XNYS:UFS Domtar Corp Quarterly Report 10-Q Filing - 3/31/2012

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Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended March 31, 2012

OR

 

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

For the transition period from              to             

COMMISSION FILE NUMBER 001-33164

DOMTAR CORPORATION

(Exact name of registrant as specified in its charter)

 

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

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

(Address of principal executive offices) (zip code)

(514) 848-5555

(Registrant’s telephone number)

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

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

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

 

Large accelerated filer   x

   Accelerated filer   ¨    Non-accelerated filer   ¨    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, 2012, 36,138,812 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, 2012

INDEX

 

PART I.

  

FINANCIAL INFORMATION

     3   

ITEM 1.

  

FINANCIAL STATEMENTS (UNAUDITED)

     3   
  

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

     3   
  

CONSOLIDATED BALANCE SHEETS

     4   
  

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

     5   
  

CONSOLIDATED STATEMENTS OF CASH FLOWS

     6   
  

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     7   
  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     8   

ITEM 2.

  

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

     40   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     57   

ITEM 4.

  

CONTROLS AND PROCEDURES

     59   

PART II

  

OTHER INFORMATION

     59   

ITEM 1.

  

LEGAL PROCEEDINGS

     59   

ITEM 1A.

  

RISK FACTORS

     59   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     60   

ITEM 3.

  

DEFAULT UPON SENIOR SECURITIES

     60   

ITEM 4.

  

MINE SAFETY DISCLOSURES

     60   

ITEM 5.

  

OTHER INFORMATION

     60   

ITEM 6.

  

EXHIBITS

     61   


Table of Contents

PART I: FINANCIAL INFORMATION

 

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

     For the three months ended  
     March 31,
2012
     March 31,
2011
 
     (Unaudited)  
     $      $  

Sales

     1,398         1,423   

Operating expenses

     

Cost of sales, excluding depreciation and amortization

     1,088         1,021   

Depreciation and amortization

     97         93   

Selling, general and administrative

     99         90   

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

     2         3   

Closure and restructuring costs (NOTE 11)

     1         11   

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

     2         (6
  

 

 

    

 

 

 
     1,289         1,212   
  

 

 

    

 

 

 

Operating income

     109         211   

Interest expense, net

     71         21   
  

 

 

    

 

 

 

Earnings before income taxes and equity earnings

     38         190   

Income tax expense

     8         57   

Equity loss, net of taxes

     2         —     
  

 

 

    

 

 

 

Net earnings

     28         133   
  

 

 

    

 

 

 

Per common share (in dollars) (NOTE 5)

     

Net earnings

     

Basic

     0.76         3.16   

Diluted

     0.76         3.14   

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

     

Basic

     36.7         42.1   

Diluted

     37.0         42.4   

Net earnings

     28         133   

Other Comprehensive income (NOTE 2):

     

Net derivative gains on cash flow hedges:

     

Net gain arising during the period, net of tax of $(1) and $1

     —           4   

Less: Reclassification adjustment for losses included in net earnings, net of tax of $1 and $1

     3         —     

Foreign currency translation adjustments

     19         24   
  

 

 

    

 

 

 

Comprehensive income

     50         161   
  

 

 

    

 

 

 

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,
2012
    December 31,
2011
 
     (Unaudited)  
     $     $  

Assets

    

Current assets

    

Cash and cash equivalents

     315        444   

Receivables, less allowances of $5 and $5

     697        644   

Inventories (NOTE 8)

     676        652   

Prepaid expenses

     26        22   

Income and other taxes receivable

     43        47   

Deferred income taxes

     127        125   
  

 

 

   

 

 

 

Total current assets

     1,884        1,934   

Property, plant and equipment, at cost

     8,613        8,448   

Accumulated depreciation

     (5,129     (4,989
  

 

 

   

 

 

 

Net property, plant and equipment

     3,484        3,459   

Goodwill (NOTE 9)

     234        163   

Intangible assets, net of amortization (NOTE 10)

     328        204   

Other assets

     108        109   
  

 

 

   

 

 

 

Total assets

     6,038        5,869   
  

 

 

   

 

 

 

Liabilities and shareholders’ equity

    

Current liabilities

    

Bank indebtedness

     13        7   

Trade and other payables

     637        688   

Income and other taxes payable

     19        17   

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

     6        4   
  

 

 

   

 

 

 

Total current liabilities

     675        716   

Long-term debt (NOTE 12)

     952        837   

Deferred income taxes and other

     968        927   

Other liabilities and deferred credits

     434        417   

Commitments and contingencies (NOTE 14)

    

Shareholders’ equity

    

Common stock
$0.01 par value; authorized 2,000,000,000 shares; issued: 42,513,417 and 42,506,732 shares

     —          —     

Treasury stock (NOTE 13)
$0.01 par value; 6,401,033 and 6,375,532 shares

     —          —     

Exchangeable shares
No par value; unlimited shares authorized; issued and held by nonaffiliates: 618,293 and 619,108 shares

     49        49   

Additional paid-in capital

     2,326        2,326   

Retained earnings

     686        671   

Accumulated other comprehensive loss

     (52     (74
  

 

 

   

 

 

 

Total shareholders’ equity

     3,009        2,972   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     6,038        5,869   
  

 

 

   

 

 

 

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

Balance at December 31, 2011

    36.8        49        2,326        671        (74     2,972   

Stock-based compensation

    —          —          4        —          —          4   

Net earnings

    —          —          —          28        —          28   

Net derivative gains on cash flow hedges:

           

Net gain arising during the period, net of tax of $(1)

    —          —          —          —          —          —     

Less: Reclassification adjustments for losses included in net earnings, net of tax of $1

    —          —          —          —          3        3   

Foreign currency translation adjustments

    —          —          —          —          19        19   

Stock repurchase

    (0.1     —          (4     —          —          (4

Cash dividends

    —          —          —          (13     —          (13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

    36.7        49        2,326        686        (52     3,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,
2012
    March 31,
2011
 
     (Unaudited)  
     $     $  

Operating activities

    

Net earnings

     28        133   

Adjustments to reconcile net earnings to cash flows from operating activities

    

Depreciation and amortization

     97        93   

Deferred income taxes and tax uncertainties

     3        29   

Impairment and write-down of property, plant and equipment

     2        3   

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

     —          (7

Stock-based compensation expense

     1        1   

Equity loss, net

     2        —     

Other

     (3     1   

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

    

Receivables

     (36     (111

Inventories

     1        1   

Prepaid expenses

     —          (1

Trade and other payables

     (85     (29

Income and other taxes

     6        23   

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

     4        2   

Other assets and other liabilities

     10        10   
  

 

 

   

 

 

 

Cash flows provided from operating activities

     30        148   
  

 

 

   

 

 

 

Investing activities

    

Additions to property, plant and equipment

     (29     (13

Proceeds from disposals of property, plant and equipment

     —          9   

Proceeds from sale of business

     —          4   

Acquisition of business, net of cash acquired

     (232     —     

Other

     (2     —     
  

 

 

   

 

 

 

Cash flows used for investing activities

     (263     —     
  

 

 

   

 

 

 

Financing activities

    

Dividend payments

     (13     (11

Net change in bank indebtedness

     6        3   

Issuance of long-term debt

     300        —     

Repayment of long-term debt

     (187     (1

Stock repurchase

     (4     (69

Other

     2        4   
  

 

 

   

 

 

 

Cash flows provided from (used for) financing activities

     104        (74
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (129     74   

Cash and cash equivalents at beginning of period

     444        530   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     315        604   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Net cash payments for:

    

Interest (including $47 million of tender offer premiums)

     65        14   

Income taxes paid

     9        2   
  

 

 

   

 

 

 

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

 

6


Table of Contents

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1    BASIS OF PRESENTATION      8   
NOTE 2    RECENT ACCOUNTING PRONOUNCEMENTS      9   
NOTE 3    ACQUISITION OF BUSINESS      10   
NOTE 4    DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT      11   
NOTE 5    EARNINGS PER SHARE      17   
NOTE 6    PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS      18   
NOTE 7    OTHER OPERATING (INCOME) LOSS, NET      19   
NOTE 8    INVENTORIES      20   
NOTE 9    GOODWILL      21   
NOTE 10    INTANGIBLE ASSETS      22   
NOTE 11    CLOSURE AND RESTRUCTURING COSTS AND LIABILITY      23   
NOTE 12    LONG-TERM DEBT      25   
NOTE 13    SHAREHOLDERS’ EQUITY      26   
NOTE 14    COMMITMENTS AND CONTINGENCIES      27   
NOTE 15    SEGMENT DISCLOSURES      31   
NOTE 16    SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION      33   

 

7


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed in the Notes to Consolidated Financial Statements, such adjustments are of a normal, recurring nature. Results for the first 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, 2011, as filed with the Securities and Exchange Commission. The December 31, 2011 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

 

8


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

COMPREHENSIVE INCOME

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

 

9


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 3. ACQUISITION OF BUSINESS

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

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

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition

 

Receivables

        21   

Inventory

        22   

Property, plant and equipment

        67   

Intangible assets (Note 10)

     

Trade names (1)

     54      

Customer relationships (2)

     71      
        125   

Goodwill (Note 9)

        71   
     

 

 

 

Total assets

        306   

Less: Liabilities

     

Trade and other payables

        27   

Capital lease obligation

        6   

Deferred income tax liabilities and unrecognized tax benefits

        38   

Pension

        3   
     

 

 

 

Total liabilities

        74   

Fair value of net assets acquired at the date of acquisition

        232   

 

(1)

Indefinite useful life

(2) 

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

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

 

10


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 4. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

INTEREST RATE RISK

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

CREDIT RISK

The Company is exposed to credit risk on the accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As at March 31, 2012 and December 31, 2011, the Company did not have any customers that represented more than 10% of the receivables.

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

COST RISK

Cash flow hedges:

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

 

11


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of March 31, 2012 to hedge forecasted purchases:

 

Commodity

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

Natural gas

     7,860,000         MMBTU (1)    $ 37                         33     26     5

 

(1) 

MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective for accounting purposes as of March 31, 2012. The critical terms of hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive income for the three months ended March 31, 2012 resulting from hedge ineffectiveness (2011 – nil).

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States, Canada and Sweden. 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. As a result, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar and of other European currencies relative to the U.S. dollar. The Company’s Swedish subsidiary is exposed to movements in foreign currency exchange rates on transactions denominated in a different currency than its Euro functional currency. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates or to designate them as hedging instruments in hedge of the subsidiary’s cash flow risk for purposes of the consolidated financial statements. Foreign exchange forward contracts are contracts whereby the Company has the obligation to buy foreign currencies at a specific rate. Currency options contracts purchased are contracts whereby the Company has the right, but not the obligation, to buy foreign currencies at the strike rate if the foreign currency trades above that rate. Currency options contracts sold are contracts whereby the Company has the obligation to buy foreign currencies at the strike rate if the foreign currency trades below that rate.

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

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

Net investment hedge:

The Company uses foreign exchange currency option contracts to hedge the net assets of Attends Europe to offset the foreign currency translation and economic exposures related to its investment in the subsidiary. Current contracts are used to hedge the net investment over the next 12 months. The effective portion of changes in the fair value of derivative contracts designated as net investment hedges is recorded in Other comprehensive income within Shareholders’ equity as part of the Foreign currency translation adjustments.

The cash flow hedges and the net investment hedge were fully effective as of March 31, 2012. As a result, there were no amounts recorded in income for the period ended March 31, 2012 resulting from hedge ineffectiveness.

The following table presents the currency values under contracts pursuant to currency options outstanding as of March 31, 2012 to hedge forecasted purchases and the net investment:

 

Contract

          Notional contractual value      Percentage of
forecasted exposures

under contracts for
 
                   2012     2013  

Currency options purchased

     CDN       $ 400         50     13
     EUR      $ 175.5         100     100
     USD      $ 20         66     0

Currency options sold

     CDN       $ 400         50     13
     EUR      $ 75         43     43
     USD      $ 20         66     0

The currency options are fully effective as at March 31, 2012. The critical terms of the hedging instruments and the hedged items match. As a result, there were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive income for the three months ended March 31, 2012 resulting from hedge ineffectiveness (2011 – nil).

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

The Effect of Derivative Instruments on the Consolidated Statements of Earnings and Comprehensive Income and Consolidated Statement of Shareholders’ Equity, Net of Tax

 

Derivatives Designated as Cash Flow and Net Investment

Hedging Instruments under the Derivatives

and Hedging Topic of FASB ASC

   Gain (Loss) Recognized in Accumulated
Other Comprehensive Loss on
Derivatives (Effective Portion)
     Gain (Loss) Reclassified from Accumulated
Other Comprehensive Loss
into Income (Effective Portion)
 
     For the three months ended      For the three months ended  
     March 31, 2012     March 31, 2011      March 31, 2012      March 31, 2011  
     $     $      $      $  

Natural gas swap contracts (a)

     (3     —           2         (2

Currency options (a)

     3        4         1         2   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

     —          4         3         —     
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

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

 

Level 1

   Quoted prices in active markets for identical assets or liabilities.

Level 2

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

Level 3

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

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (c) below) at March 31, 2012 and December 31, 2011, in accordance with the accounting standards dealing with fair value measurement and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:

 

Derivatives designated as cash flow

and net investment hedging instruments
under the Derivatives and Hedging
Topic of FASB ASC:

  March 31,
2012
    Quoted prices in
active markets for
identical assets
(Level 1)
    Significant
observable
inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
   

Balance sheet classification

    $     $     $     $      

Asset derivatives

         

Currency options

    11        —          11        —        (a) Prepaid expenses
 

 

 

   

 

 

   

 

 

   

 

 

   

Total Assets

    11        —          11        —       
 

 

 

   

 

 

   

 

 

   

 

 

   

Liabilities derivatives

         

Currency options

    6        —          6        —        (a) Trade and other payables

Natural gas swap contracts

    10        —          10        —        (a) Trade and other payables

Natural gas swap contracts

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

 

 

   

 

 

   

 

 

   

 

 

   

Total Liabilities

    19        —          19        —       
 

 

 

   

 

 

   

 

 

   

 

 

   

Other Instruments:

         

Asset backed commercial paper investments

    6        —          —          6      (b) Other assets

Long-term debt

    1,083        1,083        —          —        (c) Long-term debt

The cumulative loss recorded in Accumulated other comprehensive loss relating to natural gas contracts of $13 million at March 31, 2012, will be recognized in Cost of sales upon maturity of the derivatives over the next three years at the then prevailing values, which may be different from those at March 31, 2012.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

The cumulative gain recorded in Accumulated other comprehensive loss relating to currency options hedging forecasted purchases of $5 million at March 31, 2012, will be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at March 31, 2012.

 

Fair Value of financial instruments at:

 

Derivatives designated as cash flow
and net investment hedging
instruments under the Derivatives
and Hedging Topic of FASB ASC:
   December 31,
2011
     Quoted prices in
active markets for
identical assets
(Level 1)
     Significant
observable
inputs
(Level 2)
     Significant
unobservable
inputs

(Level 3)
    

Balance sheet classification

     $      $      $      $       

Asset derivatives

              

Currency options

     7         —           7         —         (a) Prepaid expenses
  

 

 

    

 

 

    

 

 

    

 

 

    

Total Assets

     7         —           7         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Liabilities derivatives

              

Currency options

     11         —           11         —         (a) Trade and other payables

Natural gas swap contracts

     8         —           8         —         (a) Trade and other payables

Natural gas swap contracts

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

 

 

    

 

 

    

 

 

    

 

 

    

Total Liabilities

     22         —           22         —        
  

 

 

    

 

 

    

 

 

    

 

 

    

Other Instruments:

              

Asset backed commercial paper investments

     5         —           —           5       (b) Other assets

Long-term debt

     992         992         —           —         (c) Long-term debt
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(a) Fair value of the Company’s derivatives is classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows:
  For currency options: Fair value is measured using techniques derived from the Black-Scholes pricing model. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques.
  For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates.

 

(b) Fair value of asset backed commercial paper (“ABCP”) investments is classified under Level 3 and is mainly based on a discounted cash flow financial model incorporating uncertainties regarding return, credit spreads, the nature and credit risk of underlying assets, the amounts and timing of cash inflows and the limited market for the new notes at March 31, 2012 and December 31, 2011.

 

(c) Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. In accordance with US GAAP, the Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at March 31, 2012 and December 31, 2011. However, fair value disclosure is required. The carrying value of the Company’s long-term debt is $952 million and $837 million at March 31, 2012 and December 31, 2011, respectively.

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

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 5. EARNINGS PER SHARE

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

 

     For the three months ended  
     March 31,
2012
     March 31,
2011
 

Net earnings

   $ 28       $ 133   
  

 

 

    

 

 

 

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

     36.7         42.1   

Effect of dilutive securities (millions)

     0.3         0.3   
  

 

 

    

 

 

 

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

     37.0         42.4   
  

 

 

    

 

 

 

Basic net earnings per share (in dollars)

   $ 0.76       $ 3.16   

Diluted net earnings per share (in dollars)

   $ 0.76       $ 3.14   
  

 

 

    

 

 

 

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

 

     March 31,      March 31,  
     2012      2011  

Performance stock units

     14,462         —     

Options

     88,877         167,438   
  

 

 

    

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans and multi-employer plans. The pension expense under these plans is equal to the Company’s contribution. For the three months ended March 31, 2012, the related pension expense was $9 million (2011 – $8 million).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company has several defined benefit pension plans covering approximately 80% of the employees. The defined benefit plans are generally contributory in Canada and non-contributory in the United States. Non-unionized employees in Canada joining the Company after June 1, 2000 participate in defined contribution plans. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Also, starting on January 1, 2013, all unionized employees covered under the agreement with the United Steel Workers not grandfathered under the existing defined benefit pension plans will transition to a defined contribution pension plan for future service. The Company also provides other post-retirement plans to eligible Canadian and U.S. employees; the plans are unfunded and include life insurance programs, medical and dental benefits. The Company also provides supplemental unfunded benefit pension plans to certain senior management employees.

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

 

     For the three months ended  
     March 31, 2012      March 31, 2011  
     Pension
plans
    Other
post-
retirement
benefit
plans
     Pension
plans
    Other
post-
retirement
benefit
plans
 
     $     $      $     $  

Service cost

     10        1         9        1   

Interest expense

     20        1         22        1   

Expected return on plan assets

     (23     —           (26     —     

Amortization of net actuarial loss

     4        —           3        —     

Amortization of prior year service costs

     1        —           1        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

     12        2         9        2   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company contributed $8 million for the three months ended March 31, 2012 (2011 – $7 million) to the pension plans and $2 million to the other post-retirement benefit plans (2011 – $2 million).

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 7. OTHER OPERATING (INCOME) LOSS, NET

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

 

     For the three months ended  
     March 31,
2012
     March 31,
2011
 
     $      $  

Gain on sale of property, plant and equipment

     —           (7

Foreign exchange loss

     2         —     

Other

     —           1   
  

 

 

    

 

 

 

Other operating (income) loss, net

     2         (6
  

 

 

    

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 8. INVENTORIES

The following table presents the components of inventories:

 

     March 31,
2012
     December 31,
2011
 
     $      $  

Work in process and finished goods

     373         363   

Raw materials

     117         105   

Operating and maintenance supplies

     186         184   
  

 

 

    

 

 

 
     676         652   
  

 

 

    

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 9. GOODWILL

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

 

     March 31, 2012  
     $  

Balance at beginning of period

     163   

Acquisition of Attends Healthcare Limited

     71   
  

 

 

 

Balance at end of period

     234   
  

 

 

 

The goodwill at March 31, 2012 is entirely related to the Personal Care segment. (See Note 3 “Acquisition of Business” for further information about the acquisition of Attends Healthcare Limited).

At March 31, 2012, the accumulated impairment loss amounted to $321 million, related to the 2008 impairment of goodwill in the Pulp and Paper segment (2011 – $321 million).

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 10. INTANGIBLE ASSETS

The following table presents the components of intangible assets:

 

     Estimated useful
lives
     March 31,
2012
    December 31,
2011
 
            $     $  

Intangible assets subject to amortization

       

Water rights

     40         8        8   

Power purchase agreements

     25         33        32   

Customer relationships (1)

     20 - 40         175        104   

Trade names

     7         7        7   

Supplier agreement

     5         6        6   
     

 

 

   

 

 

 
        229        157   

Accumulated amortization

        (16     (14
     

 

 

   

 

 

 
        213        143   

Intangible assets not subject to amortization

       

Trade names (1)

        115        61   
     

 

 

   

 

 

 

Total intangible assets

        328        204   
     

 

 

   

 

 

 

Amortization expense related to intangible assets for the three months ended March 31, 2012 was $2 million (2011 – $1 million).

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

 

     2012      2013      2014      2015      2016  
     $      $      $      $      $  

Amortization expense related to intangible assets

     8         6         6         5         5   

 

(1)

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

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 11. CLOSURE AND RESTRUCTURING COST AND LIABILITY

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

Mira Loma, California converting plant

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

Ashdown pulp and paper mill

On March 29, 2011, the Company announced that it would permanently shut down one of four paper machines at its Ashdown, Arkansas pulp and paper mill. This measure reduced the Company’s annual uncoated freesheet paper production capacity by approximately 125,000 short tons. The mill’s workforce was reduced by approximately 110 employees. The Company recorded $2 million of inventory obsolescence and $2 million of severance and termination costs, as well as $3 million of accelerated depreciation in the first quarter of 2011. Operations ceased on August 1, 2011.

Langhorne forms plant

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

Other Costs

During the first quarter of 2012, the Company also incurred other costs related to previous closures which include $1 million of severance and termination costs (2011 – $1 million) and nil of other costs (2011 – $2 million).

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

 

     Pulp and Paper      Total  
     Three months ended March 31, 2012  
     $      $  

Severance and termination costs

     1         1   
  

 

 

    

 

 

 

Closure and restructuring costs

     1         1   
  

 

 

    

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

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

 

     Pulp and Paper      Total  
     Three months ended March 31, 2011  
     $      $  

Severance and termination costs

     7         7   

Inventory obsolescence (1)

     2         2   

Other

     2         2   
  

 

 

    

 

 

 

Closure and restructuring costs

     11         11   
  

 

 

    

 

 

 

 

(1) 

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

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

 

     March 31,
2012
 
     $  

Balance at beginning of period

     6   

Severance payments

     (1
  

 

 

 

Balance at end of period

     5   
  

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 12. LONG-TERM DEBT

 

     Maturity    Notional
Amount
     Currency      March 31,
2012
     December 31,
2011
 
          $             $      $  

Unsecured notes

              

5.375% Notes

   2013      73         US         71         72   

7.125% Notes

   2015      166         US         166         213   

9.5% Notes

   2016      94         US         100         133   

10.75% Notes

   2017      278         US         271         375   

4.4% Notes

   2022      300         US         297         —     

Capital lease obligations

   2012 - 2028            53         48   
           

 

 

    

 

 

 
              958         841   

Less: Due within one year

              6         4   
           

 

 

    

 

 

 
              952         837   
           

 

 

    

 

 

 

UNSECURED NOTES

As a result of a cash tender offer during the first quarter of 2012, the Company repurchased $1 million of the 5.375% Notes due in 2013, $47 million of the 7.125% Notes due in 2015, $31 million of the 9.5% Notes due in 2016 and $107 million of the 10.75% Notes due in 2017. The Company recorded a premium of $47 million and additional charges of $3 million as a result of this extinguishment.

SENIOR NOTES OFFERING

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

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

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

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 13. SHAREHOLDERS’ EQUITY

On February 22, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.35 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. Total dividends of approximately $13 million were paid on April 16, 2012 to shareholders of record on March 15, 2012.

On May 1, 2012, the Company’s Board of Directors approved a quarterly dividend of $0.45 per share to be paid to holders of the Company’s common stock, as well as holders of exchangeable shares of Domtar (Canada) Paper Inc. This dividend is to be paid on July 16, 2012 to shareholders of record on June 15, 2012.

STOCK REPURCHASE PROGRAM

On May 4, 2010, the Company’s Board of Directors authorized a stock repurchase program (“the Program”) of up to $150 million of Domtar Corporation’s common stock. On May 4, 2011, the Company’s Board of Directors approved an increase to the Program from $150 million to $600 million. On December 15, 2011, the Company’s Board of Directors approved another increase to the Program from $600 million to $1 billion. Under the Program, the Company is authorized to repurchase from time to time shares of its outstanding common stock on the open market or in privately negotiated transactions in the United States. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock, from time to time, in part to reduce the dilutive effects of its stock options, awards, and employee stock purchase plan and to improve shareholders’ returns.

During 2011 and the first quarter of 2012, the Company made open market purchases of its common stock using general corporate funds. Additionally, the Company entered into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements required the Company to make up-front payments to the counterparty financial institutions which resulted in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.

During the first quarter of 2011, the Company repurchased 789,957 shares at an average price of $87.79 for a total cost of $69 million.

During the first quarter of 2012, the Company repurchased 37,171 shares at an average price of $94.57 for a total cost of $4 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, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. COMMITMENTS AND CONTINGENCIES

ENVIRONMENT

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

An action was commenced by Seaspan International Ltd. (“Seaspan”) in the Supreme Court of British Columbia, on March 31, 1999 against Domtar Inc. and others with respect to alleged contamination of Seaspan’s site bordering Burrard Inlet in North Vancouver, British Columbia, including contamination of sediments in Burrard Inlet, due to the presence of creosote and heavy metals. On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan and Domtar Inc. in order to define and implement an action plan to address soil, sediment and groundwater issues. This Order was appealed to the Environmental Appeal Board (“Board”) on March 17, 2010 but there is no suspension in the execution of this Order unless the Board orders otherwise. The appeal hearing has been scheduled for October 2012. The relevant government authorities selected a remediation plan on July 15, 2011. In the interim, no stay of execution has been granted or requested. The Company has recorded an environmental reserve to address its estimated exposure for this matter.

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

 

     March 31, 2012  
     $  

Balance at beginning of period

     92   

Environmental spending

     (4

Effect of foreign currency exchange rate change

     1   
  

 

 

 

Balance at end of period

     89   
  

 

 

 

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

Climate change regulation

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

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

The province of Quebec initiated, as part of its commitment to the Western Climate Initiative (“WCI”), a GHG cap-and-trade system on January 1, 2012. Reduction targets for Quebec are expected to be promulgated later in 2012, to be effective January 1, 2013. With the exception of the British Columbia carbon tax, which applies to the purchase of fossil fuels within the province and which was implemented in 2008, there are presently no federal or provincial legislation on regulatory obligations that affect the emission of GHGs for the Company’s pulp and paper operations elsewhere in Canada.

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

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

On December 23, 2011, the EPA proposed a new set of standards related to emissions from boilers and process heaters included in the Company’s manufacturing processes. These standards are generally referred to as Boiler MACT and seek to require reductions in the emission of certain hazardous air pollutants or surrogates of hazardous air pollutants. A final version of this Rule, as well as associated rules related to solid waste incinerators and the definition of fuels, is expected in mid-2012. It is anticipated compliance will be required by the fall of 2015 for existing emission units or upon startup for any new emission units. Domtar expects that the capital cost required to comply with the Boiler MACT rules, as they were published in December 2011, is between $37 million and $42 million. Domtar is currently assessing the associated increase in operating costs as well as alternate compliance strategies.

 

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DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

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

CONTINGENCIES

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at March 31, 2012, 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.

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

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

 

29


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 14. 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, 2012, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

 

30


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. SEGMENT DISCLOSURES

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

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

 

   

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

 

   

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

 

   

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

 

31


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 15. SEGMENT DISCLOSURES (CONTINUED)

 

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

 

     For the three months ended  

SEGMENT DATA

   March 31,
2012
    March 31,
2011
 
     $     $  

Sales

    

Pulp and Paper

     1,191        1,269   

Distribution

     189        217   

Personal Care

     70        —     
  

 

 

   

 

 

 

Total for reportable segments

     1,450        1,486   

Intersegment sales - Pulp and Paper

     (52     (63
  

 

 

   

 

 

 

Consolidated sales

     1,398        1,423   
  

 

 

   

 

 

 

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

    

Pulp and Paper

     93        92   

Distribution

     1        1   

Personal Care

     3        —     
  

 

 

   

 

 

 

Total for reportable segments

     97        93   

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

     2        3   
  

 

 

   

 

 

 

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

     99        96   
  

 

 

   

 

 

 

Operating income (loss)

    

Pulp and Paper

     107        209   

Distribution

     (1     3   

Personal Care

     8        —     

Corporate

     (5     (1
  

 

 

   

 

 

 

Consolidated operating income

     109        211   

Interest expense, net

     71        21   
  

 

 

   

 

 

 

Earnings before income taxes and equity earnings

     38        190   

Income tax expense

     8        57   

Equity loss, net of taxes

     2        —     
  

 

 

   

 

 

 

Net earnings

     28        133   
  

 

 

   

 

 

 

 

32


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar Paper Company, LLC, a 100% owned subsidiary of the Company and the successor to the Weyerhaeuser Fine Paper Business U.S. Operations, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Ariva Distribution Inc., Domtar Delaware Investments Inc., Domtar Delaware Holdings, LLC, Domtar A.W. LLC (and subsidiary), Domtar AI Inc., and Attends Healthcare Products, Inc., all 100% owned subsidiaries of the Company (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt will not be guaranteed by certain of Domtar Paper Company, LLC’s own 100% owned subsidiaries; including Domtar Delaware Holdings Inc. and Domtar Inc., (collectively the “Non-Guarantor Subsidiaries”). The 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, 2012 and December 31, 2011 and the Statements of Earnings and Comprehensive income and Cash Flows for the three months ended March 31, 2012 and March 31, 2011 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method. The March 31, 2011 comparative figures have been retrospectively adjusted to reflect the fact that Domtar Delaware Investments Inc. and Domtar Delaware Holdings, LLC both became Guarantor subsidiaries in June 2011.

 

33


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     For the three months ended March 31, 2012  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME

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

Sales

     —          1,178         475        (255     1,398   

Operating expenses

           

Cost of sales, excluding depreciation and amortization

     —          954         389        (255     1,088   

Depreciation and amortization

     —          83         14        —          97   

Selling, general and administrative

     12        83         4        —          99   

Impairment and write-down of property, plant and equipment

     —          2         —          —          2   

Closure and restructuring costs

     —          —           1        —          1   

Other operating loss, net

     —          —           2        —          2   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     12        1,122         410        (255     1,289   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (12     56         65        —          109   

Interest expense (income), net

     72        5         (6     —          71   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and equity earnings

     (84     51         71        —          38   

Income tax expense (benefit)

     (30     17         21        —          8   

Equity loss, net of taxes

     —          —           2        —          2   

Share in earnings of equity accounted investees

     82        48         —          (130     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net earnings

     28        82         48        (130     28   

Other comprehensive income (loss)

     (1     —           23        —          22   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

     27        82         71        (130     50   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     For the three months ended March 31, 2011  

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS AND
COMPREHENSIVE INCOME

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

Sales

     —          1,186        472        (235     1,423   

Operating expenses

          

Cost of sales, excluding depreciation and amortization

     —          908        348        (235     1,021   

Depreciation and amortization

     —          68        25        —          93   

Selling, general and administrative

     9        89        (8     —          90   

Impairment and write-down of property, plant and equipment

     —          3        —          —          3   

Closure and restructuring costs

     —          9        2        —          11   

Other operating income, net

     —          (5     (1     —          (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     9        1,072        366        (235     1,212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (9     114        106        —          211   

Interest expense (income), net

     23        3        (5     —          21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and equity earnings

     (32     111        111        —          190   

Income tax expense (benefit)

     (10     34        33        —          57   

Equity loss, net of taxes

     —          —          —          —          —     

Share in earnings of equity accounted investees

     155        78        —          (233     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

     133        155        78        (233     133   

Other comprehensive income

     2        —          26        —          28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     135        155        104        (233     161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

     March 31, 2012  

CONDENSED CONSOLIDATING BALANCE SHEET

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

Assets

           

Current assets

           

Cash and cash equivalents

     137         19        159        —          315   

Receivables

     —           482        215        —          697   

Inventories

     —           462        214        —          676   

Prepaid expenses

     10         4        12        —          26   

Income and other taxes receivable

     52         —          21        (30     43   

Intercompany accounts

     393         3,259        45        (3,697     —     

Deferred income taxes

     5         62        60        —          127   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     597         4,288        726        (3,727     1,884   

Property, plant and equipment, at cost

     —           5,616        2,997        —          8,613   

Accumulated depreciation

     —           (3,314     (1,815     —          (5,129
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     —           2,302        1,182        —          3,484   

Goodwill

     —           163        71        —          234   

Intangible assets, net of amortization

     —           162        166        —          328   

Investments in affiliates

     7,040         2,003        —          (9,043     —     

Intercompany long-term advances

     6         79        444        (529     —     

Other assets

     22         —          98        (12     108   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     7,665         8,997        2,687        (13,311     6,038   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity

           

Current liabilities

           

Bank indebtedness

     —           11        2        —          13   

Trade and other payables

     45         371        221        —          637   

Intercompany accounts

     3,256         390        51        (3,697     —     

Income and other taxes payable

     —           42        7        (30     19   

Long-term debt due within one year

     —           4        2        —          6   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     3,301         818        283        (3,727     675   

Long-term debt

     902         34        16        —          952   

Intercompany long-term loans

     444         85        —          (529     —     

Deferred income taxes and other

     —           900        80        (12     968   

Other liabilities and deferred credits

     58         140        236        —          434   

Shareholders’ equity

     2,960         7,020        2,072        (9,043     3,009   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

     7,665         8,997        2,687        (13,311     6,038   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

 

CONDENSED CONSOLIDATING BALANCE SHEET

   December 31, 2011  
   Parent      Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Consolidating
Adjustments
    Consolidated  
     $      $     $     $     $  

Assets

           

Current assets

           

Cash and cash equivalents

     91         2        351        —          444   

Receivables

     —           456        188        —          644   

Inventories

     —           475        177        —          652   

Prepaid expenses

     6         5        11        —          22   

Income and other taxes receivable

     20         1        26        —          47   

Intercompany accounts

     349         3,198        53        (3,600     —     

Deferred income taxes

     5         61        59        —          125   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     471         4,198        865        (3,600     1,934   

Property, plant and equipment, at cost

     —           5,581        2,867        —          8,448   

Accumulated depreciation

     —           (3,230     (1,759     —          (4,989
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net property, plant and equipment

     —           2,351        1,108        —          3,459   

Goodwill

     —           163        —          —          163   

Intangible assets, net of amortization

     —           162        42        —          204   

Investments in affiliates

     6,933         1,952        —          (8,885     —     

Intercompany long-term advances

     6         79        431        (516     —     

Other assets

     21         1        97        (10     109   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     7,431         8,906        2,543        (13,011     5,869   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and shareholders’ equity

           

Current liabilities

           

Bank indebtedness

     —           7        —          —          7   

Trade and other payables

     37         425        226        —          688   

Intercompany accounts

    

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XNYS:UFS Domtar Corp Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Popularity |  Our Choices Title |  Date |  Company |  Symbol |  Interest |  Popularity

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