Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 3, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 5, 2017)
  • 10-Q (Nov 3, 2016)
  • 10-Q (Aug 4, 2016)
  • 10-Q (May 5, 2016)

 
8-K

 
Other

Domtar 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-12.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
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, 2012

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, 2012, 34,646,777 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, 2012

INDEX

 

PART I.

   FINANCIAL INFORMATION      3   

ITEM 1.

   FINANCIAL STATEMENTS (UNAUDITED)      3   
   CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME      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      45   

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK      64   

ITEM 4.

   CONTROLS AND PROCEDURES      66   

PART II

   OTHER INFORMATION      66   

ITEM 1.

   LEGAL PROCEEDINGS      66   

ITEM 1A.

   RISK FACTORS      66   

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      67   

ITEM 3.

   DEFAULT UPON SENIOR SECURITIES      67   

ITEM 4.

   MINE SAFETY DISCLOSURES      67   

ITEM 5.

   OTHER INFORMATION      67   

ITEM 6.

   EXHIBITS      68   


Table of Contents

PART I: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

     For the three
months ended
    For the nine
months ended
 
      September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  
           (Unaudited)        
     $     $     $     $  

Sales

     1,389        1,417        4,155        4,243   

Operating expenses

        

Cost of sales, excluding depreciation and amortization

     1,100        1,055        3,263        3,132   

Depreciation and amortization

     96        93        289        281   

Selling, general and administrative

     80        75        268        253   

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

     —          8        2        73   

Closure and restructuring costs (NOTE 11)

     2        1        3        14   

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

     2        (2     6        (3
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,280        1,230        3,831        3,750   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     109        187        324        493   

Interest expense, net (NOTE 12)

     20        25        109        67   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes and equity earnings

     89        162        215        426   

Income tax expense

     22        45        57        122   

Equity loss, net of taxes

     1        —          5        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     66        117        153        304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per common share (in dollars) (NOTE 5)

        

Net earnings

        

Basic

     1.85        2.96        4.21        7.43   

Diluted

     1.84        2.95        4.20        7.38   

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

        

Basic

     35.7        39.5        36.3        40.9   

Diluted

     35.8        39.7        36.4        41.2   

Net earnings

     66        117        153        304   

Other comprehensive income (loss) (NOTE 2):

        

Net derivative gains (losses) on cash flow hedges:

        

Net gains (losses) arising during the period, net of tax of $2 and $2, respectively (2011 - $7 and $5, respectively)

     6        (17     6        (12

Less: Reclassification adjustment for (gains) losses included in net earnings, net of tax of $1 and $4, respectively (2011 - $1 and nil, respectively)

     2        (1     7        (3

Foreign currency translation adjustments

     47        (89     32        (56

Change in unrecognized gains (losses) and prior cost related to pension and post-retirement benefit plans, net of tax of $(3) and $(3) (2011 - nil and $(5))

     (5     —          (5     16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     50        (107     40        (55
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     116        10        193        249   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

     At  
     September 30,     December 31,  
     2012     2011  
     (Unaudited)  
     $     $  

Assets

    

Current assets

    

Cash and cash equivalents

     593        444   

Receivables, less allowances of $5 and $5

     674        644   

Inventories (NOTE 8)

     663        652   

Prepaid expenses

     34        22   

Income and other taxes receivable

     44        47   

Deferred income taxes

     124        125   
  

 

 

   

 

 

 

Total current assets

     2,132        1,934   

Property, plant and equipment, at cost

     8,794        8,448   

Accumulated depreciation

     (5,330     (4,989
  

 

 

   

 

 

 

Net property, plant and equipment

     3,464        3,459   

Goodwill (NOTE 9)

     261        163   

Intangible assets, net of amortization (NOTE 10)

     347        204   

Other assets

     115        109   
  

 

 

   

 

 

 

Total assets

     6,319        5,869   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities

    

Bank indebtedness

     15        7   

Trade and other payables

     682        688   

Income and other taxes payable

     16        17   

Long-term debt due within one year (NOTE 12)

     7        4   
  

 

 

   

 

 

 

Total current liabilities

     720        716   

Long-term debt (NOTE 12)

     1,196        837   

Deferred income taxes and other

     997        927   

Other liabilities and deferred credits

     402        417   

Commitments and contingencies (NOTE 14)

    

Shareholders’ equity

    

Common stock
$0.01 par value; authorized 2,000,000,000 shares; issued: 42,514,796 and 42,506,732 shares

     —          —     

Treasury stock (NOTE 13)
$0.01 par value; 7,760,573 and 6,375,532 shares

     —          —     

Exchangeable shares
No par value; unlimited shares authorized; issued and held by nonaffiliates: 616,914 and 619,108 shares

     49        49   

Additional paid-in capital

     2,210        2,326   

Retained earnings

     779        671   

Accumulated other comprehensive loss

     (34     (74
  

 

 

   

 

 

 

Total shareholders’ equity

     3,004        2,972   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     6,319        5,869   
  

 

 

   

 

 

 

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

 

4


Table of Contents

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

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

Balance at December 31, 2011

    36.8        49         2,326        671        (74     2,972   

Stock-based compensation

    —          —           4        —          —          4   

Net earnings

    —          —           —          153        —          153   

Net derivative gains on cash flow hedges:

            

Net gain arising during the period, net of tax of $2

    —          —           —          —          6        6   

Less: Reclassification adjustments for losses included in net earnings, net of tax of $4

    —          —           —          —          7        7   

Foreign currency translation adjustments

    —          —           —          —          32        32   

Amortization of unrecognized losses and prior service cost related to pension and post retirement benefit plans, net of tax of $(3)

    —          —           —          —          (5     (5

Stock repurchase

    (1.5     —           (120     —          —          (120

Cash dividends

    —          —           —          (45     —          (45
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    35.3        49         2,210        779        (34     3,004   
 

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

     For the nine months ended  
     September 30,
2012
    September 30,
2011
 
     (Unaudited)  
     $     $  

Operating activities

    

Net earnings

     153        304   

Adjustments to reconcile net earnings to cash flows from operating activities

    

Depreciation and amortization

     289        281   

Deferred income taxes and tax uncertainties

     13        56   

Impairment and write-down of property, plant and equipment

     2        73   

Loss on repurchase of long-term debt and debt restructuring costs

     —          4   

Net gains on disposals of property, plant and equipment and sale of business

     —          (5

Stock-based compensation expense

     3        3   

Equity loss, net

     5        —     

Other

     (11     —     

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

    

Receivables

     (1     (56

Inventories

     20        20   

Prepaid expenses

     (7     (4

Trade and other payables

     (80     4   

Income and other taxes

     6        27   

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

     7        (7

Other assets and other liabilities

     12        11   
  

 

 

   

 

 

 

Cash flows provided from operating activities

     411        711   
  

 

 

   

 

 

 

Investing activities

    

Additions to property, plant and equipment

     (171     (64

Proceeds from disposals of property, plant and equipment

     —          34   

Proceeds from sale of business

     —          10   

Acquisition of businesses, net of cash acquired

     (293     (288

Investment in joint venture

     (5     —     
  

 

 

   

 

 

 

Cash flows used for investing activities

     (469     (308
  

 

 

   

 

 

 

Financing activities

    

Dividend payments

     (42     (36

Net change in bank indebtedness

     8        (7

Issuance of long-term debt

     548        —     

Repayment of long-term debt

     (190     (17

Debt issue and tender offer costs

     —          (7

Stock repurchase

     (116     (415

Other

     (1     10   
  

 

 

   

 

 

 

Cash flows provided from (used for) financing activities

     207        (472
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     149        (69

Translation adjustments related to cash and cash equivalents

     —          —     

Cash and cash equivalents at beginning of period

     444        530   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     593        461   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Net cash payments for:

    

Interest (including $47 million of tender offer premiums in 2012)

     92        51   

Income taxes paid

     60        42   
  

 

 

   

 

 

 

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 BUSINESSES      10   
NOTE 4    DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT      12   
NOTE 5    EARNINGS PER SHARE      18   
NOTE 6    PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS      19   
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 COSTS AND LIABILITY      25   
NOTE 12    LONG-TERM DEBT      27   
NOTE 13    SHAREHOLDERS’ EQUITY      29   
NOTE 14    COMMITMENTS AND CONTINGENCIES      30   
NOTE 15    SEGMENT DISCLOSURES      34   
NOTE 16    SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION      36   

 

7


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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, 2011, as filed with the Securities and Exchange Commission. The December 31, 2011 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.

To conform with the basis of presentation adopted in the current period, certain figures previously reported in the Statements of Cash Flows have been reclassified.

 

8


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

COMPREHENSIVE INCOME

In June 2011, the Financial Accounting Standards Board (“FASB”) issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. The Company adopted the new requirement on January 1, 2012 with no impact on the Company’s consolidated financial statements except for the change in presentation. The Company has chosen to present a single continuous statement of comprehensive income.

FUTURE ACCOUNTING CHANGES

INTANGIBLES—GOODWILL AND OTHER

In July 2012, the FASB issued an update to Intangibles – Goodwill and Other, which simplifies how entities test indefinite-lived intangible assets for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If the entity concludes that it is more likely than not that the indefinite-lived intangible asset is impaired, then it is required to perform the quantitative impairment test.

The amended provisions are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. This amendment impacts impairment testing steps only, and therefore adoption is not expected to have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

9


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. ACQUISITION OF BUSINESSES

EAM Corporation

On May 10, 2012, the Company completed the acquisition of 100% of the outstanding shares of EAM Corporation (“EAM”). EAM manufactures high quality airlaid and ultrathin laminated absorbent cores used in feminine hygiene, adult incontinence, baby diapers, and other medical healthcare and performance packaging solutions. EAM operates a manufacturing, research and development and distribution facility in Jesup, Georgia. EAM has 54 employees. The results of EAM’s operations have been included in the consolidated financial statements since May 1, 2012, the effective time of the transaction, and are presented in the Personal Care reportable segment. The purchase price was $61 million in cash, including working capital, net of cash acquired of $1 million. 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 was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s preliminary estimates of their fair value, which was based on information currently available. During the third quarter of 2012, the Company completed the evaluation of all assets and liabilities. The Company is still reviewing the expected useful lives of intangible assets.

The table below illustrates the purchase price allocation:

 

Fair value of net assets acquired at the date of acquisition

  

  

Receivables

        6   

Inventory

        2   

Property, plant and equipment

        13   

Intangible assets (Note 10)

     

Customer relationships (1)

     19      

Technology (2)

     8      

Non-compete (3)

     1      
        28   

Goodwill (Note 9)

        31   
     

 

 

 

Total assets

        80   

Less: Liabilities

     

Trade and other payables

        4   

Deferred income tax liabilities and unrecognized tax benefits

        15   
     

 

 

 

Total liabilities

        19   

Fair value of net assets acquired at the date of acquisition

  

     61   

 

(1) 

The useful life of the Customer relationships acquired is expected to be 30 years.

(2) 

The useful life of the Technology acquired is between 7 and 20 years.

(3) 

The useful life of the Non-compete acquired is expected to be 9 years.

 

10


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. ACQUISITION OF BUSINESSES (CONTINUED)

Attends Healthcare Limited

On March 1, 2012, the Company completed the acquisition of 100% of the outstanding shares of Attends Healthcare Limited (“Attends Europe”). Attends Europe manufactures and supplies adult incontinence care products in Europe. Attends Europe operates a manufacturing, research and development and distribution facility in Aneby, Sweden and also operates distribution centers in Scotland and Germany. Attends Europe has approximately 456 employees. The results of Attends Europe’s operations have been included in the consolidated financial statements since March 1, 2012, and are presented in the Personal Care reportable segment. The purchase price was $232 million (€ 173 million) in cash, including working capital, net of acquired cash of $4 million (€ 3 million). The acquisition was accounted for as a business combination under the acquisition method of accounting, in accordance with the Business Combinations Topic of FASB ASC.

The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which was based on information currently available. During the second quarter of 2012, the Company completed the evaluation of all assets and liabilities. The Company is still reviewing the useful lives of intangible assets.

The table below illustrates the purchase price allocation:

 

Fair value of net assets acquired at the date of acquisition

  

  

Receivables

        21   

Inventory

        22   

Property, plant and equipment

        67   

Intangible assets (Note 10)

     

Trade names (1)

     54      

Customer relationships (2)

     71      
        125   

Goodwill (Note 9)

        71   
     

 

 

 

Total assets

        306   

Less: Liabilities

     

Trade and other payables

        27   

Capital lease obligation

        6   

Deferred income tax liabilities and unrecognized tax benefits

        38   

Pension

        3   
     

 

 

 

Total liabilities

        74   

Fair value of net assets acquired at the date of acquisition

        232   

 

(1) 

Indefinite useful life.

(2) 

The useful life of the Customer relationships acquired is expected to be 30 years.

For both acquisitions, 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 these acquisitions have no material impact on the Company.

 

11


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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, 2012, one of Domtar’s Paper segment customers located in the United States represented 10% ($66 million) ((2011 – 9% ($58 million)) of the Company’s receivables.

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 at the prevailing market price at the time of delivery. In order to manage the cash flow risk associated with purchases of natural gas, the Company may utilize derivative financial instruments or physical purchases to fix the price of forecasted natural gas 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 five 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.

 

12


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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, 2012 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
 
                         2012     2013     2014     2015     2016  

Natural gas

     12,180,000         MMBTU (1)    $ 53         36     27     25     14     12

 

(1) MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective for accounting purposes as of September 30, 2012. The critical terms of hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings and Other comprehensive income (loss) for the three and nine months ended September 30, 2012 resulting from hedge ineffectiveness (three and nine months ended September 30, 2011 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States, Canada, Sweden and China. As a result, it is exposed to movements in foreign currency exchange rates in Canada, Europe and Asia. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar 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 and of other European currencies relative to the U.S. dollar. The Company’s Swedish subsidiary is exposed to movements in foreign currency exchange rates on transactions denominated in a different currency than its Euro functional currency. 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 five 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 or to designate them as hedging instruments in order to hedge the subsidiary’s cash flow risk for purposes of the consolidated financial statements.

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 currency options contracts used to hedge forecasted purchases in Canadian dollars by the Canadian subsidiary and forecasted sales in British Pound Sterling and forecasted purchases in U.S. dollars by the Swedish subsidiary are designated as cash flow hedges. Current contracts are used to hedge forecasted sales or 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 Other comprehensive income (loss) and is recognized in Cost of sales or in Sales in the period in which the hedged transaction occurs.

 

13


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

Net investment hedge:

The Company uses foreign exchange currency option contracts to hedge the net assets of Attends Europe to offset the foreign currency translation and economic exposures related to its investment in the subsidiary. The Company is exposed to movements in foreign currency exchange rates of the Euro versus the U.S. dollar as Attends Europe has a Euro functional currency whereas the Company has a U.S. dollar functional and reporting currency. Current contracts are used to hedge the net investment over the next five months. The effective portion of changes in the fair value of derivative contracts designated as net investment hedges is recorded in Other comprehensive income (loss) as part of the Foreign currency translation adjustments.

The following table presents the currency values under contracts pursuant to currency options outstanding as of September 30, 2012 to hedge forecasted purchases, forecasted sales and the net investment:

 

Contract

          Notional contractual value      Percentage of forecasted
net exposures under
contracts for
 
                   2012     2013  

Currency options purchased

     CDN       $ 425         50     37
     EUR      176         97     97
     USD      $ 29         100     69
     GBP      £ 18         100     62

Currency options sold

     CDN       $ 425         50     37
     EUR      76         42     42
     USD      $ 29         100     69
     GBP      £ 18         100     62

The currency options are fully effective as at September 30, 2012. 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 and Comprehensive income for the three and nine months ended September 30, 2012 resulting from hedge ineffectiveness (three and nine months ended September 30, 2011 – nil).

 

14


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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 Comprehensive Income and Consolidated Statement of Shareholders’ Equity, Net of Tax

 

Derivatives Designated as

Cash Flow and Net Investment

Hedging Instruments

under the Derivatives and Hedging

Topic of FASB ASC

   Gain (Loss) Recognized in
Other comprehensive
income (loss) on Derivatives
(Effective Portion)
    Gain (Loss) Reclassified  from
Other comprehensive income (loss)
into Income
(Effective Portion)
 
     For the three months ended     For the three months ended  
     September 30, 2012     September 30, 2011     September 30, 2012     September 30, 2011  
     $     $     $     $  

Natural gas swap contracts (a)

     2        (2     (1     —     

Currency options (b)

     5        (15     (1     1   

Net Investment Hedge (c)

     (1     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     6        (17     (2     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Derivatives Designated as

Cash Flow and Net Investment

Hedging Instruments

under the Derivatives and Hedging

Topic of FASB ASC

   Gain (Loss) Recognized in
Other comprehensive
income (loss) on Derivatives
(Effective Portion)
    Gain (Loss) Reclassified from
Other comprehensive income (loss)
into Income
(Effective Portion)
 
     For the nine months ended     For the nine months ended  
     September 30, 2012     September 30, 2011     September 30, 2012     September 30, 2011  
     $     $     $     $  

Natural gas swap contracts (a)

     —          (3     (5     (3

Currency options (b)

     7        (9     (2     6   

Net Investment Hedge (c)

     (1     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     6        (12     (7     3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The Gain (Loss) reclassified from Other comprehensive income (loss) into Income (Effective Portion) is recorded in Cost of Sales.
(b) The Gain (Loss) reclassified from Other comprehensive income (loss) into Income (Effective Portion) is recorded in Cost of Sales or Sales.
(c) Gains and losses from the settlements of the Company’s net investment hedge remain in Other comprehensive income (loss) until partial or complete liquidation of the net investment.

 

15


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurement and disclosures, establishes 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.

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, 2012 and December 31, 2011, in accordance with the accounting standards dealing with fair value measurement 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
and net investment hedging
instruments under the Derivatives
and Hedging Topic of FASB ASC:
   September 30,
2012
     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

     11         —           11         —         (a) Prepaid expenses

Natural gas swap contracts

     2         —           2         —         (a) Intangible assets and Deferred Charges
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Assets

     13         —           13         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Liabilities derivatives

              

Currency options

     4         —           4         —         (a) Trade and other payables

Natural gas swap contracts

     4         —           4         —         (a) Trade and other payables

Natural gas swap contracts

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

 

 

    

 

 

    

 

 

    

 

 

    

Total Liabilities

     9         —           9         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Other Instruments

              

Asset backed commercial paper investments

     6         —           —           6       (b) Other assets

Long-term debt

     1,360         1,360         —           —         (c) Long-term debt
  

 

 

    

 

 

    

 

 

    

 

 

    

The cumulative loss recorded in Other comprehensive income (loss) relating to natural gas contracts of $3 million at September 30, 2012, of which $4 million will be recognized in Cost of sales over the next 12 months and the remaining gain of $1 million upon maturity of the derivatives at the then prevailing values, which may be different from those at September 30, 2012.

 

16


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

The cumulative gain recorded in Other comprehensive income (loss) relating to currency options hedging forecasted purchases of $7 million at September 30, 2012, will be recognized in Cost of sales or 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, 2012.

Fair Value of financial instruments at:

 

Derivatives designated as cash flow
and net investment hedging
instruments under the Derivatives
and Hedging Topic of FASB ASC:
   December 31,
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

     7         —           7         —         (a) Prepaid expenses
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Assets

     7         —           7         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Liabilities derivatives

              

Currency options

     11         —           11         —         (a) Trade and other payables

Natural gas swap contracts

     8         —           8         —         (a) Trade and other payables

Natural gas swap contracts

     3         —           3         —         (a) Other liabilities and deferred credits
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Liabilities

     22         —           22         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Other Instruments

              

Asset backed commercial paper investments

     5         —           —           5       (b) Other assets

Long-term debt

     992         992         —           —         (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 asset backed commercial paper (“ABCP”) investments is classified under Level 3 and is mainly based on a discounted cash flow 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, 2012 and December 31, 2011.

 

(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, 2012 and December 31, 2011. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is $1,203 million and $841 million at September 30, 2012 and December 31, 2011, respectively.

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.

 

17


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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,
2012
     September 30,
2011
     September 30,
2012
     September 30,
2011
 

Net earnings

   $ 66       $ 117       $ 153       $ 304   

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

     35.7         39.5         36.3         40.9   

Effect of dilutive securities (millions)

     0.1         0.2         0.1         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     35.8         39.7         36.4         41.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net earnings per share (in dollars)

   $ 1.85       $ 2.96       $ 4.21       $ 7.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net earnings per share (in dollars)

   $ 1.84       $ 2.95       $ 4.20       $ 7.38   
  

 

 

    

 

 

    

 

 

    

 

 

 

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,
2012
     September 30,
2011
     September 30,
2012
     September 30,
2011
 

Restricted stock units

     15,802         —           —           —     

Performance Stock Units

     7,231         —           —           —     

Options

     177,970         189,381         84,625         146,930   

 

18


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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 multi-employer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and nine months ended September 30, 2012, the related pension expense was $4 million and $19 million, respectively (2011 - $5 million and $18 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company has several defined benefit pension plans covering approximately 80% of the employees. The defined benefit plans are generally contributory in Canada and non-contributory in the United States. Non-unionized employees in Canada joining the Company after June 1, 2000 participate in defined contribution plans. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Also, starting on January 1, 2013, all U.S. unionized employees covered under the agreement with the United Steel Workers not grandfathered under the existing defined benefit pension plans will transition to a defined contribution pension plan for future service. 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. The Company also provides supplemental unfunded benefit pension 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, 2012     September 30, 2012  
     Pension
plans
    Other
post-retirement
benefit plans
    Pension
plans
    Other
post-retirement

benefit plans
 
     $     $     $     $  

Service cost

     10        —          29        2   

Interest expense

     20        1        60        4   

Expected return on plan assets

     (23       (69  

Amortization of net actuarial loss

     4        1        13        1   

Curtailment gain (a)

     —          (13     —          (13

Settlement loss

     —          —          —          —     

Amortization of prior year service costs

     1        —          3        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

     12        (11     36        (7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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, 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        —     

Curtailment loss (a)

     —          —           13        —     

Settlement loss (b)

     —          —           23        —     

Amortization of prior year service costs

     1        —           2        (1
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

     8        2         61        6   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) The curtailment gain of $13 million in the other post-retirement benefit plans for the three and nine months ended September 30, 2012, is as a result of the curtailment of benefits related to the majority of employees covered by the plan. The curtailment loss of $13 million in the pension plans for the nine months ended September 30, 2011 is related to the sale of Prince Albert.
(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 Company contributed $10 million and $29 million for the three and nine months ended September 30, 2012, respectively (2011—$16 million and $33 million, respectively) to the pension plans. The Company also contributed $2 million and $6 million for the three and nine months ended September 30, 2012, respectively (2011 - $1 million and $5 million, respectively) to the other post-retirement benefit plans.

 

20


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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 occasional loss or income items and, as a result, can fluctuate from period to period. The Company’s other operating loss (income), net includes the following:

 

     Three months ended     Nine months ended  
     September 30,
2012
     September 30,
2011
    September 30,
2012
     September 30,
2011
 
     $      $     $      $  

Gains on sale of property, plant and equipment

     —           (4     —           (5

Environmental provision

     —           3        2         3   

Foreign exchange loss (gain)

     1         (3     3         (4

Other

     1         2        1         3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other operating loss (income), net

     2         (2     6         (3
  

 

 

    

 

 

   

 

 

    

 

 

 

 

21


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 8. INVENTORIES

The following table presents the components of inventories:

 

     September 30,
2012
     December 31,
2011
 
     $      $  

Work in process and finished goods

     362         363   

Raw materials

     112         105   

Operating and maintenance supplies

     189         184   
  

 

 

    

 

 

 

Total Inventories

     663         652   
  

 

 

    

 

 

 

 

22


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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:

 

     $  

Balance at December 31, 2011

     163   

Acquisition of Attends Healthcare Limited

     71   

Acquisition of EAM Corporation

     31   

Effect of foreign currency exchange rate change

     (4
  

 

 

 

Balance at September 30, 2012

     261   
  

 

 

 

The goodwill at September 30, 2012 is entirely related to the Personal Care segment. (See Note 3 “Acquisition of Businesses” for further information on the increase in 2012).

At September 30, 2012, the accumulated impairment loss amounted to $321 million, related to the 2008 impairment of goodwill in the Pulp and Paper segment (2011 – $321 million).

 

23


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 10. INTANGIBLE ASSETS

The following table presents the components of intangible assets:

 

     Estimated useful
lives ( in years)
     September 30,
2012
    December 31,
2011
 
            $     $  

Intangible assets subject to amortization

       

Water rights

     40         8        8   

Power purchase agreements

     25         34        32   

Customer relationships (1)

     20 - 40         191        104   

Trade names

     7         7        7   

Supplier agreement

     5         6        6   

Technology (2)

     7 - 20         8        —     

Non-Compete (2)

     9         1        —     
     

 

 

   

 

 

 
        255        157   

Accumulated amortization

        (20     (14
     

 

 

   

 

 

 
        235        143   

Intangible assets not subject to amortization

       

Trade names (3)

        112        61   
     

 

 

   

 

 

 

Total intangible assets

        347        204   
     

 

 

   

 

 

 

Amortization expense related to intangible assets for the three and nine months ended September 30, 2012 was $2 million and $6 million, respectively (2011 – $1 million and $3 million, respectively).

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

 

     2012      2013      2014      2015      2016  
     $      $      $      $      $  

Amortization expense related to intangible assets

     9         8         8         7         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Increase relates to the acquisitions of Attends Healthcare Limited on March 1, 2012 ($71 million) and EAM Corporation on May 10, 2012 ($19 million).

 

(2) 

Increase relates to the acquisition of EAM Corporation on May 10, 2012.

 

(3) 

Increase relates to the acquisition of Attends Healthcare Limited on March 1, 2012.

 

24


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 11. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY

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

Ottawa/ Gatineau Hydro Assets

On June 13, 2012, the Company announced the signing of a Definitive Purchase and Sale Agreement with Energy Ottawa Inc. for the sale of its hydro assets in Ottawa, Ontario and Gatineau, Quebec for CDN$45 million. The assets have a carrying value of CDN$44 million, classified as Property, plant and equipment and Intangible assets on the Consolidated Balance Sheets. The transaction includes three power stations (21MW of installed capacity), water rights in the area, as well as Domtar Inc.’s equity stake in the Chaudière Water Power Inc. a ring dam consortium. On June 26, 2012, Energy Ottawa Inc., the renewable energy subsidiary of Hydro Ottawa Holding Inc., assigned the Definitive Purchase and Sale Agreement to Chaudière Hydro Inc., its affiliate, which is now the purchaser. Energy Ottawa Inc. remains responsible for the purchaser’s obligation under the Definitive Purchase and Sale Agreement. Currently, the Company has approximately 12 workers operating the hydro assets in Ottawa/ Gatineau which will become employees of Chaudière Hydro L.P., a subsidiary of Energy Ottawa Inc. upon closing of the transaction.

As a result of the signing of the definitive agreement, the Company assessed whether this transaction met the criteria for assets held for sale. Transfer of some of the water rights and subdivision of some lands require government consent. Given that the transfer of the water rights and the subdivision of some lands have a certain degree of uncertainty, the Company concluded the criteria for assets held for sale accounting was not met.

Mira Loma, California converting plant

During the first quarter of 2012, the Company recorded a $2 million write-down of property, plant and equipment at its Mira Loma location, in Impairment and write-down of property, plant and equipment.

Ashdown pulp and paper mill

On March 29, 2011, the Company announced that it would 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 on property, plant and equipment, a component of Impairment and write-down of property, plant and equipment. Operations ceased on August 1, 2011.

Langhorne forms plant

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

Other Costs

For the three and nine months ended September 30, 2012, the Company also incurred other costs related to previous and ongoing closures which include nil and $1 million, respectively, of severance and termination costs (2011 – $1 million and $2 million, respectively) and $2 million and $2 million, respectively, of other costs (2011 – $1 million and $5 million, respectively).

 

25


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 11. CLOSURE AND RESTRUCTURING COSTS AND LIABILITY (CONTINUED)

 

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

 

     Three months ended
September 30, 2012
     Three months ended
September 30, 2011
 
     Pulp and Paper      Distribution      Personal Care      Total      Pulp and Paper  
     $      $      $      $      $  

Severance and termination costs

     —           —           —           —           1   

Inventory obsolescence (1)

     —           —           —           —           (1

Other

     —           1         1         2         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Closure and restructuring costs

     —           1         1         2         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Nine months ended
September 30, 2012
     Nine months ended
September 30, 2011
 
     Pulp and Paper      Distribution      Personal Care      Total      Pulp and Paper  
     $      $      $      $      $  

Severance and termination costs

     1         —           —           1         8   

Inventory obsolescence (1)

     —           —           —           —           1   

Other

     —           1         1         2         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Closure and restructuring costs

     1         1         1         3         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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:

 

     $  

Balance at December 31, 2011

     6   

Severance payments

     (2
  

 

 

 

Balance at September 30, 2012

     4   
  

 

 

 

 

26


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12. LONG-TERM DEBT

 

          Par           September 30,      December 31,  
     Maturity    Amount      Currency    2012      2011  
          $           $      $  

Unsecured notes

              

5.375% Notes

   2013      73       US      71         72   

7.125% Notes

   2015      166       US      166         213   

9.5% Notes

   2016      94       US      99         133   

10.75% Notes

   2017      278       US      272         375   

4.4% Notes

   2022      300       US      297         —     

6.25 % Notes

   2042      250       US      247         —     

Capital lease obligations

   2012 - 2028            51         48   
           

 

 

    

 

 

 
              1,203         841   

Less: Due within one year

              7         4   
           

 

 

    

 

 

 
              1,196         837   
           

 

 

    

 

 

 

UNSECURED NOTES

As a result of a cash tender offer during the first quarter of 2012, the Company repurchased $1 million of the 5.375% Notes due 2013, $47 million of the 7.125% Notes due 2015, $31 million of the 9.5% Notes due 2016 and $107 million of the 10.75% Notes due 2017. The Company incurred a premium of $47 million and additional charges of $3 million as a result of this extinguishment, both of which are included in Interest expense in the Consolidated Statements of Earnings and Comprehensive Income.

SENIOR NOTES OFFERING

On August 20, 2012, the Company issued $250 million 6.25% Notes due 2042 for net proceeds of $247 million. The net proceeds from the offering of these Notes will be used for general corporate purposes.

On March 7, 2012, the Company issued $300 million 4.4% Notes due 2022 for net proceeds of $297 million. The net proceeds from the offering of these Notes were used to fund the portion of the purchase of the 5.375% Notes due 2013, 7.125% Notes due 2015, 9.5% Notes due 2016 and the 10.75% Notes due 2017 tendered and accepted by the Company pursuant to a tender offer, including the payment of accrued interest and applicable early tender premiums, not funded with cash on hand, as well as for general corporate purposes.

The Notes are redeemable, in whole or in part, at the Company’s option at any time. In the event of a change in control, each holder will have the right to require the Company to repurchase all or any part of such holder’s Notes at a purchase price in cash equal to 101% of the principal amount of the Notes, plus any accrued and unpaid interest.

The Notes are general unsecured obligations and rank equally with existing and future unsecured and unsubordinated indebtedness. The Notes are fully and unconditionally guaranteed on an unsecured basis by direct and indirect, existing and future, U.S. 100% owned subsidiaries, which currently guarantee indebtedness under the Credit Agreement as well as the Company’s other unsecured unsubordinated indebtedness.

 

27


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12. LONG-TERM DEBT (CONTINUED)

 

BANK FACILITY

On June 15, 2012, the Company amended and restated its existing 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 amended the Company’s existing $600 million revolving credit facility that was scheduled to mature June 23, 2015.

The Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility) that matures on June 15, 2017. The maximum aggregate amount of availability under the revolving Credit Agreement is $600 million, which may be borrowed in US Dollars, Canadian Dollars (in an amount up to the Canadian Dollar equivalent of $150 million) and Euros (in an amount up to the Euro equivalent of $200 million). Borrowings may be made by the Company, by its U.S. subsidiary Domtar Paper Company, LLC, by its Canadian subsidiary Domtar Inc. and by any additional borrower designated by the Company in accordance with the Credit Agreement. 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, LIBO rate, EURIBO 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 two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3.0 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1. At September 30, 2012, the Company was in compliance with the covenants, and no amounts were borrowed (December 31, 2011 – nil).

At September 30, 2012, the Company had outstanding letters of credit amounting to $12 million under this credit facility (December 31, 2011 - $29 million).

All borrowings under the Credit Agreement are unsecured. However, certain domestic subsidiaries of the Company will unconditionally guarantee any obligations from time to time arising under the Credit Agreement, and certain subsidiaries of the Company that are not organized in the United States will unconditionally guarantee any obligations of Domtar Inc., the Canadian subsidiary borrower, or of additional borrowers that are not organized in the United States, under the Credit Agreement, in each case, subject to the provisions of the Credit Agreement.

 

28


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13. SHAREHOLDERS’ EQUITY

On February 22, 2012, 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. Total dividends of approximately $13 million were paid on April 16, 2012 to shareholders of record on March 15, 2012.

On May 1, 2012 and July 31, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.45 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. Total quarterly dividends of approximately $16 million each were paid on July 16, 2012 and October 15, 2012, respectively, to shareholders of record on June 15, 2012 and September 17, 2012, respectively.

On October 31, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.45 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. This dividend is to be paid on January 15, 2013 to shareholders of record on December 14, 2012.

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. On December 15, 2011, the Company’s Board of Directors approved another increase to the Program from $600 million to $1 billion. 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 2011 and the first three quarters of 2012, 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.

During the first three quarters of 2012, the Company repurchased 1,521,667 shares at an average price of $78.77 for a total cost of $120 million. Of the $120 million shares repurchased, $4 million was payable at September 30, 2012.

During the first three quarters of 2011, the Company repurchased 4,987,795 shares at an average price of $85.44 for a total cost of $426 million. Of the $426 million shares repurchased, $11 million was payable at September 30, 2011.

Since the inception of the Program, the Company repurchased 8,181,445 shares at an average price of $80.51 for a total cost of $659 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

 

29


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. COMMITMENTS AND CONTINGENCIES

ENVIRONMENT

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

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 Inc. 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 has been re-scheduled to occur between April 15 and May 10, 2013. The relevant government authorities selected a remediation plan on July 15, 2011. In the interim, no stay of execution has been granted or requested. The Company has recorded an environmental reserve to address its estimated exposure for this matter.

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

 

     $  

Balance at December 31, 2011

     92   

Environmental spending

     (9

Effect of foreign currency exchange rate change

     2   
  

 

 

 

Balance at September 30, 2012

     85   
  

 

 

 

 

30


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

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 from public utilities and certain other significant emitters, primarily through regional GHG cap-and-trade programs. Furthermore, the U.S. Environmental Protection Agency (“EPA”) has adopted and implemented GHG permitting requirements for new sources and modifications of existing industrial facilities and has recently proposed GHG performance standards for electric utilities under the agency’s existing Clean Air Act authority. 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. 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 initiated, as part of its commitment to the Western Climate Initiative (“WCI”), a GHG cap-and-trade system on January 1, 2012. Reduction targets for Quebec have been promulgated and will be effective January 1, 2013. The Company does not expect the cost of compliance will have a material impact on the Company’s financial position, results of operations or cash flows. With the exception of the British Columbia carbon tax, which applies to the purchase of fossil fuels within the province and which was implemented in 2008, there are presently no federal or provincial legislation on regulatory obligations that affect the emission of GHGs for the Company’s pulp and paper operations elsewhere in Canada.

Under the Copenhagen Accord, the Government of Canada has committed to reducing greenhouse gases by 17 percent from 2005 levels by 2020. A sector by sector approach is being used to set performance standards to reduce greenhouse gases. On September 5, 2012 final regulations were published for the coal-fired electrical generators which will go in force July 1, 2015. The industry sector, which includes pulp and paper, is the next sector to undergo this review. The Company does not expect the performance standards to be disproportionately affected by these future measures compared with other pulp and paper producers in Canada.

While it is likely that there will be increased regulation relating to GHG emissions in the future, at this time 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.

 

31


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”)

On December 2, 2011, the EPA proposed a new set of standards related to emissions from boilers and process heaters included in the Company’s manufacturing processes. These standards are generally referred to as Boiler MACT and seek to require reductions in the emission of certain hazardous air pollutants or surrogates of hazardous air pollutants. A final version of this Rule, as well as associated rules related to solid waste incinerators and the definition of solid waste has been under review at the White House Office of Management and Budget since May 17, 2012, and therefore could be issued at any time. It is anticipated that compliance will be required by the end of 2015 or early 2016 for existing emission units or upon startup for any new emission units. Domtar expects that the capital cost required to comply with the Boiler MACT rules, as they were published in December 2011, is between $37 million and $42 million. Domtar is currently assessing the associated increase in operating costs as well as alternate compliance strategies.

Domtar is also a party to various proceedings relating to the cleanup of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws. The EPA and/or various state agencies have notified the Company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. Domtar continues to take remedial action under its Care and Control Program, as such sites mostly relate to its former wood preserving operating sites, and a number of operating sites due to possible soil, sediment or groundwater contamination. The investigation and remediation process is lengthy and subject to the uncertainties of changes in legal requirements, technological developments and, if and when applicable, the allocation of liability among potentially responsible parties.

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, 2012, cannot be predicted with certainty, it is management’s opinion that, except as noted below, their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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 $122 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 $112 million (CDN$110 million).

 

32


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

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 $112 million (CDN$110 million) as a result of the consummation of the series of transactions whereby the Fine Paper Business of Weyerhaeuser Company was transferred to the Company and the Company acquired Domtar Inc. (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 $112 million (CDN$110 million) as well as additional compensatory damages. On March 31, 2011, George Weston Limited filed a motion for summary judgment. On September 3, 2012, the Court directed that this matter proceed to examinations for discovery and trial, rather than proceed by way of summary judgment. A trial is expected in 2013. 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. No provision is recorded for this matter.

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, 2012, 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, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. SEGMENT DISCLOSURES

On September 1, 2011, the Company purchased Attends Healthcare Inc. As a result, an additional reportable segment, Personal Care, has been added. On March 1, 2012 and May 10, 2012, the Company grew its Personal Care segment with the purchase of Attends Healthcare Limited and EAM Corporation, respectively. (See Note 3 “Acquisition of Businesses” for further information).

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

 

   

Pulp and Paper Segment – comprises the manufacturing, sale and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.

 

   

Distribution Segment – comprises the purchasing, warehousing, sale and distribution of the Company’s paper products and those of other manufacturers. These products include business and printing papers, certain industrial products and printing supplies.

 

   

Personal Care Segment – consists of the manufacturing, sale and distribution of adult incontinence products and high quality absorbent cores.

 

34


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. 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

   2012     2011     2012     2011  
     $     $     $     $  

Sales

        

Pulp and Paper

     1,153        1,246        3,476        3,776   

Distribution

     167        197        528        604   

Personal Care

     111        17        288        17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total for reportable segments

     1,431        1,460        4,292        4,397   

Intersegment sales - Pulp and Paper

     (42     (43     (137     (154
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated sales

     1,389        1,417        4,155        4,243   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Pulp and Paper

     90        91        271        277   

Distribution

     —          1        3        3   

Personal Care

     6        1        15        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total for reportable segments

     96        93        289        281   

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

     —          8        2        73   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     96        101        291        354   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

        

Pulp and Paper

     103        189        306        489   

Distribution

     (5     (1     (8     —     

Personal Care

     12        —          32        —     

Corporate

     (1     (1     (6     4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

     109        187        324        493   

Interest expense, net

     20        25        109        67   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     89        162        215        426   

Income tax expense

     22        45        57        122   

Equity loss, net of taxes

     1        —          5        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     66        117        153        304   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. 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 LLC (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., Attends Healthcare Inc., and EAM Corporation, 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., Attends Healthcare Limited and Domtar Inc., (collectively the “Non-Guarantor Subsidiaries”). The subsidiary’s guarantee may be released in certain customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the indenture have been satisfied.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Statements of Earnings and Comprehensive income (loss) for the three and nine months ended September 30, 2012 and September 30, 2011, the Balance Sheets at September 30, 2012 and December 31, 2011 and the Statements of Cash Flows for the nine months ended September 30, 2012 and September 30, 2011 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.

 

36


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

      For the three months ended September 30, 2012  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME

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

Sales

     —          1,150        492        (253     1,389   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          937        416        (253     1,100   

Depreciation and amortization

     —          69        27        —          96   

Selling, general and administrative

     6        58        16        —          80   

Impairment and write-down of property, plant and equipment

     —          —          —          —          —     

Closure and restructuring costs

     —          2        —          —          2   

Other operating loss (income), net

     —          (2     4        —          2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     6        1,064        463        (253     1,280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (6     86        29        —          109   

Interest expense (income), net

     22        5        (7     —          20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and equity earnings

     (28     81        36        —          89   

Income tax expense (benefit)

     (9     22        9        —          22   

Equity loss, net of taxes

     —          —          1        —          1   

Share in earnings of equity accounted investees

     85        26        —          (111     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     66        85        26        (111     66   

Other comprehensive income (loss)

     3        (5     52        —          50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     69        80        78        (111     116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

      For the nine months ended September 30, 2012  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME

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

Sales

     —          3,456        1,448        (749     4,155   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          2,797        1,215        (749     3,263   

Depreciation and amortization

     —          208        81        —          289   

Selling, general and administrative

     24        224        20        —          268   

Impairment and write-down of property, plant and equipment

     —          2        —          —          2   

Closure and restructuring costs

     —          2        1        —          3   

Other operating loss, net

     —          —          6        —          6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     24        3,233        1,323        (749     3,831   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (24     223        125        —          324   

Interest expense (income), net

     114        14        (19     —          109   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and equity earnings

     (138     209        144        —          215   

Income tax expense (benefit)

     (46     61        42        —          57   

Equity loss, net of taxes

     —          —          5        —          5   

Share in earnings of equity accounted investees

     245        97        —          (342     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     153        245        97        (342     153   

Other comprehensive income (loss)

     5        (5     40        —          40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     158        240        137        (342     193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

 

     For the three months ended September 30, 2011  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME (LOSS)

   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   

Other comprehensive loss

     (1     —          (106     —          (107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     116        140        (39     (207     10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     For the nine months ended September 30, 2011  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME

   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   

Other comprehensive income (loss)

     1        —          (56     —          (55
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     305        372        126        (554     249   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

40


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     September 30, 2012  

CONDENSED CONSOLIDATING BALANCE SHEET

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

Assets

  

Current assets

           

Cash and cash equivalents

     300         65        228        —          593   

Receivables

     —           461        213        —          674   

Inventories

     —           460        203        —          663   

Prepaid expenses

     15         4        15        —          34   

Income and other taxes receivable

     113         —          8        (77     44   

Intercompany accounts

     370         3,484        76        (3,930     —     

Deferred income taxes

     5         58        61        —          124   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     803         4,532        804        (4,007     2,132   

Property, plant and equipment, at cost

     —           5,722        3,072        —          8,794   

Accumulated depreciation

     —           (3,446     (1,884     —          (5,330
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     —           2,276        1,188        —          3,464   

Goodwill

     —           194        67        —          261   

Intangible assets, net of amortization

     —           187        160        —          347   

Investments in affiliates

     7,272         2,088        —          (9,360     —     

Intercompany long-term advances

     6         79        444        (529     —     

Other assets

     25         —          99        (9     115   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     8,106         9,356        2,762        (13,905     6,319   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity

           

Current liabilities

           

Bank indebtedness

     —           15        —          —          15   

Trade and other payables

     50         407        225        —          682   

Intercompany accounts

     3,482         409        39        (3,930     —     

Income and other taxes payable

     —           86        7        (77     16   

Long-term debt due within one year

     —           5        2        —          7   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     3,532         922        273        (4,007     720   

Long-term debt

     1,150         31        15        —          1,196   

Intercompany long-term loans

     444         85        —          (529     —     

Deferred income taxes and other

     —