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Domtar 10-Q 2015

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
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 March 31, 2015

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.)

234 Kingsley Park Drive, Fort Mill, SC 29715

(Address of principal executive offices) (zip code)

(803) 802-7500

(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   ¨    Smaller reporting company   ¨
     

(do not check if a 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 April 30, 2015, 63,700,903 shares of the issuer’s voting common stock were outstanding.


Table of Contents

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2015

INDEX

 

PART I.

  

FINANCIAL INFORMATION

   3

ITEM 1.

  

FINANCIAL STATEMENTS (UNAUDITED)

   3
  

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE (LOSS) 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

   40

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

  

48

ITEM 4.

  

CONTROLS AND PROCEDURES

  

48

PART II

  

OTHER INFORMATION

  

49

ITEM 1.

  

LEGAL PROCEEDINGS

  

49

ITEM 1A.

  

RISK FACTORS

  

49

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  

49

ITEM 3.

  

DEFAULT UPON SENIOR SECURITIES

  

49

ITEM 4.

  

MINE SAFETY DISCLOSURES

  

49

ITEM 5.

  

OTHER INFORMATION

  

50

ITEM 6.

  

EXHIBITS

  

51


Table of Contents

PART I: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE (LOSS) INCOME

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

     For the three months ended  
     March 31,     March 31,  
     2015     2014  
     (Unaudited)  
     $     $  

Sales

     1,348        1,394   

Operating expenses

    

Cost of sales, excluding depreciation and amortization

     1,062        1,103   

Depreciation and amortization

     90        99   

Selling, general and administrative

     100        114   

Impairment and write-down of property, plant and equipment (NOTE 12)

     19        —     

Closure and restructuring costs (NOTE 12)

     1        1   

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

     5        (2
  

 

 

   

 

 

 
     1,277        1,315   
  

 

 

   

 

 

 

Operating income

     71        79   

Interest expense, net

     26        25   
  

 

 

   

 

 

 

Earnings before income taxes

     45        54   

Income tax expense

     9        15   
  

 

 

   

 

 

 

Net earnings

     36        39   
  

 

 

   

 

 

 

Per common share (in dollars) (NOTE 5)

    

Net earnings

    

Basic

     0.56        0.60   

Diluted

     0.56        0.60   

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

    

Basic

     63.8        64.9   

Diluted

     63.9        65.0   

Cash dividends per common share

     0.375        0.275   

Net earnings

     36        39   

Other comprehensive (loss) income (NOTE 13):

    

Net derivative losses on cash flow hedges:

    

Net losses arising during the period, net of tax of $(13) and $(3), respectively

     (18     (3

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

     5        2   

Foreign currency translation adjustments

     (167     (36

Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) and $(1), respectively

     2        2   
  

 

 

   

 

 

 

Other comprehensive loss

     (178     (35
  

 

 

   

 

 

 

Comprehensive (loss) income

     (142     4   
  

 

 

   

 

 

 

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  
     March 31,     December 31,  
     2015     2014  
     (Unaudited)  
     $     $  

Assets

    

Current assets

    

Cash and cash equivalents

     183        174   

Receivables, less allowances of $10 and $6

     660        628   

Inventories (NOTE 9)

     704        714   

Prepaid expenses

     28        25   

Income and other taxes receivable

     12        54   

Deferred income taxes

     78        75   
  

 

 

   

 

 

 

Total current assets

     1,665        1,670   

Property, plant and equipment, at cost

     8,726        8,909   

Accumulated depreciation

     (5,731     (5,778
  

 

 

   

 

 

 

Net property, plant and equipment

     2,995        3,131   

Goodwill (NOTE 10)

     537        567   

Intangible assets, net of amortization (NOTE 11)

     612        661   

Other assets

     151        156   
  

 

 

   

 

 

 

Total assets

     5,960        6,185   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities

    

Bank indebtedness

     6        10   

Trade and other payables

     697        721   

Income and other taxes payable

     39        26   

Long-term debt due within one year

     169        169   
  

 

 

   

 

 

 

Total current liabilities

     911        926   

Long-term debt

     1,179        1,181   

Deferred income taxes and other

     790        810   

Other liabilities and deferred credits

     370        378   

Commitments and contingencies (NOTE 15)

    

Shareholders’ equity

    

Common stock
$0.01 par value; authorized 2,000,000,000 shares; issued: 65,001,104 shares

     1        1   

Treasury stock (NOTE 14)
$0.01 par value; 1,300,201 and 991,017 shares

     —          —     

Additional paid-in capital

     2,000        2,012   

Retained earnings

     1,155        1,145   

Accumulated other comprehensive loss

     (446     (268
  

 

 

   

 

 

 

Total shareholders’ equity

     2,710        2,890   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     5,960        6,185   
  

 

 

   

 

 

 

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

 

4


Table of Contents

DOMTAR CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

    Issued  and
outstanding
common shares
(millions of shares)
    Common stock,
at par
    Additional paid-in
capital
    Retained
earnings
    Accumulated  other
comprehensive loss
    Total
shareholders’
equity
 
    (Unaudited)  
          $     $     $     $     $  

Balance at December 31, 2014

    64.0        1        2,012        1,145        (268     2,890   

Stock-based compensation, net of tax

    —          —          1        —          —          1   

Net earnings

    —          —          —          36        —          36   

Net derivative losses on cash flow hedges:

           

Net losses arising during the period, net of tax of $(13)

    —          —          —          —          (18     (18

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

    —          —          —          —          5        5   

Foreign currency translation adjustments

    —          —          —          —          (167     (167

Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1)

    —          —          —          —          2        2   

Stock repurchase

    (0.3     —          (13     —          —          (13

Cash dividends declared

    —          —          —          (26     —          (26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

    63.7        1        2,000        1,155        (446     2,710   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 three months ended  
     March 31,
2015
    March 31,
2014
 
     (Unaudited)  
     $     $  

Operating activities

    

Net earnings

     36        39   

Adjustments to reconcile net earnings to cash flows from operating activities

    

Depreciation and amortization

     90        99   

Deferred income taxes and tax uncertainties

     (15     —     

Impairment and write-down of property, plant and equipment

     19        —     

Net gain on disposal of property, plant and equipment

     (1     —     

Stock-based compensation expense

     2        1   

Other

     (1     3   

Changes in assets and liabilities, excluding the effects of acquisition of business

    

Receivables

     (44     9   

Inventories

     (12     (14

Prepaid expenses

     2        3   

Trade and other payables

     (10     (23

Income and other taxes

     55        20   

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

     2        (2

Other assets and other liabilities

     4        6   
  

 

 

   

 

 

 

Cash flows provided from operating activities

     127        141   
  

 

 

   

 

 

 

Investing activities

    

Additions to property, plant and equipment

     (70     (45

Proceeds from disposals of property, plant and equipment

     1        —     

Acquisition of business, net of cash acquired

     —          (546
  

 

 

   

 

 

 

Cash flows used for investing activities

     (69     (591
  

 

 

   

 

 

 

Financing activities

    

Dividend payments

     (24     (18

Net change in bank indebtedness

     (4     (8

Change in revolving bank credit facility

     —          (80

Proceeds from receivables securitization facilities

     —          90   

Payments on receivables securitization facilities

     —          (58

Repayment of long-term debt

     (1     —     

Stock repurchase

     (13     —     

Other

     1        1   
  

 

 

   

 

 

 

Cash flows used for financing activities

     (41     (73
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     17        (523

Impact of foreign exchange on cash

     (8     (2

Cash and cash equivalents at beginning of period

     174        655   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     183        130   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Net cash payments for:

    

Interest

     27        22   

Income taxes refund, net

     (23     (1
  

 

 

   

 

 

 

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

 

6


Table of Contents

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1   

BASIS OF PRESENTATION

     8   
NOTE 2   

RECENT ACCOUNTING PRONOUNCEMENTS

     9   
NOTE 3   

ACQUISITION OF BUSINESS

     10   
NOTE 4   

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

     11   
NOTE 5   

EARNINGS PER COMMON SHARE

     16   
NOTE 6   

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

     17   
NOTE 7   

OTHER OPERATING LOSS (INCOME), NET

     18   
NOTE 8   

INCOME TAXES

     19   
NOTE 9   

INVENTORIES

     20   
NOTE 10   

GOODWILL

     21   
NOTE 11   

INTANGIBLE ASSETS

     22   
NOTE 12    CLOSURE AND RESTRUCTURING COSTS AND LIABILITY AND IMPAIRMENT AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT      23   
NOTE 13   

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

     24   
NOTE 14   

SHAREHOLDERS’ EQUITY

     26   
NOTE 15   

COMMITMENTS AND CONTINGENCIES

     27   
NOTE 16   

SEGMENT DISCLOSURES

     31   
NOTE 17   

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

     33   

 

7


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(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. Results for the first three 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, 2014, as filed with the Securities and Exchange Commission. The December 31, 2014 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.

 

8


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 2.

 

 

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

DISCONTINUED OPERATIONS

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, an update on Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this update change the requirements for reporting discontinued operations and require additional disclosures for both disposal transactions that meet the criteria for a discontinued operation and disposals that do not meet these criteria. The objective of this update is to reach a greater convergence between the FASB’s and IASB’s reporting requirements for discontinued operations.

The Company adopted the new requirement on January 1, 2015 with no impact on the Company’s consolidated financial statements, as no triggering event occurred throughout the period.

FUTURE ACCOUNTING CHANGES

CLOUD COMPUTING ARRANGEMENTS

In April 2015, the FASB issued ASU 2015-05, an update on customer’s accounting for fees paid in a cloud computing arrangement. The ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.

The ASU is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect these changes to have a material impact on the consolidated financial statements.

 

9


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3.

 

 

ACQUISITION OF BUSINESS

Acquisition of Laboratorios Indas

On January 2, 2014, Domtar Corporation completed the acquisition of 100% of the outstanding shares of Laboratorios Indas, S.A.U. (“Indas”), primarily a branded incontinence products manufacturer and marketer in Spain. Indas has approximately 570 employees and operates two manufacturing facilities in Spain. The results of Indas’ operations have been included in the Personal Care reportable segment as of January 2, 2014. The purchase price was $546 million (€399 million) in cash, net of cash acquired of $46 million (€34 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 estimates of their fair value.

The table below illustrates the purchase price allocation:

 

Fair value of net assets acquired at the date of acquisition

     

Receivables

      $ 101   

Inventory

        28   

Income and other taxes receivable

        3   

Property, plant and equipment

        72   

Intangible assets

     

Customer relationships (1)

     142      

Trade names (2)

     140      

Catalog rights (2)

     46      
        328   

Goodwill

        234   

Deferred income tax assets

        16   
     

 

 

 

Total assets

        782   

Less: Liabilities

     

Trade and other payables

        71   

Income and other taxes payable

        3   

Long-term debt (including short-term portion)

        42   

Deferred income tax liabilities

        119   

Other liabilities and deferred credits

        1   
     

 

 

 

Total liabilities

        236   

Fair value of net assets acquired at the date of acquisition

        546   

 

(1) 

The useful life of Customer relationships acquired is between 10-20 years.

(2) 

Indefinite useful life.

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, the expected synergies and the expected future cash flows of the business. Disclosed goodwill is not deductible for tax purposes.

 

10


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4.

 

 

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, and interest rates. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company’s hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The ineffective portion of the qualifying instrument is immediately recognized to earnings. The amount of ineffectiveness recognized was immaterial for all years presented. The Company does not hold derivative financial instruments for trading purposes.

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 of March 31, 2015, one of Domtar’s Pulp and Paper segment customers located in the United States represented 13% ($88 million) (2014 – 10% ($64 million)) of the Company’s receivables.

The Company is 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.

INTEREST RATE RISK

The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, bank indebtedness, bank credit facility and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. On December 18, 2014, the Company entered into a $100 million notional 2.5 year fixed to floating interest rate swap to receive fixed (1.0225%) and pay the 3 month LIBOR. This swap was designated as a fair value hedge for a portion of its 10.75% notes due June 2017. The changes in fair value of both the hedging and the hedged item are immediately recognized in interest expense. Gains (losses) related to the ineffectiveness portion of the hedges were not material for this reporting period.

COST RISK

Cash flow hedges:

The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next three years.

 

11


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(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 March 31, 2015 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
 

Natural Gas

          

2015 (1)

     7,425,000         MMBTU (2)    $ 31                         54

2016

     8,775,000         MMBTU (2)    $ 35                         42

2017

     2,700,000         MMBTU (2)    $ 11                         13

 

(1)

Represents the remaining nine months of 2015

(2)

MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective as of March 31, 2015. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive (Loss) Income for the three months ended March 31, 2015 resulting from hedge ineffectiveness (2014 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States, Canada and Europe. As a result, it is exposed to movements in foreign currency exchange rates in Canada and Europe. Moreover, certain assets and liabilities are denominated in currencies other than the U.S. dollar and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and the European currencies. The Company’s European subsidiaries are also exposed to movements in foreign currency exchange rates on transactions denominated in a currency other than their 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 three years. The Company may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates.

Derivatives are used to hedge forecasted purchases in Canadian dollars by its Canadian subsidiary over the next 24 months. Derivatives are used to hedge forecasted sales by its US subsidiaries in Euros over the next 21 months and British pounds over the next nine months. Derivatives are also used to hedge forecasted sales in British pounds and Norwegian krone and forecasted purchases of Swedish krona over the next 12 months and forecasted purchases in US dollars over the next 21 months by its European subsidiaries. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

The following table presents the currency values under significant contracts pursuant to currency options outstanding as of March 31, 2015 to hedge forecasted purchases and sales:

 

Currency exposure hedged

  

Business Segment

   Year      Notional
contractual value
     Percentage of
forecasted net
exposures under
contracts
    Protection rate      Obligation rate  
        2015              

CDN/USD

   Pulp and Paper         300 CDN         52     1 USD = 1.1026         1 USD = 1.1373   

USD/Euro

   Personal Care         44 USD         77     1 Euro = 1.3135         1 Euro = 1.3155   

Euro/USD

   Pulp and Paper         34 EUR         76     1 Euro = 1.1572         1 Euro = 1.1572   
        2016              

CDN/USD

   Pulp and Paper         240 CDN         31     1 USD = 1.1292         1 USD = 1.1739   

USD/Euro

   Personal Care         40 USD         53     1 Euro = 1.0722         1 Euro = 1.1918   

Euro/USD

   Pulp and Paper         15 EUR         25     1 Euro = 1.1629         1 Euro = 1.1629   
        2017              

CDN/USD

   Pulp and Paper         45 CDN         6     1 USD = 1.2042         1 USD = 1.2731   
  

 

  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The foreign exchange derivative contracts were fully effective as of March 31, 2015. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive (Loss) Income for the three months ended March 31, 2015 resulting from hedge ineffectiveness (2014 - nil).

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements 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.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (c) below) at March 31, 2015 and December 31, 2014, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

Fair Value of financial instruments at:

  March 31,
2015
    Quoted prices in
active markets for
identical assets
(Level 1)
    Significant
observable
inputs
(Level 2)
    Significant
unobservable
inputs

(Level 3)
   

Balance sheet classification

    $     $     $     $      
Derivatives designated under the Derivatives and Hedging Topic of FASB ASC:          

Asset derivatives

         

Currency derivatives

    14        —          14        —        (a) Prepaid expenses

Currency derivatives

    4        —          4        —        (a) Other assets
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Assets

    18        —          18        —       
 

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities derivatives

         

Currency derivatives

    36        —          36        —        (a) Trade and other payables

Currency derivatives

    15        —          15        —        (a) Other liabilities and deferred credits

Natural gas swap contracts

    12        —          12        —        (a) Trade and other payables

Natural gas swap contracts

    8        —          8        —        (a) Other liabilities and deferred credits
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Liabilities

    71        —          71        —       
 

 

 

   

 

 

   

 

 

   

 

 

   

Other Instruments:

         

Asset backed notes (“ABN”)

    10        10        —          —        Accounts receivable

Asset backed notes

    1        —          —          1      (b) Other assets

Long-term debt

    1,485        —          1,485        —        (c) Long-term debt
 

 

 

   

 

 

   

 

 

   

 

 

   

The cumulative loss recorded in Other comprehensive (loss) income relating to natural gas contracts of $20 million at March 31, 2015, will be recognized in Cost of sales upon maturity of the derivatives over the next 33 months at the then prevailing values, which may be different from those at March 31, 2015.

The cumulative loss recorded in Other comprehensive (loss) income relating to currency options and forwards hedging forecasted purchases of $33 million at March 31, 2015, will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 24 months at the then prevailing values, which may be different from those at March 31, 2015.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

Fair Value of financial instruments at:

  December 31,
2014
    Quoted prices in
active markets for
identical assets
(Level 1)
    Significant
observable
inputs
(Level 2)
    Significant
unobservable
inputs

(Level 3)
   

Balance sheet classification

    $     $     $     $      
Derivatives designated under the Derivatives and Hedging Topic of FASB ASC:          

Asset derivatives

         

Currency derivatives

    7        —          7        —        (a) Prepaid expenses

Currency derivatives

    3        —          3        —        (a) Other assets
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Assets

    10        —          10        —       
 

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities derivatives

         

Currency derivatives

    14        —          14        —        (a) Trade and other payables

Currency derivatives

    9        —          9        —        (a) Other liabilities and deferred credits

Natural gas swap contracts

    13        —          13        —        (a) Trade and other payables

Natural gas swap contracts

    6        —          6        —        (a) Other liabilities and deferred credits
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Liabilities

    42        —          42        —       
 

 

 

   

 

 

   

 

 

   

 

 

   

Other Instruments:

         

Asset backed notes

    11        —          10        1      (b) Other assets

Long-term debt

    1,475        —          1,475        —        (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 derivatives: 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) 

ABN are reported at fair value utilizing Level 2 or Level 3 inputs. Fair value of ABN reported under Level 2 is based on current market quotes. Fair value of ABN reported under Level 3 is based on the value of the collateral investments held in the conduit issuer, reduced by the negative value of credit default derivatives, with an additional discount applied for illiquidity. These ABN are held outside of the Company’s pension plans.

 

(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 March 31, 2015 and December 31, 2014. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is $1,348 million and $1,350 million at March 31, 2015 and December 31, 2014, 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.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 5.

 

 

EARNINGS PER COMMON SHARE

On April 30, 2014, the Company’s Board of Directors approved a 2-for-1 split of its common stock to be effected through a stock dividend. Shareholders of record on June 10, 2014 were entitled to receive one additional share for every share they owned on that date.

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

 

     For the three months ended  
     March 31,
2015
     March 31,
2014
 

Net earnings

   $ 36       $ 39   
  

 

 

    

 

 

 

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

     63.8         64.9   

Effect of dilutive securities (millions)

     0.1         0.1   
  

 

 

    

 

 

 

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

     63.9         65.0   
  

 

 

    

 

 

 

Basic net earnings per common share (in dollars)

   $ 0.56       $ 0.60   

Diluted net earnings per common share (in dollars)

   $ 0.56       $ 0.60   
  

 

 

    

 

 

 

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

 

     March 31,
2015
     March 31,
2014
 

Options

     139,007         337,272   
  

 

 

    

 

 

 

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(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 two Canadian multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three months ended March 31, 2015, the related pension expense was $8 million (2014 -$8 million).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after June 1, 2000 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Most unionized employees in the U.S. and all U.S. non-hourly employees that are not grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution 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  
     March 31, 2015      March 31, 2014  
     Pension
plans
    Other post-
retirement
benefit plans
     Pension
plans
    Other post-
retirement
benefit plans
 
     $     $      $     $  

Service cost

     9        1         9        1   

Interest expense

     16        1         20        1   

Expected return on plan assets

     (24     —           (26     —     

Amortization of net actuarial loss

     2        —           2        —     

Amortization of prior year service costs

     1        —           1        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

     4        2         6        2   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company contributed $3 million for the three months ended March 31, 2015 (2014 – $10 million) to the pension plans and $1 million to the other post-retirement benefit plans (2014 – nil).

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 7.

 

 

OTHER OPERATING LOSS (INCOME), NET

Other operating loss (income), net 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:

 

     For the three months ended  
     March 31,
2015
    March 31,
2014
 
     $     $  

Gain on sale of property, plant and equipment

     (1     —     

Bad debt expense

     5        1   

Foreign exchange gain

     —          (3

Other

     1        —     
  

 

 

   

 

 

 

Other operating loss (income), net

     5        (2
  

 

 

   

 

 

 

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 8.

 

 

INCOME TAXES

For the first quarter of 2015, the Company’s income tax expense was $9 million, consisting of a current income tax expense of $24 million and a deferred income tax benefit of $15 million. This compares to a tax expense of $15 million for the first quarter of 2014, consisting of a current income tax expense of $15 million and no deferred income tax expense. The Company received income tax refunds, net of payments, of $23 million during the first quarter of 2015. The effective tax rate was 20% compared with an effective tax rate of 28% in the first quarter of 2014. The effective tax rate for the first quarter of 2015 was impacted by the impairment and write-down of property, plant, and equipment charges occurring in a high-tax jurisdiction.

 

19


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 9.

 

 

INVENTORIES

The following table presents the components of inventories:

 

     March 31,
2015
     December 31,
2014
 
     $      $  

Work in process and finished goods

     388         395   

Raw materials

     122         123   

Operating and maintenance supplies

     194         196   
  

 

 

    

 

 

 
     704         714   
  

 

 

    

 

 

 

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 10.

 

 

GOODWILL

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

 

     March 31, 2015  
     $  

Balance at December 31, 2014

     567   

Effect of foreign currency exchange rate change

     (30
  

 

 

 

Balance at end of period

     537   
  

 

 

 

The goodwill at March 31, 2015 is entirely related to the Personal Care segment.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 11.

 

 

INTANGIBLE ASSETS

The following table presents the components of intangible assets:

 

     Estimated useful lives
(in years)
     March 31, 2015      December 31, 2014  
        
            Gross carrying
amount
     Accumulated
amortization
    Net      Gross carrying
amount
     Accumulated
amortization
    Net  
            $      $     $      $      $     $  

Intangible assets subject to amortization

                  

Water rights

     40         8         (1     7         8         (1     7   

Customer relationships

     10 - 40         352         (34     318         374         (32     342   

Technology

     7 - 20         8         (2     6         8         (2     6   

Non-Compete

     9         1         —          1         1         —          1   

License rights

     12         28         (4     24         29         (4     25   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
        397         (41     356         420         (39     381   

Intangible assets not subject to amortization

                  

Trade names

        214         —          214         233         —          233   

License rights

        6         —          6         6         —          6   

Catalog rights

        36         —          36         41         —          41   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

        653         (41     612         700         (39     661   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense related to intangible assets for the three months ended March 31, 2015 was $5 million (2014 – $5 million).

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

 

     2015      2016      2017      2018      2019  
     $      $      $      $      $  

Amortization expense related to intangible assets

     19         19         18         18         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12.

 

 

CLOSURE AND RESTRUCTURING COSTS AND LIABILITY AND IMPAIRMENT

AND WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT

The Company regularly reviews its overall production capacity with the objective of aligning its production capacity with anticipated long-term demand, which in some cases could result in closure or impairment costs being recorded in earnings.

As a result of the Company’s previous withdrawal from its U.S. multiemployer plans, the total provision for the withdrawal liabilities is $60 million at March 31, 2015. Of the $60 million provision, $14 million of this amount has a small amount of measurement uncertainty as the Company remains exposed to potential additional withdrawal liabilities to the fund in the event of a mass withdrawal occurring anytime within the next two years.

Ashdown, Arkansas mill

On December 10, 2014, the Company announced that its Board of Directors approved a $160 million capital project to convert a paper machine at the Ashdown, Arkansas mill to a high quality fluff pulp line used in absorbent applications such as baby diapers, feminine hygiene and adult incontinence products. The planned conversion is expected to come online by the third quarter of 2016 and will allow for the production of up to 516,000 metric tons of fluff pulp per year once the machine is in full operation. The project will also result in the permanent reduction of 364,000 short tons of annual uncoated freesheet production capacity in the second quarter of 2016.

The conversion work is expected to commence during the second quarter of 2016 and the fluff pulp line is scheduled to startup by the third quarter of 2016. The cost of conversion will be approximately $160 million of which $40 million is expected to be invested in 2015 and $120 million in 2016. The Company will also invest $40 million in a pulp bale line that will provide flexibility to manufacture papergrade softwood pulp, contingent on market conditions.

The aggregate pre-tax earnings charge in connection with this conversion is estimated to be $120 million which includes an estimated $117 million in non-cash charges relating to accelerated depreciation of the carrying amounts of the manufacturing equipment as well as the write-off of related spare parts. Of the estimated pre-tax charge of $120 million, $3 million relates to estimated cash severance, employee benefits and training. Of the estimated total pre-tax charge of $120 million, $113 million is expected to be incurred during 2015 and 2016. As a result of the 2014 fourth quarter decision to convert a paper machine to a fluff pulp line at its Ashdown, Arkansas mill, the Company recorded in the first quarter of 2015 $19 million of accelerated depreciation under Impairment and write-down of property, plant and equipment on the Consolidated Statement of Earnings and Comprehensive (Loss) Income.

Other costs

During the first quarter of 2015, other costs related to previous and ongoing closures include $1 million of severance and termination costs related to Personal Care.

During the first quarter of 2014, other costs related to previous and ongoing closures include $1 million of severance and termination costs related to Personal Care.

At March 31, 2015, the Company’s provision for closure and restructuring costs is $3 million. This provision is comprised of severance and termination costs of $2 million in the Pulp and Paper segment and $1 million in the Personal Care segment.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13.

 

 

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component(1) for the periods ended March 31, 2015 and December 31, 2014:

 

     Net derivative
gains (losses)
on cash flow
hedges
    Pension
items(2)
    Post-
retirement
benefit items (2)
    Foreign
currency
items
    Total  

Balance at December 31, 2013

     —          (210     (7     152        (65
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Natural gas swap contracts

     (10     N/A        N/A        N/A        (10

Currency options

     (15     N/A        N/A        N/A        (15

Forward contracts

     2        N/A        N/A        N/A        2   

Net gain

     N/A        (4     (6     N/A        (10

Foreign currency items

     N/A        N/A        N/A        (200     (200
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before reclassifications

     (23     (4     (6     (200     (233
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from Accumulated other comprehensive loss

     8        22        —          —          30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss) income

     (15     18        (6     (200     (203
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     (15     (192     (13     (48     (268 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     (15     (192     (13     (48     (268
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Natural gas swap contracts

     (3     N/A        N/A        N/A        (3

Currency options

     (21     N/A        N/A        N/A        (21

Forward contracts

     6        N/A        N/A        N/A        6   

Net gain

     N/A        —          —          N/A        —     

Foreign currency items

     N/A        N/A        N/A        (167     (167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss before reclassifications

     (18     —          —          (167     (185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from Accumulated other comprehensive loss

     5        2        —          —          7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive (loss) income

     (13     2        —          (167     (178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

     (28     (190     (13     (215     (446 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) All amounts are after tax. Amounts in parenthesis indicate losses.
(2) The accrued benefit obligation is actuarially determined on an annual basis as of December 31.

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

 

The following tables present reclassifications out of Accumulated other comprehensive loss:

 

Details about Accumulated other
comprehensive loss components

   Amount reclassified from
Accumulated other

comprehensive loss
 
     For the three months ended  
     March 31, 2015     March 31, 2014  

Net derivative gains (losses) on cash flow hedges

    

Natural gas swap contracts

     4        (2 ) (1) 

Currency options and forwards

     5        6  (1) 
  

 

 

   

 

 

 

Total before tax

     9        4   

Tax expense

     (4     (2
  

 

 

   

 

 

 

Net of tax

     5        2   
  

 

 

   

 

 

 

Amortization of defined benefit pension items

    

Amortization of net actuarial loss and prior year service cost

     3        3  (2) 

Tax expense

     (1     (1
  

 

 

   

 

 

 

Net of tax

     2        2   
  

 

 

   

 

 

 

 

(1) These amounts are included in Cost of Sales in the Consolidated Statements of Earnings and Comprehensive (Loss) Income.
(2) These amounts are included in the computation of net periodic benefit cost. Refer to Note 6 “Pension plans and other post-retirement benefit plans” for additional details.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14.

 

 

SHAREHOLDERS’ EQUITY

On February 23, 2015, the Company’s Board of Directors approved a quarterly dividend of $0.40 per share to be paid to holders of the Company’s common stock. Total dividends of approximately $26 million were paid on April 15, 2015 to shareholders of record on April 2, 2015.

On May 5, 2015, the Company’s Board of Directors approved a quarterly dividend of $0.40 per share to be paid to holders of the Company’s common stock. This dividend is to be paid on July 15, 2015, to shareholders of record on July 2, 2015.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (“the Program”) of up to $1 billion of Domtar Corporation’s common stock. On February 23, 2015, the Company’s Board of Directors approved an increase to the Program from $1 billion to $1.3 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 stock options, awards, and to improve shareholders’ returns.

The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company enters 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 require the Company to make up-front payments to the counterparty financial institutions which results 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 quarter of 2015, the Company repurchased 340,844 shares at an average price of $39.20 for a total cost of $13 million.

During the first quarter of 2014, the Company did not repurchase any shares under the Program.

Since the inception of the Program, the Company has repurchased 23,678,824 shares at an average price of $39.21 for a total cost of $929 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15.

 

 

 

COMMITMENTS AND CONTINGENCIES

ENVIRONMENT

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

An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against the Company 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. Beyond the filing of preliminary pleadings, no steps have been taken by the parties in this action. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and the Company (“responsible persons”) 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 relevant government authorities selected a remediation approach on July 15, 2011, and on January 8, 2013, the same authorities decided that each responsible persons’ implementation plan is satisfactory and that the responsible persons should decide which plan is to be used. Most of the remaining appeals that were to be heard before the Board were abandoned by the parties during the course of the Board proceedings which were held in the fall of 2013. Seaspan and Domtar have selected a remedial plan and have applied to the Vancouver Fraser Port Authority for permitting approval. The Company has recorded an environmental reserve to address its estimated exposure. The possible loss in excess of the reserve is not considered to be material for this matter.

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

 

     March 31, 2015  
     $  

Balance at beginning of period

     60   

Additions

     1   

Environmental spending

     (1

Effect of foreign currency exchange rate change

     (4
  

 

 

 

Balance at end of period

     56   
  

 

 

 

 

27


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

The Company 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 U.S. Environmental Protection Agency (“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. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at 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.

Climate change regulation

In response to the Kyoto Protocol, which calls 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 jurisdictions 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 the legislation has not passed, the U.S. government is promulgating regulations under the existing Clean Air Act to reduce GHG emissions from public utilities and certain other emitters. The EPA has adopted and implemented GHG permitting requirements for certain new sources and modifications of existing industrial facilities and has proposed GHG performance standards for newly constructed, reconstructed and modified electric utilities. The EPA has also relied on the existing Clean Air Act to propose a “Clean Power Plan” that will set emission guidelines for existing electric utilities and require states to develop plans for reducing GHG emissions by making significant changes to the energy resources utilized within the state. The EPA is developing a biogenic carbon accounting framework to account for carbon dioxide emissions from biomass fuels for Clean Air Act permitting and regulatory purposes. The EPA references this framework in the proposals addressing GHG performance standards for the electric utilities. Furthermore, several states are already regulating GHG emissions from public utilities and certain other significant emitters, primarily through regional GHG cap-and-trade programs or renewable energy requirements.

The U.S. Supreme Court held on June 23, 2014 that the EPA had exceeded its statutory authority in establishing its GHG permitting program. Specifically, the Court determined that the EPA could not impose GHG permitting requirements on a source unless that source had already triggered permitting requirements for other non-GHG pollutants. However, for sources already subject to permitting, the Court held that the Clean Air Act did not preclude the EPA from requiring those sources to install “best available control technology” for GHGs.

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 reduction programs or to pay taxes or other fees with respect to its GHG emissions. This, in turn, could increase the Company’s operating costs and capital spending. The Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers in the United States.

The Government of Canada has committed to reducing Canada’s 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. The Government of Canada has implemented regulations intended to regulate emissions from motor vehicles and has enacted regulations to reduce GHG emissions from coal-fired electrical generators which are scheduled to become effective July 1, 2015. Proposed regulations relating to GHG emissions from the oil and gas sector are currently in consultation and are expected to come into force in 2016. Performance standards for industrial sectors will also be developed. The pulp and paper sector is currently undergoing review. The Company does not expect the performance of its facilities to be disproportionately affected by these future measures compared with other pulp and paper producers in Canada.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

The province of Quebec initiated a GHG cap-and-trade system on January 1, 2012. Reduction targets for Quebec became 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. British Columbia imposed a carbon tax in 2008, which applies to the purchase of fossil fuels within the province. There are currently no other federal or provincial statutory or regulatory obligations that affect the emission of GHGs for the Company’s pulp and paper operations elsewhere in Canada. The Province of Ontario is expected to initiate development of a regulatory program, including carbon pricing policies for GHG emission reductions in 2015.

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 Company does not anticipate to be disproportionately affected or impacted by these measures.

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

The EPA published in the Federal Register on January 31, 2013, for facilities that are major sources for Hazardous Air Pollutants, a new set of standards related to emissions from boilers and process heaters included in some of 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. The Company is developing plans to bring facilities affected by the Boiler MACT rule into compliance by the January 2016 regulatory deadline for major sources. The Company expects that the capital cost required to comply with the Boiler MACT rules is approximately $15 million. Boiler MACT rules are being litigated. Changes to the rule resulting from the litigation could affect the current expected capital cost for compliance and could also affect future operating costs.

The EPA has agreed to reconsider a limited number of issues in the most recent Boiler MACT rule, and elements of the EPA’s rule have been legally challenged. Since the consequences of these activities cannot be predicted, adjustments to compliance plans may be needed to accommodate any changes to the final rule.

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 March 31, 2015, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Spanish Competition Investigation

In September 2014, following preliminary inquiries commenced in January 2014, Spain’s National Commission of Markets and Competition initiated a formal investigation of several companies and their parent companies, including Indas (a subsidiary of the Company, acquired on January 2, 2014), and two of its affiliates, as well as an industry association, Federacion Espanola de Empresas de Tecnologia Sanitaria (“FENIN”), with respect to possible unlawful conduct, consisting of fixing prices, commercial terms and dispensation of heavy adult incontinence products in the Spanish market. The activities under investigation predate the acquisition of Indas by the Company. The sellers of Indas made representations and warranties to the Company in the purchase agreement regarding, among other things, Indas’ and its subsidiary’s compliance with competition laws. The liability retained by the sellers is backed by bank guarantees, and limited insurance coverage has been purchased with regards to excess liability. As a result, while the final outcome with respect to the investigation cannot be predicted with certainty, it is management’s opinion that its resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

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 March 31, 2015, 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.

Pension Plans

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At March 31, 2015 the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16.

 

 

SEGMENT DISCLOSURES

The Company operates in the two reportable segments described below. 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 design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.

 

   

Personal Care Segment – consists of the manufacturing, marketing and distribution of absorbent hygiene products.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SEGMENT DISCLOSURES (CONTINUED)

 

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

 

     For the three months
ended
 
SEGMENT DATA    March 31,
2015
    March 31,
2014
 
     $     $  

Sales

    

Pulp and Paper

     1,146        1,168   

Personal Care

     218        233   
  

 

 

   

 

 

 

Total for reportable segments

     1,364        1,401   

Intersegment sales - Pulp and Paper

     (16     (7
  

 

 

   

 

 

 

Consolidated sales

     1,348        1,394   
  

 

 

   

 

 

 

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

    

Pulp and Paper

     74        83   

Personal Care

     16        16   
  

 

 

   

 

 

 

Total for reportable segments

     90        99   

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

     19        —     
  

 

 

   

 

 

 

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

     109        99   
  

 

 

   

 

 

 

Operating income (loss) (1)

    

Pulp and Paper

     75        89   

Personal Care

     10        14   

Corporate

     (14     (24
  

 

 

   

 

 

 

Consolidated operating income

     71        79   

Interest expense, net

     26        25   
  

 

 

   

 

 

 

Earnings before income taxes

     45        54   

Income tax expense

     9        15   
  

 

 

   

 

 

 

Net earnings

     36        39   
  

 

 

   

 

 

 

 

(1) 

As a result of changes in the Company’s organization structure, the Company has changed the way it allocates certain Corporate general and administrative costs to the segments. Further, certain Corporate costs not related to segment activities, as well as the mark-to-market impact on stock-based compensation awards, will be presented on the Corporate line. As a result, the Company has revised its 2014 segment disclosures to conform to its 2015 presentation. (Previously reported numbers for Operating income (loss) are as follows; Pulp and Paper: $69 million, Personal Care: $15 million, Corporate $(5) million).

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17.

 

 

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar Paper Company, LLC, a 100% owned subsidiary of the Company, 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 Products Inc., EAM Corporation, Domtar Personal Care Absorbent Hygiene Inc, and Associated Hygienic Products LLC., 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’s own 100% owned subsidiaries; including Domtar Delaware Holdings Inc. and its foreign subsidiaries, including Attends Healthcare Limited, Domtar Inc. and Laboratorios Indas. S.A.U., (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 Balance Sheets at March 31, 2015 and December 31, 2014 and the Statements of Earnings and Comprehensive (Loss) Income and Cash Flows for the three months ended March 31, 2015, and March 31, 2014 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.

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

      For the three months ended March 31, 2015  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE LOSS

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

Sales

     —          1,116        533        (301     1,348   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          976        387        (301     1,062   

Depreciation and amortization

     —          64        26        —          90   

Selling, general and administrative

     5        33        62        —          100   

Impairment and write-down of property, plant and equipment

     —          19        —          —          19   

Closure and restructuring costs

     —          —          1        —          1   

Other operating loss (income), net

     2        5        (2     —          5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     7        1,097        474        (301     1,277   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (7     19        59        —          71   

Interest expense (income), net

     26        7        (7     —          26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings before income taxes

     (33     12        66        —          45   

Income tax (benefit) expense

     (9     1        17        —          9   

Share in earnings of equity accounted investees

     60        49        —          (109     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     36        60        49        (109     36   

Other comprehensive loss

     (178     (180     (166     346        (178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (142     (120     (117     237        (142
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

      For the three months ended March 31, 2014  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME

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

Sales

     —          1,109        554        (269     1,394   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          933        439        (269     1,103   

Depreciation and amortization

     —          68        31        —          99   

Selling, general and administrative

     13        73        28        —          114   

Closure and restructuring costs

     —          1        —          —          1   

Other operating loss, net

     —          (1     (1     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     13        1,074        497        (269     1,315   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (13     35        57        —          79   

Interest expense (income), net

     25        5        (5     —          25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) earnings before income taxes

     (38     30        62        —          54   

Income tax (benefit) expense

     (10     8        17        —          15   

Share in earnings of equity accounted investees

     67        45        —          (112     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     39        67        45        (112     39   

Other comprehensive income (loss)

     1        (1     (35     —          (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     40        66        10        (112     4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

      March 31, 2015  
CONDENSED CONSOLIDATING BALANCE SHEET    Parent      Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $      $     $     $     $  

Assets

  

Current assets

           

Cash and cash equivalents

     79         20        84        —          183   

Receivables

     —           407        253        —          660   

Inventories

     —           482        222        —          704   

Prepaid expenses

     11         9        8        —          28   

Income and other taxes receivable

     49         —          8        (45     12   

Intercompany accounts

     975         4,611        15        (5,601     —     

Deferred income taxes

     —           49        29        —          78   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,114         5,578        619        (5,646     1,665   

Property, plant and equipment, at cost

     —           6,156        2,570        —          8,726   

Accumulated depreciation

     —           (4,063     (1,668     —          (5,731
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     —           2,093        902        —          2,995   

Goodwill

     —           296        241        —          537   

Intangible assets, net of amortization

     —           261        351        —          612   

Investments in affiliates

     7,895         2,028        —          (9,923     —     

Intercompany long-term advances

     6         80        435        (521     —     

Other assets

     31         23        126        (29     151   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     9,046         10,359        2,674        (16,119     5,960   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity

           

Current liabilities

           

Bank indebtedness

     —           6        —          —          6   

Trade and other payables

     70         420        207        —          697   

Intercompany accounts

     4,606         917        78        (5,601     —     

Income and other taxes payable

     28         42        14        (45     39   

Long-term debt due within one year

     166         2        1        —          169   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     4,870         1,387        300        (5,646     911   

Long-term debt

     1,168         1        10        —          1,179   

Intercompany long-term loans

     273         248        —          (521     —     

Deferred income taxes and other

     4         648        167        (29     790   

Other liabilities and deferred credits

     21         180        169        —          370   

Shareholders’ equity

     2,710         7,895        2,028        (9,923     2,710   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     9,046         10,359        2,674        (16,119     5,960   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     December 31, 2014  

CONDENSED CONSOLIDATING BALANCE SHEET

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

Assets

           

Current assets

           

Cash and cash equivalents

     79         18        77        —          174   

Receivables

     —           370        258        —          628   

Inventories

     —           495        219        —          714   

Prepaid expenses

     11         7        7        —          25   

Income and other taxes receivable

     37         —          17        —          54   

Intercompany accounts

     977         4,613        13        (5,603     —     

Deferred income taxes

     —           40        35        —          75   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,104         5,543        626        (5,603     1,670   

Property, plant and equipment, at cost

     —           6,119        2,790        —          8,909   

Accumulated depreciation

     —           (3,985     (1,793     —          (5,778
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     —           2,134        997        —          3,131   

Goodwill

     —           296        271        —          567   

Intangible assets, net of amortization

     —           263        398        —          661   

Investments in affiliates

     8,015         2,153        —          (10,168     —     

Intercompany long-term advances

     6         80        434        (520     —     

Other assets

     31         11        135        (21     156   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     9,156         10,480        2,861        (16,312     6,185   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity

           

Current liabilities

           

Bank indebtedness

     —           10        —          —          10   

Trade and other payables

     69         409        243        —          721   

Intercompany accounts

     4,582         925        96        (5,603     —     

Income and other taxes payable

     2         9        15        —          26   

Long-term debt due within one year

     166         2        1        —          169   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     4,819         1,355        355        (5,603     926   

Long-term debt

     1,168         2        11        —          1,181   

Intercompany long-term loans

     260         260        —          (520     —     

Deferred income taxes and other

     —           675        156        (21     810   

Other liabilities and deferred credits

     19         173        186        —          378   

Shareholders’ equity

     2,890         8,015        2,153        (10,168     2,890   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     9,156         10,480        2,861        (16,312     6,185   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     For the three months ended March 31, 2015  

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

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

Operating activities

          

Net earnings

     36        60        49        (109     36   

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

     (10     17        (25     109        91   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided from operating activities

     26        77        24        —          127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

          

Additions to property, plant and equipment

     —          (46     (24     —          (70

Proceeds from disposals of property, plant and equipment

     —          —          1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used for investing activities

     —          (46     (23     —          (69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

          

Dividend payments

     (24     —          —          —          (24

Net change in bank indebtedness

     —          (4     —          —          (4

Repayment of long-term debt

     —          (1     —          —          (1

Stock repurchase

     (13     —          —          —          (13

Increase in long-term advances to related parties

     —          (24     —          24        —     

Decrease in long-term advances to related parties

     10        —          14        (24     —     

Other

     1        —          —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows (used for) provided from financing activities

     (26     (29     14        —          (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —          2        15        —          17   

Impact of foreign exchange on cash

     —          —          (8     —          (8

Cash and cash equivalents at beginning of period

     79        18        77        —          174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     79        20        84        —          183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     For the three months ended March 31, 2014  

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

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

Operating activities

          

Net earnings

     39        67        45        (112     39   

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

     41        (42     (9     112        102   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows provided from operating activities

     80        25        36        —          141   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities

          

Additions to property, plant and equipment

     —          (30     (15     —          (45

Acquisition of business, net of cash acquired

     —          —          (546     —          (546
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used for investing activities

     —          (30     (561     —          (591
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

          

Dividend payments

     (18     —          —          —          (18

Net change in bank indebtedness

     (1     (7     —          —          (8

Change of revolving bank credit facility

     (80     —          —          —          (80

Proceeds from receivables securitization facilities

     —          —          90        —          90   

Payments on receivables securitization facilities

     —          —          (58     —          (58

Increase in long-term advances to related parties

     (389     (6     —          395        —     

Decrease in long-term advances to related parties

     —          —          395        (395     —     

Other

     2        —          (1     —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows (used for) provided from financing activities

     (486     (13     426        —          (73
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (406     (18     (99     —          (523

Impact of foreign exchange on cash

     —          —          (2     —          (2

Cash and cash equivalents at beginning of period

     439        22        194        —          655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     33        4        93        —          130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents