syl-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________

FORM 10-Q

________________


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

For the Quarterly Period Ended March 31, 2022


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

For the Transition Period From to

______________________________

Commission File Number 001-40718

________________

SYLVAMO CORPORATION

(Exact Name of Registrant as Specified in its Charter)

________________


Delaware			86-2596371
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)


6400 Poplar Avenue Memphis, Tennessee			38197
(Address of Principal Executive Offices)			(Zip Code)

901-519-8000

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former name, former address and and former fiscal year if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class to be so registered	Trading Symbol(s)	Name of each exchange on which each class is to be registered
Common Stock, par value $1.00 per share	SLVM	New York Stock Exchange
Preferred Stock Purchase Rights	SLVM	New York Stock Exchange

________________

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (paragraph 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

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

Act. ☐

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

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of May 6, 2022 was 44,111,237.

INDEX


		PAGE NO.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated and Combined Statement s of Operations - Three Months Ended March 31 , 202 2 and 20 21	4
	Condensed Consolidated an d Combined Statement s of Comprehensive Income (Loss) - Three Months Ended March 31 , 202 2 and 20 21	5
	Condensed Co nsolidated Balance Sheet s - March 31 , 202 2 and December 31, 20 21	6
	Condensed Consolidated and Combined Statement s of Cash Flows - Three Months Ended March 31 , 202 2 and 20 21	7
	Notes to Condensed Consolidated and Combined Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 6.	Exhibits	34
Signatures		35

ITEM 1. FINANCIAL STATEMENTS

SYLVAMO CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Unaudited)

(In millions, except per share amounts)


	Three Months Ended March 31,
	2022		2021
NET SALES	$	977	$	778
COSTS AND EXPENSES
Cost of products sold (exclusive of depreciation, amortization and cost of timber harvested shown separately below)	649		525
Selling and administrative expenses	67		41
Depreciation, amortization and cost of timber harvested	34		36
Distribution expenses	85		85
Taxes other than payroll and income taxes	6		7
Impairment of business	68		—
Interest (income) expense, net	16		—
INCOME BEFORE INCOME TAXES	52		84
Income tax provision	26		22
NET INCOME	$	26	$	62
EARNINGS PER SHARE
Basic	$	0.59	$	1.41
Diluted	$	0.59	$	1.41

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

SYLVAMO CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In millions)


	Three Months Ended March 31,
	2022		2021
NET INCOME	$	26	$	62
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Defined Benefit Pension and Postretirement Adjustments:
Amortization of pension and postretirement loss (less tax of $0 and $0)	(1)		—
Change in cumulative foreign currency translation adjustment	99		(155)
Net gains/losses on cash flow hedging derivatives:
Net gains (losses) arising during the period (less tax of ($12) and $1)	29		(2)
Reclassification adjustment for (gains) losses included in net earnings (less tax of $3 and $0)	(6)		—
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX	121		(157)
COMPREHENSIVE INCOME (LOSS)	$	147	$	(95)

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

SYLVAMO CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)


	March 31, 2022		December 31, 2021
	(unaudited)
ASSETS
Current Assets
Cash and temporary investments	$	229	$	180
Accounts and notes receivable, net	483		490
Contract assets	29		29
Inventories	376		342
Other current assets	56		67
Total Current Assets	1,173		1,108
Plants, Properties and Equipment, net	816		885
Forestlands	330		278
Goodwill	151		132
Right of Use Assets	43		41
Deferred Charges and Other Assets	196		153
TOTAL ASSETS	$	2,709	$	2,597
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable	$	435	$	445
Notes payable and current maturities of long-term debt	25		42
Accrued payroll and benefits	46		51
Other current liabilities	181		220
Total Current Liabilities	687		758
Long-Term Debt	1,341		1,358
Deferred Income Taxes	205		169
Other Liabilities	145		130
Commitments and Contingent Liabilities (Note 12)
Equity
Common stock $1 par value, 200.0 shares authorized, 44.1 shares and 43.9 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	44		44
Paid-in capital	8		4
Retained earnings	1,961		1,935
Accumulated other comprehensive loss	(1,680)		(1,801)
	333		182
Less: Common stock held in treasury, at cost, 0.1 shares and 0.0 shares at March 31, 2022 and December 31, 2021, respectively.	(2)		—
Total Equity	331		182
TOTAL LIABILITIES AND EQUITY	$	2,709	$	2,597

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

SYLVAMO CORPORATION

CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Unaudited)

(In millions)


	Three Months Ended March 31,
	2022		2021
OPERATING ACTIVITIES
Net Income	$	26	$	62
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and cost of timber harvested	34		36
Deferred income tax provision, net	(4)		12
Stock-based compensation	4		3
Impairment of business	68		—
Changes in operating assets and liabilities and other
Accounts and notes receivable	30		(16)
Inventories	(31)		2
Accounts payable and accrued liabilities	(56)		10
Other	21		(27)
CASH PROVIDED BY OPERATING ACTIVITIES	92		82
INVESTMENT ACTIVITIES
Invested in capital projects	(19)		(17)
Cash pool arrangements with Parent	—		(11)
Other	—		5
CASH USED FOR INVESTMENT ACTIVITIES	(19)		(23)
FINANCING ACTIVITIES
Net transfers from Parent	—		79
Reduction of debt	(35)		(3)
Other	(4)		—
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES	(39)		76
Effect of Exchange Rate Changes on Cash	15		(61)
Change in Cash and Temporary Investments	49		74
Cash and Temporary Investments
Beginning of the period	180		95
End of the period	$	229	$	169

The accompanying notes are an integral part of these condensed consolidated and combined financial statements.

SYLVAMO CORPORATION

NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

NOTE 1 BASIS OF PRESENTATION

On December 3, 2020, International Paper Company (“International Paper” or “Parent”) announced that its Board of Directors had approved a plan to spin-off its Printing Papers segment along with certain mixed-use coated paperboard and pulp businesses in Europe, Latin America, and North America (collectively referred to herein as the “Company,” “we,” “us,” or “our”), and separate into two distinct publicly-traded companies. On October 1, 2021, we settled the net parent investment and the spin-off was completed by a pro rata distribution to International Paper’s stockholders of approximately 80.1% of our common stock, with International Paper retaining a 19.9% ownership interest. As a result of the spin-off, Sylvamo Corporation is now an independent public company trading on the New York Stock Exchange under the symbol “SLVM.”

Prior to the spin-off, we historically operated as part of International Paper and not as a standalone company. These condensed consolidated and combined financial statements reflect the combined historical 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 condensed 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’’). We recommend that the accompanying condensed consolidated and combined financial statements be read in conjunction with the audited consolidated combined financial statements and the notes thereto included in our 2021 Form 10-K. The accompanying condensed consolidated and combined financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for any interim period are not indicative of the results that might be achieved for a full year.

For the periods prior to the spin-off, the condensed combined statements of operations also include expense allocations for certain functions provided by International Paper, including, but not limited to general corporate expenses related to finance, legal, information technology, human resources, communications, insurance and stock-based compensation. These expenses have been allocated to the Company on the basis of direct usage when identifiable, with the remainder principally allocated on the basis of percent of capital employed, headcount or other measures. During the three months ended March 31, 2021, the Company was allocated $38 million of such general corporate expenses, which were included within “Cost of products sold” and “Selling and administrative expenses.” Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to or the benefit received by the Company during the periods presented. The allocations may not, however, reflect the expenses the Company would have incurred if the Company had been an independent company for all periods presented. Actual costs that may have been incurred if the Company had been an independent company during these periods would depend on several factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. The Company is unable to determine what such costs would have been had the Company been independent during the periods prior to completion of the spin-off.

All intracompany transactions have been eliminated. Related party transactions between the Company and International Paper relating to general operating activities have been included in these condensed consolidated and combined financial statements. These related party transactions historically settled in cash between the Company and International Paper have been reflected in the condensed consolidated and combined statements of cash flows as either “Accounts and notes receivable” or “Accounts payable and accrued liabilities” within operating activities.

The aggregate net effect of transactions with International Paper not settled in cash, including corporate allocations, has been reflected in the condensed consolidated and combined statements of cash flows as “Net transfers from Parent” within financing activities.

In addition, certain of the Company’s Europe locations participated in International Paper’s centralized cash pooling arrangement. Amounts due from the cash pool were generally settled on a daily basis with the aggregate net activity between the Company and International Paper reflected in the condensed consolidated and combined statements of cash flows as “Cash pool arrangements with Parent” within investing activities. Our participation in International Paper’s centralized cash pooling arrangements was terminated prior to September 30, 2021.

International Paper utilized a centralized approach to cash management and financing its operations. This arrangement was not reflective of the manner in which the Company would have been able to finance its operations had it been independent from International Paper for the periods prior to the completion of the spin-off. The cash and temporary investments held by International Paper at the corporate level were not specifically identifiable to the Company and therefore were not reflected in the Company’s condensed combined statements of cash flows. Cash and temporary investments in the condensed combined statements of cash flows for the periods prior to the completion of the spin-off represent only cash and temporary investments held locally by the Company.

The condensed combined financial statements for the periods prior to the completion of the spin-off included certain assets and liabilities that were historically held at the International Paper corporate level but were specifically identifiable or otherwise attributable to the Company. International Paper’s third-party debt and the related interest expense have not been allocated to the Company for any of the periods presented as the Company was not the legal obligor of such debt. 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 proceeds of the debt were used primarily to fund a $1.5 billion special payment to International Paper on September 29, 2021 and pay related fees and expenses.

The Company operates on a calendar year-end.

Russian Actions In Ukraine

Our operations in Russia include a paper mill in Svetogorsk, Russia, and long-term harvesting rights on 860,000 acres of government-owned forestland, and represent approximately 15% of our net sales and 10% of our long-lived assets for the year ended December 31, 2021.

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, directors or employees are specially designated nationals (“SDNs”) or blocked persons, or otherwise named in sanctions packages, and our mill is located near the Finnish border and is not near the conflict in Ukraine. The Company is operating in accordance with applicable sanctions regimes currently in effect. Since the invasion of Ukraine, our Russian operations have experienced loss of suppliers, disruptions in raw materials, increased raw material costs and higher transportation and other supply chain costs. Despite these challenges, the mill remains operational, at a reduced capacity, utilizing substitute materials. The financial performance of our Russian mill was not materially different than our internal plan for the first quarter of 2022 and we have generally maintained the terms and collectability of our customer contracts.

Management, together with risk oversight from the board of directors, continue to actively monitor and enhance the security of our people and the stability of the infrastructure at our Svetogorsk mill, including communications and internet availability. Our business continuity plans are designed to address known contingency scenarios to see that we have adequate processes and practices in place to protect the safety of our people and to handle potential impacts to our infrastructure, and we execute such plans and adapt to developments as they occur.

The Company is pursuing various paths to exit our Russian operations, including a potential sale, and will continue to evaluate those options. As a result of the significant changes in the business climate during the first quarter of 2022, we recorded an impairment charge of $68 million ($57 million net of tax) associated with our Russian operations. The impairment charge was based on a probability-weighted average approach of the potential cash flows from various paths to exit the business. We will continue to evaluate our Russian operations for additional impairment (if any) as more information becomes available regarding the final exit plan and associated cash flows. The final path selected to exit our Russian operations could have a material impact on our results of operations. See Note 7 Impairment of Business for further details.

NOTE 2 SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are described in Note 2 to the audited consolidated and combined financial statements included in our 2021 Form 10-K. There have been no material changes to the significant accounting policies for the three months ended March 31, 2022.

Recently Issued Accounting Pronouncements Not Yet Adopted

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This guidance is effective upon issuance and generally can be applied through December 31, 2022. We will apply the amendments in this update to account for contract modifications due to changes in reference rates once those occur. We do not expect these amendments to have a material impact on our condensed consolidated and combined financial statements.

NOTE 3 REVENUE RECOGNITION

External Net Sales by Product

External net sales by major products were as follows by segment:


	Three Months Ended March 31,
In millions	2022		2021
Europe
Uncoated Papers	$	207	$	180
Coated Paperboard / Other	26		25
Market Pulp	40		39
Europe	273		244
Latin America
Uncoated Papers	196		143
Market Pulp	—		13
Latin America	196		156
North America
Uncoated Papers	486		362
Market Pulp	22		16
North America	508		378
Total	$	977	$	778

Revenue Contract Balances

A contract asset is created when the Company recognizes revenue on its customized products for which we have an enforceable right to payment.

A contract liability is created when customers prepay for goods prior to the Company transferring those goods to the customer. The contract liability is reduced when control of the goods is transferred to the customer, satisfying our performance obligation. The majority of our customer prepayments are received during the fourth quarter each year for goods that will be transferred to customers over the following twelve months. Contract liabilities of $11 million and $17 million are included in “Other current liabilities” as of March 31, 2022 and December 31, 2021, respectively.

The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the difference between the price and quantity at comparable points in time for goods which we have an unconditional right to payment or receive pre-payment from the customer, respectively.

NOTE 4 EQUITY

A summary of changes in equity for the three months ended March 31, 2022 and 2021 is provided below:


Three Months Ended March 31, 2022
In millions	Shares	Common Stock		Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Common Stock Held In Treasury, At Cost		Total Equity
Balance, December 31, 2021	44	$	44	$	4	$	1,935	$	(1,801)	$	—	$	182
Stock-based employee compensation	—	—		4		—		—		(2)		2
Comprehensive income (loss)	—	—		—		26		121		—		147
Balance, March 31, 2022	44	$	44	$	8	$	1,961	$	(1,680)	$	(2)	$	331


Three Months Ended March 31, 2021
In millions	Parent Company Investment		Accumulated Other Comprehensive Loss		Total Equity
Balance, December 31, 2020	3,592		(1,480)		2,112
Net transfers from Parent	82		—		82
Comprehensive income (loss)	62		(157)		(95)
Balance, March 31, 2021	$	3,736	$	(1,637)	$	2,099

NOTE 5 OTHER COMPREHENSIVE INCOME

The following table presents the changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”), net of tax, reported in the condensed consolidated and combined financial statements:


	Three Months Ended March 31,
In millions	2022		2021
Defined Benefit Pension and Postretirement Adjustments
Balance at beginning of period	$	(80)	$	(48)
Amounts reclassified from accumulated other comprehensive income	(1)		—
Balance at end of period	(81)		(48)
Change in Cumulative Foreign Currency Translation Adjustments
Balance at beginning of period	(1,719)		(1,433)
Other comprehensive income (loss) before reclassifications	99		(155)
Balance at end of period	(1,620)		(1,588)
Net Gains and Losses on Cash Flow Hedging Derivatives
Balance at beginning of period	(2)		1
Other comprehensive income (loss) before reclassifications	29		(2)
Amounts reclassified from accumulated other comprehensive income	(6)		—
Balance at end of period	21		(1)
Total Accumulated Other Comprehensive Income (Loss) at End of Period	$	(1,680)	$	(1,637)

NOTE 6 EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that would have been outstanding had potentially dilutive shares of common stock been issued. The dilutive effect of restricted stock units is reflected in diluted earnings per share by applying the treasury stock method.

There are no adjustments required to be made to net income for purposes of computing basic and diluted earnings per share.

These financial statements are prepared on the basis that, at the date of distribution of Sylvamo common stock by International Paper to its shareholders on October 1, 2021, Sylvamo had 43,949,277 total shares of common stock outstanding. The calculation of earnings per share utilizes the number of shares of common stock outstanding at the date of distribution as the basis for the calculation of the weighted average number of shares of common stock outstanding for periods presented prior to the spinoff because, at that time, Sylvamo did not operate as a separate, stand-alone entity, and no shares or equity-based awards were outstanding prior to the date of distribution.

Basic and diluted earnings per share are calculated as follows:


	Three Months Ended March 31,
In millions, except per share amounts	2022		2021
Net income	$	26	$	62
Weighted average common shares outstanding	44.0		43.9
Effect of dilutive securities	0.2		—
Weighted average common shares outstanding - assuming dilution	44.2		43.9