France and one in Nymölla, Sweden. 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. In January 2023, the Company acquired a paper mill in Nymölla, Sweden. The integrated mill has two pulp lines and the capacity to produce approximately 500,000 short tons of uncoated freesheet on two paper machines. The mill produces several brands, including Multicopy, and paper used for office printing, business forms, digital printing, offset for printing books and much more. The Nymölla mill has an excellent environmental footprint, which complements Sylvamo’s purpose to produce paper in the most responsible and sustainable ways.

Latin America

Our Latin American operations focus on uncoated freesheet paper and market pulp, supported by the management of approximately 250,000 acres of certified eucalyptus forestlands in Brazil. With a total uncoated freesheet paper capacity exceeding 1.1 million short tons, our three mills in Brazil serve both regional and international markets, being a key supplier in Latin America and a solid global exporter, reaching customers in over 130 countries. Our portfolio includes market-leading brands such as Chamex and Chamequinho copy papers, widely recognized by consumers and distribution channels for their superior quality. Additionally, Chambril offset papers are trusted by printers and converters for their versatility and reliability across various applications. Chambril is available in a wide range of basis weights and specifications to meet the demands of books, notebooks, inserts, leaflets, and industrial end-use requirements. All the products are primarily made from sustainably sourced eucalyptus, which is cultivated and harvested in less than seven years. Latin America operations combine sustainable forestry practices, operational excellence, strong brands and global distribution network.

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North America

The North American paper business manufactures uncoated freesheet papers at its mills in Eastover, South Carolina and Ticonderoga, New York and has an offtake agreement to purchase the uncoated papers produced by International Paper’s Riverdale mill in Selma, Alabama. The North American papers business comprises three product lines, 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 13% 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 business segment 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 business segment operating profit provides investors and analysts useful insights into our operating performance. Business segment operating profit is reconciled to Income from continuing operations before income taxes, the most directly comparable GAAP measure. Business segment operating profit may be determined or calculated differently by other companies and therefore may not be comparable among companies.

The following table presents a comparison of income from continuing operations before income taxes to business segment operating profit:

(a)    We define business segment operating profit as our income from continuing operations before income taxes calculated in accordance with GAAP, excluding net interest expense (income) and net special items. We believe that business segment 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.

(b)    Net 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 legal fees related to the Brazil Tax Dispute, a loss related to forest fires in Brazil, foreign VAT refunds, transaction and integration costs related to the Nymölla acquisition, professional and legal fees related to negotiations resulting in a shareholder cooperation agreement, the impact of the step-up of acquired Nymölla inventory sold during the first quarter of 2023 and certain severance costs related to our salaried workforce.

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The following tables present Sales and Operating profit (loss), which is the Company’s measure of segment profitability, for each of the Company’s segments. See Note 17 Financial Information by Business Segment and Geographic Area to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on the Company’s segments.

Europe

For the year ended December 31, 2024, our Europe segment sales decreased $20 million compared to the same period in 2023, primarily due to lower sales price and mix ($58 million) which more than offset higher volumes ($39 million).

Europe operating profit for the year ended December 31, 2024 was $35 million higher than the same period in 2023 as lower planned maintenance outages ($26 million), lower unabsorbed costs due to economic downtime ($27 million), lower operating costs ($11 million), lower input costs ($16 million), primarily for chemicals, and higher volumes ($13 million) more than offset the impact of lower sales price and mix ($58 million).

Latin America

For the year ended December 31, 2024, our Latin America segment sales decreased $32 million compared to the same period in 2023, primarily driven by lower sales price and mix ($35 million) and significant unfavorable foreign exchange impacts which were partially offset by higher volumes ($39 million).

Operating profit for Latin America for the year ended December 31, 2024 was $47 million lower than the same period in 2023, primarily driven by the impact of lower sales price and mix ($34 million), higher operating costs ($18 million) and higher planned maintenance outages ($9 million) which more than offset higher volumes ($9 million) and lower input costs, primarily for chemicals and pulp ($5 million).

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North America

For the year ended December 31, 2024, our North America segment sales increased $78 million, compared to the same period in 2023, primarily driven by higher volumes ($145 million) which more than offset lower sales price and mix ($68 million).

Operating profit for North America for the year ended December 31, 2024 was $24 million higher than the same period in 2023 as higher volume ($45 million), lower unabsorbed costs due to economic downtime ($56 million) and lower input costs, primarily for chemicals, wood and distribution ($20 million), more than offset lower sales price and mix ($68 million), higher operating costs ($28 million) and slightly higher planned maintenance outages ($1 million).

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 uses this measure in managing the operating performance of our business and believes that Adjusted EBITDA provide 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, 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.

(a) Net 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 legal fees related to the Brazil Tax Dispute, foreign VAT refunds, transaction and integration costs related to the Nymölla acquisition, professional and legal fees related to negotiations resulting in a shareholder cooperation agreement, the impact of the step-up of acquired Nymölla inventory sold during the first quarter of 2023 and certain severance costs related to our salaried workforce.

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

Free cash flow is a non-GAAP measure and the most directly comparable GAAP measure is cash provided by operating activities from continuing 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 return cash to shareholders. 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.

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The following are reconciliations of cash provided by operating activities from continuing operations to free cash flow:

The non-GAAP financial measures presented in this Annual Report on 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 Annual Report on 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

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.

The terms of the agreements governing our debt contain customary limitations 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 from continuing operations totaled $469 million for the year ended December 31, 2024, compared with cash provided by operating activities from continuing operations of $504 million for the year ended December 31, 2023. The decrease in cash provided by operating activities from continuing operations in 2024 relates primarily to changes in working capital which was partially offset by higher net income.

Cash used for working capital components (accounts and notes receivable, inventories, accounts payable and accrued liabilities, and other) was $8 million for the year ended December 31, 2024, compared with cash provided by working capital components of $85 million for the year ended December 31, 2023. Working capital components for the year ended December 31, 2024 primarily reflect $47 million of cash used for accounts and notes receivable and $28 million cash used for other operating activities. This activity was offset by $25 million of cash provided by inventories and $42 million of cash provided by accounts payable and accrued liabilities.

Investment Activities

The total cash outflow from investing activities from continuing operations for the year ended December 31, 2024 decreased from the year ended December 31, 2023, primarily due to the purchase of the Nymölla mill which occurred in the prior year.

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

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Capital spending primarily consists of purchases of machinery and equipment and reforestation related to our global mill operations. As a percentage of depreciation, amortization and cost of timber harvested, capital spending totaled 139% and 147% for the years ended December 31, 2024 and 2023, respectively.

Financing Activities

Cash used for financing activities from continuing operations for the year ended December 31, 2024 primarily reflects the payments of $218 million, $49 million, $35 million, $10 million, and $3 million on our outstanding principal debt balances for Term Loan F, Term Loan A, the AR Securitization, Revolving Credit Facility, and Term Loan F-2, respectively. Additionally, payments of $93 million were made to redeem, at a premium, the full value of our 7.00% Senior Notes and pay $5 million in debt issuance costs in connection with the debt refinancing in the third quarter of 2024. These amounts are primarily offset by the issuance of Term Loan F-2, draws on our Revolving Credit Facility, and AR Securitization of $235 million, $10 million, and $6 million, respectively. During the year ended December 31, 2024, the Company also paid $62 million in dividends and paid $69 million to repurchase shares pursuant to our share repurchase program.

Cash used for financing activities from continuing operations for the year ended December 31, 2023 primarily reflects the payments of $70 million, $36 million, $26 million, and $31 million on our outstanding principal debt balances for the Revolving Credit Facility, AR Securitization, Term Loan F, and Term Loan A, respectively. Additionally, $360 million was paid to bond holders as part of our tender offer. These amounts are primarily offset by the issuance of Term Loan A, draws on our Revolving Credit Facility, and AR Securitization of $300 million, $70 million, and $78 million, respectively. During the year ended December 31, 2023, the Company also paid $57 million in dividends and paid $70 million to repurchase shares pursuant to our share repurchase program.

Contractual Obligations

Contractual obligations for future payments at December 31, 2024 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 $2 million in 2025, an average of $2 million from 2025 to 2029 and $7 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 $305 million in 2025, $168 million in 2026 and average $58 million annually from 2027 to 2029, with $109 million thereafter.

At December 31, 2024, contractual obligations for future payments of debt maturities (including finance lease liabilities disclosed in Note 10 Leases) by calendar year were as follows: 2025 - $22 million; 2026 - $25 million; 2027 - $370 million; 2028 - $25 million; 2029 - $191 million; thereafter - $180 million.

Capital Expenditures

For the year ended December 31, 2024, we have invested approximately $221 million, or 5.9% of net sales in total capital expenditures. Of that amount, we spent approximately $195 million, or 5.2% of net sales, on maintenance, regulatory and reforestation capital expenditures, and approximately $27 million, or 0.7% of net sales, on high-return capital projects. Our annual maintenance, regulatory and reforestation capital expenditures are expected to be in the range of approximately $175 to $190 million per year (before inflation) for the next several years, which we believe will be sufficient to maintain our operations and productivity. In addition, we expect to invest approximately $50 to $70 million in high-return projects in 2025.

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PILLAR TWO DIRECTIVE

The Organization for Economic Co-Operation and Development (“OECD”) has been working on a project to act to prevent what it refers to as base erosion and profit shifting (“BEPS”). Most recently, the OECD, through an association of almost 140 countries known as the “inclusive framework,” has announced a consensus to address, among other things, perceived challenges presented by global digital commerce (“Pillar 1”) and the perceived need for a minimum global effective tax rate of 15% (“Pillar 2”). On December 15, 2022, the European Union formally adopted the Pillar Two Directive, and a majority of EU member states have enacted the directive into domestic law as of December 31, 2023. Other countries are taking similar actions. We have evaluated the developments and do not anticipate any material impact on our financial position, results of operations, or cash flows.

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 or may, if a business is classified as held for sale, exceed the sales price less costs to dispose. 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 or a 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 its annual testing of goodwill impairment by applying the qualitative assessment to its France reporting unit as of October 1, 2024. For the current year evaluation, the Company assessed various assumptions, events and circumstances that would have affected the estimated fair value of the reporting unit under the qualitative assessment. The results of the qualitative assessment indicated that it is not more likely than not that the fair values of its France reporting unit was less than its carrying value.

The Company also performed its annual testing of goodwill impairment by applying the quantitative goodwill impairment test to its Brazil reporting unit due to the length of time lapsed since the previous quantitative goodwill impairment test. The Company calculated the estimated fair value of the Brazil reporting unit using a probability-weighted approach based on discounted future cash flows, market multiples and transaction multiples. As a result, the Company concluded that the fair value of the Brazil reporting unit was substantially in excess of carrying value and no goodwill impairment charge was recorded.

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, 2024.

No goodwill impairment charges were recorded in 2024, 2023 or 2022.

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Income Taxes

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. 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. If we determine that we would not be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would not benefit the projected losses in our annual effective estimated tax rate and/or make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

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 environmental and safety matters, taxes (including VAT), personal injury, product liability, labor and employment, contracts, sales of property and other 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. Claims-based liabilities require review of recent and historical claims data. The Company utilizes its in-house legal and environmental experts to develop estimates and involves third-party specialists as needed 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.

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 on our continuing operations are the Euro and the Brazilian real.

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MARKET RISK

We use financial instruments, including fixed and variable rate debt. 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 SOFR. As of December 31, 2024, Sylvamo had floating rate debt of $796 million comprised of Term Loan F, Term Loan F-2, Term Loan A and amounts drawn on the Securitization Program, which is partially offset by $652 million of interest rate swaps. At December 31, 2024, the applicable one-month SOFR rate was 4.36%. Based on the amounts outstanding, a 100-basis point increase in market interest rates would result in a change to annual interest expense, including the impact of the swaps, of approximately $1 million at December 31, 2024. As of December 31, 2023, Sylvamo had floating rate debt of $859 million comprised of Term Loan F, Term Loan A and amounts drawn on the Securitization Program, which is partially offset by $469 million of interest rate swaps. At December 31, 2023, the applicable one-month SOFR rate was 5.36%. 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, 2023. For more information about our term loans, Revolving Credit Facility, and Securitization Program see Note 14 Long-Term Debt to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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 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, 2024 and 2023 the net fair value of financial instruments with exposure to foreign currency risk was approximately a $14 million liability and a $6 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 $14 million and $12 million at December 31, 2024 and 2023, respectively.