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Domtar 10-Q 2011
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from________to________

COMMISSION FILE NUMBER 001-33164

 

 

DOMTAR CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-5901152
(State of Incorporation)   (I.R.S. Employer Identification No.)

395 de Maisonneuve West, Montreal, Quebec H3A 1L6 Canada

(Address of principal executive offices) (zip code)

(514) 848-5555

(Registrant’s telephone number)

 

 

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  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

At October 31, 2011, 36,446,349 shares of the issuer’s voting common stock were outstanding.

 

 

 


Table of Contents

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2011

INDEX

 

PART I.

   FINANCIAL INFORMATION      3   

ITEM 1.

   FINANCIAL STATEMENTS (UNAUDITED)      3   
   CONSOLIDATED STATEMENTS OF EARNINGS      3   
   CONSOLIDATED BALANCE SHEETS      4   
   CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY      5   
   CONSOLIDATED STATEMENTS OF CASH FLOWS      6   
   INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      7   
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      8   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     43   

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK      63   

ITEM 4.

   CONTROLS AND PROCEDURES      64   

PART II

   OTHER INFORMATION      64   

ITEM 1.

   LEGAL PROCEEDINGS      64   

ITEM 1A.

   RISK FACTORS      64   

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      65   

ITEM 3.

   DEFAULT UPON SENIOR SECURITIES      65   

ITEM 4.

   REMOVED AND RESERVED      65   

ITEM 5.

   OTHER INFORMATION      65   

ITEM 6.

   EXHIBITS      65   


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

     For the three months ended     For the nine months ended  

CONSOLIDATED STATEMENTS OF EARNINGS

   September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 
     (Unaudited)  
     $     $     $     $  

Sales

     1,417        1,473        4,243        4,477   

Operating expenses

        

Cost of sales, excluding depreciation and amortization

     1,055        1,048        3,132        3,397   

Depreciation and amortization

     93        97        281        300   

Selling, general and administrative

     75        91        253        244   

Impairment and write-down of property, plant and equipment (NOTE 11)

     8        14        73        50   

Closure and restructuring costs (NOTE 11)

     1        1        14        26   

Other operating loss (income), net (NOTE 7)

     (2     (14     (3     12   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,230        1,237        3,750        4,029   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     187        236        493        448   

Interest expense, net

     25        24        67        126   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     162        212        426        322   

Income tax expense

     45        21        122        42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     117        191        304        280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per common share (in dollars) (NOTE 5)

        

Net earnings

        

Basic

     2.96        4.47        7.43        6.53   

Diluted

     2.95        4.44        7.38        6.48   

Weighted average number of common and exchangeable shares outstanding (millions)

        

Basic

     39.5        42.7        40.9        42.9   

Diluted

     39.7        43.0        41.2        43.2   

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

 

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Table of Contents

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

     At  
     September 30,
2011
    December 31,
2010
 
     (Unaudited)  
     $     $  

Assets

    

Current assets

    

Cash and cash equivalents

     461        530   

Receivables, less allowances of $5 and $7

     679        601   

Inventories (NOTE 8)

     630        648   

Prepaid expenses

     24        28   

Income and other taxes receivable

     51        78   

Deferred income taxes

     115        115   
  

 

 

   

 

 

 

Total current assets

     1,960        2,000   

Property, plant and equipment, at cost

     8,424        9,255   

Accumulated depreciation

     (4,934     (5,488
  

 

 

   

 

 

 

Net property, plant and equipment

     3,490        3,767   

Goodwill (NOTE 9)

     163        —     

Intangible assets, net of amortization (NOTE 10)

     205        56   

Other assets

     202        203   
  

 

 

   

 

 

 

Total assets

     6,020        6,026   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities

    

Bank indebtedness

     17        23   

Trade and other payables

     753        678   

Income and other taxes payable

     29        22   

Long-term debt due within one year (NOTE 13)

     5        2   
  

 

 

   

 

 

 

Total current liabilities

     804        725   

Long-term debt (NOTE 13)

     837        825   

Deferred income taxes and other

     1,052        924   

Other liabilities and deferred credits

     328        350   

Commitments and contingencies (NOTE 15)

    

Shareholders’ equity

    

Common stock
$0.01 par value; authorized 2,000,000,000 shares; issued: 42,447,365 and 42,300,031 shares

     —          —     

Treasury stock (NOTE 14)
$0.01 par value; 5,296,520 and 664,857 shares

     —          —     

Exchangeable shares
No par value; unlimited shares authorized; issued and held by nonaffiliates: 678,475 and 812,694 shares

     53        64   

Additional paid-in capital

     2,388        2,791   

Retained earnings

     623        357   

Accumulated other comprehensive loss

     (65     (10
  

 

 

   

 

 

 

Total shareholders’ equity

     2,999        3,202   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     6,020        6,026   
  

 

 

   

 

 

 

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

 

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Table of Contents

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’
EQUITY

   Issued and
outstanding
common and
exchangeable
shares
(millions of
shares)
    Exchangeable
shares
    Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income (loss)
    Total
shareholders’
equity
 
     (Unaudited)  
           $     $     $     $     $  

Balance at December 31, 2010

     42.4        64        2,791        357        (10     3,202   

Conversion of exchangeable shares

     —          (11     11        —          —          —     

Stock-based compensation

     0.4        —          12        —          —          12   

Net earnings

     —          —          —          304        —          304   

Net derivative gains on cash flow hedges:

            

Net gain arising during the period, net of tax of $(5)

     —          —          —          —          (12     (12

Less: Reclassification adjustments for losses included in net earnings, net of tax of nil

     —          —          —          —          (3     (3

Foreign currency translation adjustments

     —          —          —          —          (56     (56

Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans

     —          —          —          —          16        16   

Stock repurchase

     (5.0     —          (426     —          —          (426

Cash dividends

     —          —          —          (38     —          (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     37.8        53        2,388        623        (65     2,999   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

      For the nine months ended  

CONSOLIDATED STATEMENTS OF CASH FLOWS

   September 30,
2011
    September 30,
2010
 
     (Unaudited)  
     $     $  

Operating activities

    

Net earnings

     304        280   

Adjustments to reconcile net earnings to cash flows from operating activities

    

Depreciation and amortization

     281        300   

Deferred income taxes and tax uncertainties

     56        7   

Impairment and write-down of property, plant and equipment

     73        50   

Loss on repurchase of long-term debt

     4        40   

Net losses (gains) on disposals of property, plant and equipment and sale of businesses

     (5     33   

Stock-based compensation expense

     3        3   

Other

     —          (6

Changes in assets and liabilities, excluding the effects of acquisition and sale of businesses

    

Receivables

     (56     (134

Inventories

     20        40   

Prepaid expenses

     (4     (2

Trade and other payables

     14        (4

Income and other taxes

     27        375   

Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense

     (7     5   

Other assets and other liabilities

     1        13   
  

 

 

   

 

 

 

Cash flows provided from operating activities

     711        1,000   
  

 

 

   

 

 

 

Investing activities

    

Additions to property, plant and equipment

     (64     (112

Proceeds from disposals of property, plant and equipment

     34        26   

Proceeds from sale of businesses

     10        161   

Acquisition of business, net of cash acquired

     (288     —     
  

 

 

   

 

 

 

Cash flows (used for) provided from investing activities

     (308     75   
  

 

 

   

 

 

 

Financing activities

    

Dividend payments

     (36     (11

Net change in bank indebtedness

     (7     (16

Repayment of long-term debt

     (17     (763

Borrowings under accounts receivable securitization program

     —          20   

Premium paid on debt repurchases

     (7     (26

Stock repurchase

     (415     (44

Prepaid on structured stock repurchase, net

     —          (19

Other

     10        (3
  

 

 

   

 

 

 

Cash flows used for financing activities

     (472     (862
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (69     213   

Translation adjustments related to cash and cash equivalents

     —          —     

Cash and cash equivalents at beginning of period

     530        324   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     461        537   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Net cash payments for:

    

Interest

     51        77   

Income taxes paid

     42        24   
  

 

 

   

 

 

 

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

 

6


Table of Contents

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1    BASIS OF PRESENTATION    8
NOTE 2    RECENT ACCOUNTING PRONOUNCEMENTS    9
NOTE 3    ACQUISITION OF BUSINESS    10
NOTE 4    DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT    11
NOTE 5    EARNINGS PER SHARE    17
NOTE 6    PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS    18
NOTE 7    OTHER OPERATING LOSS (INCOME), NET    21
NOTE 8    INVENTORIES    22
NOTE 9    GOODWILL    23
NOTE 10    INTANGIBLE ASSETS    24
NOTE 11    CLOSURE AND RESTRUCTURING LIABILITY    25
NOTE 12    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME    27
NOTE 13    LONG-TERM DEBT    28
NOTE 14    SHAREHOLDERS’ EQUITY    29
NOTE 15    COMMITMENTS AND CONTINGENCIES    31
NOTE 16    SEGMENT DISCLOSURES    34
NOTE 17    SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION    36

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed in the Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Results for the first nine months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the Securities and Exchange Commission. The December 31, 2010 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

STOCK COMPENSATION

In April 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Compensation – Stock Compensation, which addresses the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying security trades. This update clarifies that those employee share-based payment awards should not be considered to contain a condition that is not a market, performance, or service condition and therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.

This update is effective for fiscal years and interim periods beginning on or after December 15, 2010 with early adoption permitted. The Company adopted the new requirement on January 1, 2011 with no impact on the Company’s consolidated financial statements.

FUTURE ACCOUNTING CHANGES

COMPENSATION – RETIREMENT BENEFITS

In September 2011, the FASB issued an update to Compensation – Retirement Benefits, which addresses the disclosures about an employer’s participation in a multiemployer plan. This update will require additional disclosures about multiemployer plans to improve transparency and increase awareness of the commitments and risks involved with participation in multiemployer plans. The new accounting guidance requires employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans.

This update is effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. The Company anticipates that the adoption of this standard will expand its consolidated financial statement footnote disclosures and will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

INTANGIBLES – GOODWILL AND OTHER

In September 2011, the FASB issued an update to Intangibles – Goodwill and Other, which simplify how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

The amended provisions are effective for reporting periods beginning on or after December 15, 2011, with early adoption permitted. This amendment impacts impairment testing steps only, and therefore adoption will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. ACQUISITION OF BUSINESS

On September 1, 2011, Domtar Corporation completed the acquisition of 100% of the outstanding shares of Attends Healthcare Inc., (“Attends”). Attends produces a complete line of incontinence care products and distributes washcloths marketed primarily under the Attends® brand name. The company has a wide product offering encompassing 170 items and it serves a diversified customer base in multiple channels throughout the United States and Canada. Attends has approximately 330 employees and the facility is located in Greenville, North Carolina. The results of Attends’ operations have been included in the consolidated financial statements as of September 1, 2011, and are included in the Personal Care segment. The purchase price was $288 million in cash, including working capital, net of acquired cash of $12 million, subject to post-closing adjustments. The acquisition was accounted for as a business combination under the acquisition method of accounting, in accordance with the Business Combinations Topic of FASB Accounting Standards Codification (“ASC”).

The total purchase price is allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s preliminary estimates of their fair value, which are based on information currently available. The items to be finalized are capital lease assets and obligations, intangible assets, both current and non-current deferred tax liabilities which are subject to change, pending the finalization of certain tax returns and residual goodwill. The Company will complete the valuation of all assets and liabilities within the next twelve months.

The table below illustrates the preliminary purchase price allocation:

Fair value of net assets acquired at the date of acquisition

 

Receivables

      $ 12   

Inventory

        17   

Property, plant and equipment

        54   

Intangible assets (Note 10)

     

Trade names (1)

     61      

Customer relationships (2)

     93      
        154   

Goodwill (Note 9)

        163   

Other assets

        4   
     

 

 

 

Total assets

        404   

Less: Liabilities

     

Trade and other payables

        15   

Income and other taxes payable

        2   

Capital lease obligation

        31   

Deferred income tax liabilities

        66   

Other liabilities

        2   
     

 

 

 

Total liabilities

        116   

Fair value of net assets acquired at the date of acquisition

        288   

 

(1) 

Indefinite useful life.

(2)

The useful life of the Customer relationships acquired is expected to be 40 years.

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation of the business, the assembled workforce, and the expected future cash flows of the business. Disclosed goodwill is not deductible for tax purposes. Pro forma results have not been provided, as the acquisition had no material impact on the Company.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

INTEREST RATE RISK

The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, its bank indebtedness, its bank credit facility and its long-term debt. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts.

CREDIT RISK

The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As at September 30, 2011, the Company had one customer, which represented 10% of its receivables (December 31, 2010 – 6%).

The Company is also exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company minimizes this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored. Additionally, the Company is exposed to credit risk in the event of non-performance by its insurers. The Company minimizes this exposure by doing business only with large reputable insurance companies.

COST RISK

Cash flow hedges:

The Company purchases natural gas and oil at the prevailing market price at the time of delivery. In order to manage the cash flow risk associated with purchases of natural gas and oil, the Company may utilize derivative financial instruments or physical purchases to fix the price of forecasted natural gas and oil purchases. The Company formally documents the hedge relationships, including identification of the hedging instruments and the hedged items, the risk management objectives and strategies for undertaking the hedge transactions, and the methodologies used to assess effectiveness and measure ineffectiveness. Current contracts are used to hedge forecasted purchases over the next three years. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 2011 to hedge forecasted purchases:

 

Commodity

  

Notional contractual quantity
under derivative contracts

         Notional contractual value
under derivative contracts
(in millions of dollars)
     Percentage of forecasted
purchases under
derivative
contracts for
 
                       2011     2012     2013     2014  

Natural gas

   7,320,000      MMBTU (1)    $ 38                         29     27     13     2

 

(1) MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective for accounting purposes as of September 30, 2011. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings for the three and nine months ended September 30, 2011 resulting from hedge ineffectiveness (three and nine months ended September 30, 2010 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States and Canada. As a result, it is exposed to movements in the foreign currency exchange rate in Canada. Also, certain assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. As a result, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar relative to the U.S. dollar. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates. Foreign exchange forward contracts are contracts whereby the Company has the obligation to buy Canadian dollars at a specific rate. Currency options purchased are contracts whereby the Company has the right, but not the obligation, to buy Canadian dollars at the strike rate if the Canadian dollar trades above that rate. Currency options sold are contracts whereby the Company has the obligation to buy Canadian dollars at the strike rate if the Canadian dollar trades below that rate.

The Company formally documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions. Foreign exchange forward contracts and currency options contracts used to hedge forecasted purchases in Canadian dollars are designated as cash flow hedges. Current contracts are used to hedge forecasted purchases over the next 12 months. The effective portion of changes in the fair value of derivative contracts designated as cash flow hedges is recorded as a component of Accumulated other comprehensive loss within Shareholders’ equity, and is recognized in Cost of sales in the period in which the hedged transaction occurs.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

The following table presents the currency values under contracts pursuant to currency options outstanding as of September 30, 2011 to hedge forecasted purchases:

 

Contract

          Notional contractual value      Percentage of CDN denominated
forecasted expenses, net of  revenues
under contracts for
 
                   2011     2012  

Currency options purchased

     CDN       $ 400         50     38

Currency options sold

     CDN       $ 400         50     38

The currency options are fully effective as at September 30, 2011. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings for the three and nine months ended September 30, 2011 resulting from hedge ineffectiveness (three and nine months ended September 30, 2010 – nil).

The Effect of Derivative Instruments on the Consolidated Statements of Earnings and Consolidated Statement of Shareholders’ Equity

 

Derivatives Designated as

Cash Flow Hedging Instruments

under the Derivatives and Hedging

Topic of FASB ASC

   Gain (Loss) Recognized in
Accumulated Other Comprehensive
Loss on Derivatives
(Effective Portion)
    Gain (Loss) Reclassified from Accumulated
Other Comprehensive
Loss into Income
(Effective Portion)
 
     For the three months ended     For the three months ended  
     September 30, 2011     September 30, 2010     September 30, 2011      September 30, 2010  
     $     $     $      $  

Natural gas swap contracts (a)

     (2     (2     —           (2

Currency options (a)

     (15     3        1         2   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

     (17     1        1         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) The Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) is recorded in Cost of Sales.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

The Effect of Derivative Instruments on the Consolidated Statements of Earnings and Consolidated Statement of Shareholders’ Equity

 

Derivatives Designated as

Cash Flow Hedging Instruments

under the Derivatives and Hedging

Topic of FASB ASC

   Loss Recognized in
Accumulated Other Comprehensive
Loss on Derivatives

(Effective Portion)
    Gain (Loss) Reclassified from Accumulated
Other Comprehensive
Loss into Income

(Effective Portion)
 
     For the nine months ended     For the nine months ended  
     September 30, 2011     September 30, 2010     September 30, 2011     September 30, 2010  
     $     $     $     $  

Natural gas swap contracts (a)

     (3     (7     (3     (6

Currency options (a)

     (9     (3     6        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (12     (10     3        10   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) is recorded in Cost of Sales.

The cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts of $6 million as at September 30, 2011, will be recognized in Cost of sales upon maturity of the derivatives over the next three years at the then prevailing values, which may be different from those at September 30, 2011.

The cumulative loss recorded in Accumulated other comprehensive loss relating to currency options of $9 million as at September 30, 2011, will be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at September 30, 2011.

The accounting standards for fair value measurements and disclosures, establish a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.

 

Level 1

   Quoted prices in active markets for identical assets or liabilities.

Level 2

   Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

   Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (c) below) at September 30, 2011 and December 31, 2010, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:

 

Derivatives designated as cash
flow hedging instruments under
the Derivatives and Hedging
Topic of FASB ASC:
   September 30,
2011
     Quoted prices in
active markets for
identical assets
(Level 1)
     Significant
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
    

Balance sheet classification

     $      $      $      $       

Asset derivatives

              

Currency options

     6         —           6         —         (a) Prepaid expenses
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Assets

     6         —           6         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Liabilities derivatives

              

Currency options

     15         —           15         —         (a) Trade and other payables

Natural gas swap contracts

     5         —           5         —         (a) Trade and other payables

Natural gas swap contracts

     1         —           1         —         (a) Other liabilities and deferred credits
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Liabilities

     21         —           21         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Other Instruments:

              

Asset backed commercial paper investments (“ABCP”)

     6         —           —           6       (b) Other assets

Long-term debt

     986         986         —           —         (c) Long-term debt
  

 

 

    

 

 

    

 

 

    

 

 

    

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

 

Fair Value of financial instruments at:

 

Derivatives designated as cash
flow hedging instruments under
the Derivatives and Hedging
Topic of FASB ASC:
   December 31,
2010
     Quoted prices in
active markets for
identical assets
(Level 1)
     Significant
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
    

Balance sheet classification

     $      $      $      $       

Asset derivatives

              

Currency options

     14         —           14         —         (a) Prepaid expenses
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Assets

     14         —           14         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Liabilities derivatives

              

Currency options

     3         —           3         —         (a) Trade and other payables

Natural gas swap contracts

     7         —           7         —         (a) Trade and other payables

Natural gas swap contracts

     2         —           2         —         (a) Other liabilities and deferred credits
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Liabilities

     12         —           12         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Other Instruments:

              

ABCP

     6         —           —           6       (b) Other assets

Long-term debt

     979         979         —           —         (c) Long-term debt
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(a) Fair value of the Company’s derivatives is classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows:

 

  For currency options: Fair value is measured using techniques derived from the Black-Scholes pricing model. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques.

 

  For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates.

 

(b) Fair value of ABCP investments is classified under Level 3 and is mainly based on a financial model incorporating uncertainties regarding return, credit spreads, the nature and credit risk of underlying assets, the amounts and timing of cash inflows and the limited market for the notes at September 30, 2011 and December 31, 2010.

 

(c) Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. In accordance with US GAAP, the Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at September 30, 2011 and December 31, 2010. However, fair value disclosure is required.

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 5. EARNINGS PER SHARE

The following table provides the reconciliation between basic and diluted earnings per share:

 

     For the three months ended      For the nine months ended  
     September 30,
2011
     September 30,
2010
     September 30,
2011
     September 30,
2010
 

Net earnings

   $ 117       $ 191       $ 304       $ 280   

Weighted average number of common and exchangeable shares outstanding (millions)

     39.5         42.7         40.9         42.9   

Effect of dilutive securities (millions)

     0.2         0.3         0.3         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of diluted common and exchangeable shares outstanding (millions)

     39.7         43.0         41.2         43.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net earnings per share (in dollars)

   $ 2.96       $ 4.47       $ 7.43       $ 6.53   

Diluted net earnings per share (in dollars)

   $ 2.95       $ 4.44       $ 7.38       $ 6.48   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides the securities that could potentially dilute basic earnings per share in the future, but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive:

 

     For the three months ended      For the nine months ended  
     September 30,
2011
     September 30,
2010
     September 30,
2011
     September 30,
2010
 

Options (in units)

     189,381         410,812         146,930         410,812   

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and nine months ended September 30, 2011, the related pension expense was $5 million and $18 million, respectively (2010 – $5 million and $20 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company has several defined benefit pension plans covering a majority of all employees. The defined benefit plans are generally contributory in Canada and non-contributory in the United States. The Company also provides other post-retirement plans to eligible Canadian and U.S. employees; the plans are unfunded and include life insurance programs, medical and dental benefits and short-term and long-term disability programs. The Company also provides supplemental unfunded benefit plans to certain senior management employees.

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans

 

     For the three months ended      For the nine months ended  
     September 30, 2011      September 30, 2011  
     Pension
Plans
    Other
post-retirement
benefit plans
     Pension
Plans
    Other
post-retirement
benefit plans
 
     $     $      $     $  

Service cost

     9        —           26        2   

Interest expense

     21        2         65        5   

Expected return on plan assets

     (26     —           (78     —     

Amortization of net actuarial loss

     3        —           10        —     

Settlement loss (b)

     —          —           23        —     

Amortization of prior year service costs

     1        —           2        (1
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

     8        2         48        6   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

 

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans

 

     For the three months ended      For the nine months ended  
     September 30, 2010      September 30, 2010  
     Pension
Plans
    Other
post-retirement
benefit plans
     Pension
Plans
    Other
post-retirement
benefit plans
 
     $     $      $     $  

Service cost

     8        1         25        3   

Interest expense

     22        2         66        5   

Expected return on plan assets

     (23     —           (69     —     

Amortization of net actuarial loss

     2        —           5        —     

Curtailment loss (gain) (a)

     2        —           12        (13

Settlement loss (b)

     —          —           16        —     

Amortization of prior year service costs

     1        —           2        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

     12        3         57        (5
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) The curtailment loss of $2 million and $12 million, respectively, in the pension plans for the three and nine months ended September 30, 2010, represents nil and $10 million, respectively, related to the sale of the Wood business and $2 million and $2 million, respectively, related to the sale of the Woodland, Maine mill.

The curtailment gain of $13 million in the other post-retirement benefit plans, for the nine months ended September 30, 2010, represents $3 million related to the sale of the Wood business and $10 million related to the harmonization of the Company’s post-retirement benefit plans.

 

(b) The settlement loss of $23 million in the pension plans, for the nine months ended September 30, 2011, is related to the sale of assets of Prince Albert.

The settlement loss of $16 million in the pension plans, for the nine months ended September 30, 2010, is related to the sale of the Wood business.

The Company contributed $16 million and $33 million for the three and nine months ended September 30, 2011, respectively (2010 – $9 million and $27 million, respectively), to the pension plans. The Company also contributed $1 million and $5 million for the three and nine months ended September 30, 2011, respectively (2010 – $2 million and $5 million, respectively), to the other post-retirement benefit plans.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 6. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

 

Multiemployer Plans

The Company is currently reviewing its strategy and participation in its current multiemployer pension plans, and is assessing the possibility of withdrawing completely from some plans. These withdrawals would normally result in a withdrawal liability and a charge to earnings to be recorded by the Company, when determined to be probable. The measurement of these liabilities is based on the plan administrator’s allocation methodologies and assumptions.

Although not considered probable, and as such not recorded in the results for the period ended September 30, 2011, the withdrawal liability related to these plans is estimated to be approximately $27 million based on management’s best estimate and subject to the final assessment of the plan administrator.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 7. OTHER OPERATING LOSS (INCOME), NET

Other operating loss (income) is an aggregate of both recurring and periodic loss or income items and, as a result, can fluctuate from period to period. The Company’s other operating loss (income) includes the following:

 

     For the three months ended     For the nine months ended  
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 
     $     $     $     $  

Loss on sale of Wood business

     —          —          —          50   

Gain on sale of Woodland mill

     —          (10     —          (10

Alternative fuel tax credits (Note 16)

     —          —          —          (25

Gains on sale of property, plant and equipment

     (4     (4     (5     (7

Environmental provision

     3        —          3        —     

Foreign exchange loss (gain), net

     (3     (1     (4     3   

Other

     2        1        3        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other operating loss (income), net

     (2     (14     (3     12   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 8. INVENTORIES

The following table presents the components of inventories:

 

     September 30,
2011
     December 31,
2010
 
     $      $  

Work in process and finished goods

     348         361   

Raw materials

     101         105   

Operating and maintenance supplies

     181         182   
  

 

 

    

 

 

 
     630         648   
  

 

 

    

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 9. GOODWILL

The carrying value and any changes in the carrying value of goodwill are as follows:

 

     September 30,
2011
     December 31,
2010
 
     $      $  

Balance at beginning of period

     —           —     

Acquisition of Attends Healthcare Inc.

     163         —     
  

 

 

    

 

 

 

Balance at end of period

     163         —     
  

 

 

    

 

 

 

The goodwill at September 30, 2011 is entirely related to the Personal Care segment. (See Note 3 – Acquisition of Business for further information.)

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 10. INTANGIBLE ASSETS

The following table presents the components of intangible assets:

 

     Weighted average
useful lives
     September 30,
2011
    December 31,
2010
 
            $     $  

Intangible assets subject to amortization

       

Water rights

     40         8        8   

Power purchase agreements

     25         32        33   

Customer relationships (1)

     38         104        11   

Trade names

     7         6        7   

Supplier agreements

     5         6        6   
     

 

 

   

 

 

 
        156        65   

Accumulated amortization

        (12     (9
     

 

 

   

 

 

 
        144        56   

Intangible assets not subject to amortization

       

Trade names (1)

        61        —     
     

 

 

   

 

 

 

Total intangible assets

        205        56   
     

 

 

   

 

 

 

Amortization expense related to intangible assets for the three and nine months ended September 30, 2011 was $1 million and $3 million, respectively (2010 – nil and $2 million, respectively).

Amortization expense for the next five years related to intangible assets is expected to be as follows:

 

     2011      2012      2013      2014      2015  
     $      $      $      $      $  

Amortization expense related to intangible assets

     5         7         5         5         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

See Note 3 – Acquisition of Business for further information.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 11. CLOSURE AND RESTRUCTURING LIABILITY

The Company regularly reviews its overall production capacity with the objective of adjusting its production capacity with anticipated long-term demand.

On March 29, 2011, the Company announced that it will permanently shut down one of four paper machines at its Ashdown, Arkansas pulp and paper mill. This measure reduced the Company’s annual uncoated freesheet paper production capacity by approximately 125,000 short tons. The mill’s workforce was reduced by approximately 110 employees. For the three and nine months ended September 30, 2011, the Company recorded $1 million recovery and $1 million expense, respectively, of inventory obsolescence and nil and $2 million, respectively, of severance and termination costs as well as $8 million and $73 million, respectively, of accelerated depreciation, a component of Impairment and write-down of property, plant and equipment. Operations ceased on August 1, 2011.

On February 1, 2011, the Company announced the closure of its forms plant in Langhorne, Pennsylvania, and recorded $4 million in severance and termination costs.

For the three and nine months ended September 30, 2011, the Company also incurred other costs related to previous closures which included $1 million and $2 million, respectively, of severance and termination costs and $1 million and $5 million, respectively, of other costs.

For the three and nine months ended September 30, 2010, the Company recorded $13 million and $39 million, respectively, of accelerated depreciation, nil and $1 million, respectively, of severance and termination costs and $1 million and $1 million, respectively, of inventory obsolescense related to the reconfiguration of the Plymouth, North Carolina mill, announced on October 20, 2009. During the third quarter of 2010, the Company recorded $1 million of write-downs for the related paper machine.

During the second quarter of 2010, the Company decided to close the Cerritos, California form converting plant, and recorded a $1 million write-down for the related assets and $1 million in severance and termination costs. Operations ceased on July 16, 2010.

On March 16, 2010, the Company announced that it would permanently close its coated groundwood paper mill in Columbus, Mississippi. This measure resulted in the permanent curtailment of 238,000 tons of coated groundwood and 70,000 metric tons of thermo-mechanical pulp, as well as affected 219 employees. The Company recorded a $9 million write-down for the related fixed assets. In addition, for the three and nine months ended September 30, 2010, the Company recorded nil and $8 million, respectively, of severance and termination costs, nil and $8 million, respectively, of inventory obsolescence and $2 million recovery and nil, respectively, of other costs. Operations ceased in April 2010.

For the three and nine months ended September 30, 2010, the Company also incurred other costs related to previous closures which included $1 million and $2 million, respectively, of severance and termination costs and $1 million and $5 million, respectively, of other costs.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 11. CLOSURE AND RESTRUCTURING LIABILITY (CONTINUED)

 

The following tables provide the components of closure and restructuring costs by segment:

 

00 00
     For the three months ended
September 30, 2011
     For the three months ended
September 30, 2010
 
     Pulp and Paper      Pulp and Paper  
     $      $  

Severance and termination costs

     1         1   

Inventory obsolescence (1)

     (1)         1   

Other

     1         (1
  

 

 

    

 

 

 

Closure and restructuring costs

     1         1   
  

 

 

    

 

 

 

 

     For the nine months ended
September 30, 2011
     For the nine months ended
September 30, 2010
 
     Pulp and Paper      Pulp and Paper  
     $         $   

Severance and termination costs

     8         12   

Inventory obsolescence (1)

     1         9   

Other

     5         5   
  

 

 

    

 

 

 

Closure and restructuring costs

     14         26   
  

 

 

    

 

 

 

 

(1) 

Inventory obsolescence primarily relates to the write-down of operating and maintenance supplies classified as Inventories on the Consolidated Balance Sheets.

The following table provides the activity in the closure and restructuring liability:

 

     September 30,
2011
 
     $  

Balance at December 31, 2010

     17   

Additions

     8   

Severance payments

     (9

Change in estimates

     —     

Other

     —     

Effect of foreign currency exchange rate change

     —     
  

 

 

 

Balance at September 30, 2011

     16   
  

 

 

 

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     For the three months ended     For the nine months ended  

COMPREHENSIVE INCOME

   September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 
     $     $     $     $  

Net earnings

     117        191        304        280   

Other comprehensive income (loss)

        

Net derivative gains (losses) on cash flow hedges:

        

Net gain (loss) arising during the three and nine month periods, net of tax of $7 and $5, respectively (2010 - $2 and $5, respectively)

     (17     1        (12     (10

Less: Reclassification adjustment for losses included in net earnings, net of tax of $1 and nil, respectively (2010 - $ (2) and $(4), respectively)

     (1     —          (3     (10

Foreign currency translation adjustments

     (89     28        (56     22   

Change in unrecognized gains (losses) and prior cost related to pension and post-retirement benefit plans, net of tax of nil and $(5), respectively (2010 - $3 and $(2), respectively)

     —          (8     16        (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     10        212        249        232   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13. LONG-TERM DEBT

On June 23, 2011, the Company entered into a new Credit Agreement (the “Credit Agreement”), among the Company and certain of its subsidiaries as borrowers (collectively, the “Borrowers”) and the lenders and agents party thereto. The Credit Agreement replaced the Company’s existing $750 million senior secured revolving credit facility that was scheduled to mature March 7, 2012.

The Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility) with an initial maximum aggregate amount of availability of $600 million that matures on June 23, 2015. Borrowings may be made by the Company, by its U.S. subsidiary Domtar Paper Company, LLC, and, subject to a limit of $150 million, by its Canadian subsidiary Domtar Inc. The Company may increase the maximum aggregate amount of availability under the revolving Credit Agreement by up to $400 million, and the Borrowers may extend the final maturity of the Credit Agreement by one year, if, in each case, certain conditions are satisfied, including: (i) the absence of any event of default or default under the Credit Agreement, and (ii) the consent of the lenders participating in each such increase or extension, as applicable.

Borrowings under the Credit Agreement will bear interest at a rate dependent on the Company’s credit ratings at the time of such borrowing and will be calculated at the Borrowers’ option according to a base rate, prime rate, Eurodollar rate or the Canadian bankers’ acceptance rate plus an applicable margin, as the case may be. In addition, the Company must pay facility fees quarterly at rates dependent on the Company’s credit ratings.

The Credit Agreement contains customary covenants for transactions of this type, including the following financial covenants: (i) an interest coverage ratio (as defined under the Credit Agreement) that must be maintained at a level of not less than 3.0 to 1 and (ii) a leverage ratio (as defined under the Credit Agreement) that must be maintained at a level of not greater than 3.75 to 1. At September 30, 2011, the Company was in compliance with its covenants and no amounts were borrowed (December 31, 2010 – nil). At September 30, 2011, the Company had outstanding letters of credit amounting to $57 million under this credit facility (December 31, 2010 – $50 million).

All borrowings under the Credit Agreement are unsecured. Certain domestic subsidiaries of the Company unconditionally guarantee any obligations from time to time arising under the Credit Agreement, and certain Canadian subsidiaries of the Company unconditionally guarantee any obligations of Domtar Inc., the Canadian subsidiary borrower, under the Credit Agreement.

During the third quarter of 2011, the Company repurchased $15 million of its 10.75% debt and recorded a $4 million loss on repurchase of this debt.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. SHAREHOLDERS’ EQUITY

On February 23, 2011, the Company’s Board of Directors approved a quarterly dividend of $0.25 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., a subsidiary of Domtar Corporation. The total dividends of approximately $10 million were paid on April 15, 2011 to shareholders of record on March 15, 2011.

On May 4, 2011, the Company’s Board of Directors approved a quarterly dividend of $0.35 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., the total dividends of approximately $15 million were paid on July 15, 2011 to shareholders of record on June 15, 2011.

On August 3, 2011, the Company’s Board of Directors approved a quarterly dividend of $0.35 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., the total dividends of approximately $13 million were paid on October 17, 2011 to shareholders of record on September 15, 2011.

On November 2, 2011, the Company’s Board of Directors approved a quarterly dividend of $0.35 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc., on January 17, 2012 to shareholders of record on December 15, 2011.

STOCK REPURCHASE PROGRAM

On May 4, 2010, the Company’s Board of Directors authorized a stock repurchase program (“the Program”) of up to $150 million of Domtar Corporation’s common stock. On May 4, 2011, the Company’s Board of Directors approved an increase to the Program from $150 million to $600 million. Under the Program, the Company is authorized to repurchase from time to time shares of its outstanding common stock on the open market or in privately negotiated transactions in the United States. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock, from time to time, in part to reduce the dilutive effects of its stock options, awards, and employee stock purchase plan and to improve shareholders’ returns.

During 2010 and the first three quarters of 2011, the Company made open market purchases of its common stock using general corporate funds. Additionally, the Company entered into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements required the Company to make up-front payments to the counterparty financial institutions which resulted in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.

 

29


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. SHAREHOLDER’S EQUITY (CONTINUED)

 

During 2011, the Company repurchased 4,987,795 shares at an average price of $85.44 per share for a total cost of $426 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share. Of the $426 million shares repurchased, $11 million was payable at September 30, 2011.

During 2010, the Company repurchased 738,047 shares at an average price of $59.96 per share for a total cost of $44 million. Also, the Company entered into structured stock repurchase agreements that did not result in the repurchase of shares but resulted in net gains of $2 million which are recorded as a component of Shareholders’ equity.

 

30


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. COMMITMENTS AND CONTINGENCIES

ENVIRONMENT

The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities.

During the first quarter of 2006, the pulp and paper mill in Prince Albert, Saskatchewan was closed due to poor market conditions. The Company’s management determined that the Prince Albert facility was no longer a strategic fit for the Company and would not be reopened. On May 3, 2011, Domtar sold its Prince Albert facility to Paper Excellence Canada Holdings Corporation (“Paper Excellence”). Paper Excellence agreed to assume all past, present and future known and unknown environmental liabilities and as such, the Company reversed its reserve for environmental liabilities for this site in the second quarter of 2011.

An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against Domtar Inc. and others with respect to alleged contamination of Seaspan’s site bordering Burrard Inlet in North Vancouver, British Columbia, including contamination of sediments in Burrard Inlet, due to the presence of creosote and heavy metals. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and Domtar in order to define and implement an action plan to address soil, sediment and groundwater issues. This Order was appealed to the Environmental Appeal Board (“Board”) on March 17, 2010 but there is no suspension in the execution of this Order unless the Board orders otherwise. The appeal hearing scheduled for January 2011 was cancelled and no alternative date has been scheduled as of yet. The relevant government authorities selected a remediation plan on July 15, 2011. This plan selection has no impact on the on-going appeal. The Company has recorded an environmental reserve to address estimated exposure.

The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:

 

     September 30,
2011
 
     $  

Balance at December 31, 2010

     107   

Additions

     4   

Sale of businesses and closed facility

     (11

Environmental spending

     (10

Accretion

     2   

Effect of foreign currency exchange rate change

     (2
  

 

 

 

Balance at September 30, 2011

     90   
  

 

 

 

 

31


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

At September 30, 2011, the Company had a provision of $90 million for environmental matters and other asset retirement obligations (December 31, 2010 – $107 million). Additional costs, not known or identifiable, could be incurred for remediation efforts. Based on policies and procedures in place to monitor environmental exposure, management believes that such additional remediation costs would not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Climate change regulation

Since 1997, when an international conference on global warming concluded an agreement known as the Kyoto Protocol, which called for reductions of certain emissions that may contribute to increases in atmospheric greenhouse gas (“GHG”) concentrations, various international, national and local laws have been proposed or implemented focusing on reducing GHG emissions. These actual or proposed laws do or may apply in the countries where the Company currently has, or may have in the future, manufacturing facilities or investments.

In the United States, Congress has considered legislation to reduce emissions of GHGs, although it appears unlikely that any legislation will be actively considered again until after the 2012 elections. Several states already are regulating GHG emissions by public utilities and certain other significant emitters, primarily through regional GHG cap-and-trade programs. Furthermore, the U.S. Environmental Protection Agency (“EPA”) is scheduled later in 2011 to propose regulations regulating GHGs pursuant to the Clean Air Act. Passage of GHG legislation by Congress or individual states, or the adoption of regulations by the EPA or analogous state agencies, that restrict emissions of GHGs in areas in which the Company conducts business could have a variety of impacts upon the Company, including requiring it to implement GHG containment and reduction programs or to pay taxes or other fees with respect to any failure to achieve the mandated results. This, in turn, will increase the Company’s operating costs, which, to the extent passed through to customers, could reduce demand for the Company’s products. However, the Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers in the United States.

The province of Quebec is expected to initiate, as part of its commitment to the Western Climate Initiative (“WCI”), a GHG cap-and-trade system by January 1, 2012. Reduction targets for Quebec are expected to be promulgated later in 2012, to be effective January 1, 2013. There are presently no federal or provincial legislation on regulatory obligations to reduce GHGs for the Company’s pulp and paper operations elsewhere in Canada.

While it is likely that there will be increased regulation relating to GHG emissions, at this stage it is not possible to estimate either a timetable for the promulgation or implementation of any new regulations or the Company’s cost of compliance to said regulations. The impact could, however, be material.

Industrial Boiler Maximum Achievable Controlled Technology Standard

The EPA has proposed several standards related to emissions from boilers and process heaters included in the Company’s manufacturing processes. These standards are referred to as “Boiler MACT.” The EPA issued a final rule in February 2011. The EPA stayed the effectiveness of this rule, however, in order to allow it to carry out a detailed review of certain of its provisions, thus making uncertain what actions the agency will take with those portions of the rule under review. Most recently, the EPA has stated that its review will be complete in the fourth quarter 2011 and that the Boiler MACT will be effective by April 2012. compliance with Boiler MACT will be required immediately for “new” sources and three years after effectiveness for existing sources, although such timing could be changed as the final rule may be altered as a result of the review. In addition, legislation has been introduced in Congress that could modify or delay the Boiler MACT, although its passage is uncertain. It is apparent that owners and operators of boilers and process heaters will be required to address multiple emission standards in order to comply with the final rule. Until the final rule is promulgated, it is not possible to accurately determine what containment or reduction programs will be required or to accurately estimate cost of compliance. While compliance may have significant impact on the Company’s results of operations, financial position or cash flows, the Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers in the United States.

 

32


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

CONTINGENCIES

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at September 30, 2011, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The pulp and paper mill in Prince Albert was closed in the first quarter of 2006 and has not been operated since. In December 2009, the Company decided to dismantle the Prince Albert facility. In a grievance relating to the closure of the Prince Albert facility, the union claimed that it is entitled to the accumulated pension benefits during the actual layoff period because, according to the union, a majority of employees still had recall rights during the layoff. Arbitration in this matter was held in February 2010, and the arbitrator ruled in favor of the Company on August 24, 2010. As a result of the sale of the Prince Albert facility to Paper Excellence in May 2011, the union agreed to release any claims for judicial review it may have against the Company in relation to the grievance.

On July 31, 1998, Domtar Inc. (now a 100% owned subsidiary of Domtar Corporation) acquired all of the issued and outstanding shares of E.B. Eddy Limited and E.B. Eddy Paper, Inc. (“E.B. Eddy”), an integrated producer of specialty paper and wood products. The purchase agreement included a purchase price adjustment whereby, in the event of the acquisition by a third party of more than 50% of the shares of Domtar Inc. in specified circumstances, Domtar Inc. may be required to pay an increase in consideration of up to a maximum of $116 million (CDN$120 million), an amount gradually declining over a 25-year period. At March 7, 2007, the maximum amount of the purchase price adjustment was approximately $106 million (CDN$110 million).

On March 14, 2007, the Company received a letter from George Weston Limited (the previous owner of E.B. Eddy and a party to the purchase agreement) demanding payment of $106 million (CDN$110 million) as a result of the consummation of the combination of the Weyerhaeuser Fine Paper Business with Domtar Inc. on March 7, 2007, (the “Transaction”). On June 12, 2007, an action was commenced by George Weston Limited against Domtar Inc. in the Superior Court of Justice of the Province of Ontario, Canada, claiming that the consummation of the Transaction triggered the purchase price adjustment and sought a purchase price adjustment of $106 million (CDN$110 million) as well as additional compensatory damages. The Company does not believe that the consummation of the Transaction triggers an obligation to pay an increase in consideration under the purchase price adjustment and intends to defend itself vigorously against any claims with respect thereto. However, the Company may not be successful in the defense of such claims, and if the Company is ultimately required to pay an increase in consideration, such payment may have a material adverse effect on the Company’s financial position, results of operations or cash flows. On March 31, 2011, George Weston Limited filed a motion for summary judgment which the Company expects to be resolved by the Court in due course. No provision is recorded for this potential purchase price adjustment.

INDEMNIFICATIONS

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At September 30, 2011, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

 

33


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SEGMENT DISCLOSURES

Following the sale of the Wood business on June 30, 2010, the Company’s reporting segments correspond to the following business activities: Pulp and Paper and Distribution.

On September 1, 2011, the Company purchased Attends Healthcare products Inc. As a result, an additional segment, Personal Care, has been added to the existing reportable segments.

Prior to June 30, 2010, the Company operated in three reportable segments: Pulp and Paper (formerly known as Papers), Distribution (formerly known as Paper Merchants) and Wood.

Each reportable segment offers different products and services and requires different technology and marketing strategies. The following summary briefly describes the operations included in each of the Company’s reportable segments:

 

   

Pulp and Paper – represents the aggregation of the manufacturing and distribution of business, commercial printing and publishing, and converting and specialty papers, as well as market softwood, fluff and hardwood pulp.

 

   

Distribution – involves the purchasing, warehousing, sale and distribution of various products made by the Company and by other manufacturers. These products include business and printing papers and certain industrial products.

 

   

Personal Care – involves the manufacturing and distribution of adult incontinence products.

 

   

Wood – comprises the manufacturing and marketing of lumber and wood-based value-added products and the management of forest resources.

The Company evaluates performance based on operating income, which represents sales, reflecting transfer prices between segments at fair value, less allocable expenses before interest expense and income taxes.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SEGMENT DISCLOSURES (CONTINUED)

 

An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:

 

     For the three months ended     For the nine months ended  
     September 30,     September 30,     September 30,     September 30,  

SEGMENT DATA

   2011     2010     2011     2010  
     $     $     $     $  

Sales

        

Pulp and Paper

     1,246        1,296        3,776        3,858   

Distribution

     197        233        604        658   

Personal Care

     17        —          17        —     

Wood

     —          —          —          150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total for reportable segments

     1,460        1,529        4,397        4,666   

Intersegment sales – Pulp and Paper

     (43     (56     (154     (178

Intersegment sales – Wood

     —          —          —          (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated sales

     1,417        1,473        4,243        4,477   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization and impairment and write-down of property, plant and equipment

        

Pulp and Paper

     91        96        277        287   

Distribution

     1        1        3        3   

Personal Care

     1        —          1        —     

Wood

     —          —          —          10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total for reportable segments

     93        97        281        300   

Impairment and write-down of property, plant and equipment – Pulp and Paper

     8        14        73        50   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated depreciation and amortization and impairment and write-down of property, plant and equipment

     101        111        354        350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

        

Pulp and Paper (a)

     189        237        489        506   

Distribution

     (1     —          —          —     

Personal Care

     —          —          —          —     

Wood (b)

     —          —          —          (54

Corporate

     (1     (1     4        (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

     187        236        493        448   

Interest expense, net

     25        24        67        126   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     162        212        426        322   

Income tax expense

     45        21        122        42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     117        191        304        280   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

The U.S. Internal Revenue Code of 1986, as amended (the “Code”) permitted a refundable excise tax credit, until the end of 2009, for the production and use of alternative bio fuel mixtures derived from biomass. The Company submitted an application with the IRS to be registered as an alternative fuel mixer and received notification that its registration had been accepted in March 2009. The Company began producing and consuming alternative fuel mixtures in February 2009 at its eligible mills. Although the credit ended at the end of 2009, in 2010, the Company recorded $25 million of such credits in Other operating income on the Consolidated Statement of Earnings. The $25 million represented an adjustment to amounts presented as deferred revenue at December 31, 2009 and was released to income in the first quarter of 2010, following guidance issued by the IRS in March 2010.

 

(b)

On June 30, 2010, the Company sold its Wood business to EACOM Timber Corporation. The sale resulted in a loss on disposal of the Wood business and related pension curtailments and settlements of $50 million in the second quarter of 2010.

 

35


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar Paper Company, LLC, a 100% owned subsidiary of the Company and the successor to the Weyerhaeuser Fine Paper Business U.S. Operations, Domtar Industries Inc. (and subsidiaries, excluding Domtar Funding LLC), Ariva Distribution Inc., Domtar Delaware Investments Inc., Domtar Delaware Holdings LLC, Domtar A.W., LLC (and subsidiary), Domtar AI Inc., and Attends Healthcare Inc., all 100% owned subsidiaries of the Company (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt will not be guaranteed by certain of Domtar Paper Company LLC’s own 100% owned subsidiaries; including Domtar Delaware Holdings Inc. and Domtar Inc., (collectively the “Non-Guarantor Subsidiaries”).

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at September 30, 2011 and December 31, 2010 and the Statements of Earnings, and Cash Flows for the nine months ended September 30, 2011 and September 30, 2010 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method. The 2010 comparative figures have been retrospectively adjusted to reflect the fact that Domtar Delaware Investments Inc. and Domtar Delaware Holdings LLC both became Guarantor subsidiaries in June 2011.

 

     For the three months ended September 30, 2011  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

   Parent     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $     $     $     $     $  

Sales

     —          1,196        463        (242     1,417   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          940        357        (242     1,055   

Depreciation and amortization

     —          68        25        —          93   

Selling, general and administrative

     5        77        (7     —          75   

Impairment and write-down of property, plant and equipment

     —          8        —          —          8   

Closure and restructuring costs

     —          1        —          —          1   

Other operating income, net

     —          (1     (1     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     5        1,093        374        (242     1,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5     103        89        —          187   

Interest expense (income), net

     28        4        (7     —          25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (33     99        96        —          162   

Income tax expense (benefit)

     (10     26        29        —          45   

Share in earnings of equity accounted investees

     140        67        —          (207     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     117        140        67        (207     117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     For the nine months ended September 30, 2011  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

   Parent     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $     $     $     $     $  

Sales

     —          3,550        1,397        (704     4,243   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          2,752        1,084        (704     3,132   

Depreciation and amortization

     —          204        77        —          281   

Selling, general and administrative

     22        249        (18     —          253   

Impairment and write-down of property, plant and equipment

     —          73        —          —          73   

Closure and restructuring costs

     —          11        3        —          14   

Other operating loss (income), net

     —          (11     8        —          (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     22        3,278        1,154        (704     3,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (22     272        243        —          493   

Interest expense (income), net

     75        10        (18     —          67   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (97     262        261        —          426   

Income tax expense (benefit)

     (29     72        79        —          122   

Share in earnings of equity accounted investees

     372        182        —          (554     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     304        372        182        (554     304   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the three months ended September 30, 2010  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

   Parent     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $     $     $     $     $  

Sales

     —          1,255        462        (244     1,473   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          957        335        (244     1,048   

Depreciation and amortization

     —          72        25        —          97   

Selling, general and administrative

     9        100        (18     —          91   

Impairment and write-down of property, plant and equipment

     —          14        —          —          14   

Closure and restructuring costs

     —          (1     2        —          1   

Other operating loss (income), net

     7        2        (23     —          (14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     16        1,144        321        (244     1,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (16     111        141        —          236   

Interest expense (income), net

     24        3        (3     —          24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (40     108        144        —          212   

Income tax expense (benefit)

     (4     24        1        —          21   

Share in earnings of equity accounted investees

     227        143        —          (370     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     191        227        143        (370     191   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

   For the nine months ended September 30, 2010  
     Parent     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $     $     $     $     $  

Sales

     —          3,689        1,486        (698     4,477   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          2,905        1,190        (698     3,397   

Depreciation and amortization

     —          217        83        —          300   

Selling, general and administrative

     19        203        22        —          244   

Impairment and write-down of property, plant and equipment

     —          50        —          —          50   

Closure and restructuring costs

     —          20        6        —          26   

Other operating loss (income), net

     7        (10     15        —          12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     26        3,385        1,316        (698     4,029   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (26     304        170        —          448   

Interest expense (income), net

     124        9        (7     —          126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (150     295        177        —          322   

Income tax expense (benefit)

     (30     69        3        —          42   

Share in earnings of equity accounted investees

     400        174        —          (574     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     280        400        174        (574     280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

      September 30, 2011  

CONDENSED CONSOLIDATING BALANCE SHEET

   Parent      Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $      $     $     $     $  

Assets

           

Current assets

           

Cash and cash equivalents

     142         6        313        —          461   

Receivables

     —           499        180        —          679   

Inventories

     —           462        168        —          630   

Prepaid expenses

     6         7        11        —          24   

Income and other taxes receivable

     164         —          27        (140     51   

Intercompany accounts

     323         3,141        142        (3,606     —     

Deferred income taxes

     1         94        20        —          115   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     636         4,209        861        (3,746     1,960   

Property, plant and equipment, at cost

     —           5,594        2,830        —          8,424   

Accumulated depreciation

     —           (3,231     (1,703     —          (4,934
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     —           2,363        1,127        —          3,490   

Goodwill

     —           163        —          —          163   

Intangible assets, net of amortization

     —           163        42        —          205   

Investments in affiliates

     6,786         1,895        1        (8,682     —     

Intercompany long-term advances

     6         80        431        (517     —     

Other assets

     51         —          304        (153     202   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     7,479         8,873        2,766        (13,098     6,020   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity

           

Current liabilities

           

Bank indebtedness

     —           14        3        —          17   

Trade and other payables

     48         375        330        —          753   

Intercompany accounts

     3,227         350        29        (3,606     —     

Income and other taxes payable

     —           162        7        (140     29   

Long-term debt due within one year

     —           4        1        —          5   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     3,275         905        370        (3,746     804   

Long-term debt

     789         37        11        —          837   

Intercompany long-term loans

     432         85        —          (517     —     

Deferred income taxes and other

     —           1,113        92        (153     1,052   

Other liabilities and deferred credits

     37         58        233        —          328   

Shareholders’ equity

     2,946         6,675        2,060        (8,682     2,999   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     7,479         8,873        2,766        (13,098     6,020   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     December 31, 2010  

CONDENSED CONSOLIDATING BALANCE SHEET

   Parent      Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $      $     $     $     $  

Assets

           

Current assets

           

Cash and cash equivalents

     311         50        169        —          530   

Receivables

     4         416        181        —          601   

Inventories

     —           477        171        —          648   

Prepaid expenses

     5         6        17        —          28   

Income and other taxes receivable

     47         —          33        (2     78   

Intercompany accounts

     367         2,801        287        (3,455     —     

Deferred income taxes

     1         104        10        —          115   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     735         3,854        868        (3,457     2,000   

Property, plant and equipment, at cost

     —           5,537        3,718        —          9,255   

Accumulated depreciation

     —           (2,993     (2,495     —          (5,488
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     —           2,544        1,223        —          3,767   

Intangible assets, net of amortization

     —           10        46        —          56   

Investments in affiliates

     6,421         1,713        —          (8,134     —     

Intercompany long-term advances

     6         80        271        (357     —     

Other assets

     27         1        189        (14     203   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     7,189         8,202        2,597        (11,962     6,026   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity

           

Current liabilities

           

Bank indebtedness

     —           19        4        —          23   

Trade and other payables

     33         375        270        —          678   

Intercompany accounts

     2,825         400        230        (3,455     —     

Income and other taxes payable

     —           14        10        (2     22   

Long-term debt due within one year

     —           2        —          —          2   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     2,858         810        514        (3,457     725   

Long-term debt

     803         10        12        —          825   

Intercompany long-term loans

     351         6        —          (357     —     

Deferred income taxes and other

     —           920        18        (14     924   

Other liabilities and deferred credits

     39         66        245        —          350   

Shareholders’ equity

     3,138         6,390        1,808        (8,134     3,202   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     7,189         8,202        2,597        (11,962     6,026   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

40


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     For the nine months ended September 30, 2011  

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

   Parent     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $     $     $     $     $  

Operating activities

          

Net earnings

     304        372        182        (554     304   

Changes in operating and intercompany assets and liabilities and non cash items, included in net earnings

     (36     (232     121        554        407   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided from operating activities

     268        140        303        —          711