UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20162017
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 ☒ 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 ☒ 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, or an emerging growth company. See the definitiondefinitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act:Act.
Large accelerated filer | ☒ | Accelerated filer |
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Non-accelerated filer | ☐ (Do not check if a | Small reporting company | ☐ | |||
Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
At OctoberJuly 31, 2016, 62,585,3372017, 62,654,157 shares of the issuer’s common stock were outstanding.
FORM 10-Q
For the Quarterly Period Ended SeptemberJune 30, 20162017
INDEX
PART I. | 3 | |
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ITEM 1. | 3 | |
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|
|
| CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME | 3 |
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| 4 | |
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| 5 | |
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| 6 | |
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| 7 | |
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| 8 | |
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 3. |
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ITEM 4. |
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PART II |
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ITEM 1. |
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ITEM 1A. |
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ITEM 2. |
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ITEM 3. |
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ITEM 4. |
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ITEM 5. |
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ITEM 6. |
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ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
|
| For the three months ended |
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| For the nine months ended |
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| Three months ended |
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| Three months ended |
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| Six months ended |
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| Six months ended |
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| September 30, |
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| September 30, |
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| September 30, |
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| September 30, |
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| June 30, |
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| June 30, |
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| June 30, |
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| June 30, |
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| 2016 |
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| 2015 |
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| 2016 |
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| 2015 |
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| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
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| (Unaudited) |
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| (Unaudited) |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ |
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Sales |
|
| 1,270 |
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|
| 1,292 |
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|
| 3,824 |
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| 3,950 |
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| 1,224 |
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|
| 1,267 |
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| 2,528 |
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| 2,554 |
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Operating expenses |
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Cost of sales, excluding depreciation and amortization |
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| 969 |
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| 1,026 |
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|
| 3,032 |
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| 3,140 |
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| 968 |
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|
| 1,013 |
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|
| 2,043 |
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|
| 2,063 |
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Depreciation and amortization |
|
| 87 |
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|
| 89 |
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|
| 263 |
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|
| 270 |
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|
| 79 |
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|
| 87 |
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|
| 159 |
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| 176 |
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Selling, general and administrative |
|
| 107 |
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|
| 95 |
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|
| 314 |
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|
| 294 |
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|
| 111 |
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|
| 104 |
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|
| 219 |
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| 207 |
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Impairment of property, plant and equipment (NOTE 11) |
|
| 5 |
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| 20 |
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| 29 |
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|
| 57 |
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|
| — |
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| 3 |
|
|
| — |
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|
| 24 |
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Closure and restructuring costs (NOTE 11) |
|
| 10 |
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|
| 1 |
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|
| 33 |
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|
| 3 |
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|
| — |
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|
| 21 |
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|
| — |
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|
| 23 |
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Other operating loss (income), net (NOTE 6) |
|
| — |
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|
| — |
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| 4 |
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| (8 | ) | ||||||||||||||||
Other operating loss, net (NOTE 6) |
|
| 2 |
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|
| — |
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|
| 1 |
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| 4 |
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| 1,178 |
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|
| 1,231 |
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| 3,675 |
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| 3,756 |
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|
| 1,160 |
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| 1,228 |
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| 2,422 |
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| 2,497 |
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Operating income |
|
| 92 |
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|
| 61 |
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|
| 149 |
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|
| 194 |
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|
| 64 |
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|
| 39 |
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|
| 106 |
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|
| 57 |
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Interest expense, net |
|
| 17 |
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|
| 64 |
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|
| 49 |
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|
| 115 |
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| 17 |
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|
| 15 |
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|
| 34 |
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|
| 32 |
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Earnings (loss) before income taxes |
|
| 75 |
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| (3 | ) |
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| 100 |
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|
| 79 |
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Income tax expense (benefit) (NOTE 7) |
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| 16 |
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| (14 | ) |
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| 19 |
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| (6 | ) | ||||||||||||||||
Earnings before income taxes |
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| 47 |
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| 24 |
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| 72 |
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| 25 |
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Income tax expense (NOTE 7) |
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| 9 |
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| 6 |
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| 14 |
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| 3 |
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Net earnings |
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| 59 |
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| 11 |
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|
| 81 |
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| 85 |
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| 38 |
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| 18 |
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| 58 |
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| 22 |
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Per common share (in dollars) (NOTE 4) |
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Net earnings |
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Basic |
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| 0.94 |
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| 0.17 |
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| 1.29 |
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| 1.34 |
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| 0.61 |
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| 0.29 |
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| 0.93 |
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| 0.35 |
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Diluted |
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| 0.94 |
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| 0.17 |
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| 1.29 |
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| 1.34 |
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| 0.61 |
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| 0.29 |
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| 0.93 |
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| 0.35 |
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Weighted average number of common shares outstanding (millions) |
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Basic |
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| 62.6 |
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| 62.9 |
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| 62.6 |
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| 63.4 |
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| 62.6 |
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| 62.6 |
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| 62.6 |
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| 62.7 |
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Diluted |
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| 62.7 |
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| 63.0 |
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| 62.7 |
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| 63.5 |
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| 62.7 |
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| 62.7 |
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| 62.7 |
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| 62.8 |
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Cash dividends per common share |
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| 0.42 |
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| 0.40 |
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| 1.22 |
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| 1.18 |
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| 0.415 |
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| 0.40 |
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| 0.83 |
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| 0.80 |
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Net earnings |
|
| 59 |
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|
| 11 |
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|
| 81 |
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|
| 85 |
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|
| 38 |
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|
| 18 |
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|
| 58 |
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|
| 22 |
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Other comprehensive income (loss) (NOTE 13): |
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Net derivative (losses) gains on cash flow hedges: |
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Net (losses) gains arising during the period, net of tax of $4 and $(14), respectively (2015 - $13 and $24, respectively) |
|
| (6 | ) |
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| (19 | ) |
|
| 23 |
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|
| (35 | ) | ||||||||||||||||
Less: Reclassification adjustment for losses included in net earnings, net of tax of $(2) and $(10), respectively (2015 - $(5) and $(13), respectively) |
|
| 1 |
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|
| 7 |
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| 14 |
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|
| 18 |
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Other comprehensive income (loss) (NOTE 12): |
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Net derivative gains (losses) on cash flow hedges: |
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Net gains arising during the period, net of tax of $(2) and $(2), respectively (2016 – $(5) and $(18), respectively) |
|
| 2 |
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|
| 9 |
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|
| 2 |
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|
| 29 |
| ||||||||||||||||
Less: Reclassification adjustment for (gains) losses included in net earnings, net of tax of nil and $2, respectively (2016 – $(3) and $(8), respectively) |
|
| (1 | ) |
|
| 5 |
|
|
| (4 | ) |
|
| 13 |
| ||||||||||||||||
Foreign currency translation adjustments |
|
| 6 |
|
|
| (58 | ) |
|
| 61 |
|
|
| (182 | ) |
|
| 67 |
|
|
| (30 | ) |
|
| 82 |
|
|
| 55 |
|
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $nil and $(2), respectively (2015 - $(1) and $(2), respectively) |
|
| 2 |
|
|
| 1 |
|
|
| 5 |
|
|
| 5 |
| ||||||||||||||||
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(1) and $(2), respectively (2016 – $(1) and $(2), respectively) |
|
| 3 |
|
|
| 2 |
|
|
| 5 |
|
|
| 3 |
| ||||||||||||||||
Other comprehensive income (loss) |
|
| 3 |
|
|
| (69 | ) |
|
| 103 |
|
|
| (194 | ) |
|
| 71 |
|
|
| (14 | ) |
|
| 85 |
|
|
| 100 |
|
Comprehensive income (loss) |
|
| 62 |
|
|
| (58 | ) |
|
| 184 |
|
|
| (109 | ) | ||||||||||||||||
Comprehensive income |
|
| 109 |
|
|
| 4 |
|
|
| 143 |
|
|
| 122 |
|
The accompanying notes are an integral part of the consolidated financial statements.
DOMTAR CORPORATION
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
|
| At |
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| At |
| ||||||||||
|
| September 30, |
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| December 31, |
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| June 30, |
|
| December 31, |
| ||||
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
|
| $ |
|
| $ |
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| $ |
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| $ |
| ||||
Assets |
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Current assets |
|
|
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|
|
|
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|
|
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|
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Cash and cash equivalents |
|
| 168 |
|
|
| 126 |
|
|
| 124 |
|
|
| 125 |
|
Receivables, less allowances of $6 and $6 |
|
| 616 |
|
|
| 627 |
| ||||||||
Receivables, less allowances of $7 and $7 |
|
| 613 |
|
|
| 613 |
| ||||||||
Inventories (NOTE 8) |
|
| 770 |
|
|
| 766 |
|
|
| 759 |
|
|
| 759 |
|
Prepaid expenses |
|
| 46 |
|
|
| 21 |
|
|
| 41 |
|
|
| 40 |
|
Income and other taxes receivable |
|
| 33 |
|
|
| 14 |
|
|
| 18 |
|
|
| 31 |
|
Total current assets |
|
| 1,633 |
|
|
| 1,554 |
|
|
| 1,555 |
|
|
| 1,568 |
|
Property, plant and equipment, net |
|
| 2,887 |
|
|
| 2,835 |
|
|
| 2,779 |
|
|
| 2,825 |
|
Goodwill (NOTE 9) |
|
| 548 |
|
|
| 539 |
|
|
| 569 |
|
|
| 550 |
|
Intangible assets, net (NOTE 10) |
|
| 600 |
|
|
| 601 |
|
|
| 625 |
|
|
| 608 |
|
Other assets |
|
| 162 |
|
|
| 125 |
|
|
| 139 |
|
|
| 129 |
|
Total assets |
|
| 5,830 |
|
|
| 5,654 |
|
|
| 5,667 |
|
|
| 5,680 |
|
Liabilities and shareholders' equity |
|
|
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Current liabilities |
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|
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Bank indebtedness |
|
| — |
|
|
| 12 |
| ||||||||
Trade and other payables |
|
| 645 |
|
|
| 720 |
|
|
| 627 |
|
|
| 656 |
|
Income and other taxes payable |
|
| 25 |
|
|
| 27 |
|
|
| 28 |
|
|
| 22 |
|
Long-term debt due within one year |
|
| 63 |
|
|
| 41 |
|
|
| 1 |
|
|
| 63 |
|
Total current liabilities |
|
| 733 |
|
|
| 788 |
|
|
| 656 |
|
|
| 753 |
|
Long-term debt |
|
| 1,309 |
|
|
| 1,210 |
|
|
| 1,203 |
|
|
| 1,218 |
|
Deferred income taxes and other |
|
| 692 |
|
|
| 654 |
|
|
| 677 |
|
|
| 675 |
|
Other liabilities and deferred credits |
|
| 342 |
|
|
| 350 |
|
|
| 361 |
|
|
| 358 |
|
Commitments and contingencies (NOTE 15) |
|
|
|
|
|
|
|
| ||||||||
Shareholders' equity (NOTE 14) |
|
|
|
|
|
|
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| ||||||||
Common stock $0.01 par value; authorized 2,000,000,000 shares; issued: 65,001,104 shares |
|
| 1 |
|
|
| 1 |
| ||||||||
Treasury stock $0.01 par value; 2,415,767 and 2,151,168 shares |
|
| — |
|
|
| — |
| ||||||||
Commitments and contingencies (NOTE 14) |
|
|
|
|
|
|
|
| ||||||||
Shareholders' equity (NOTE 13) |
|
|
|
|
|
|
|
| ||||||||
Common stock $0.01 par value; authorized 2,000,000,000 shares; issued: 65,001,104 and 65,001,104 shares |
|
| 1 |
|
|
| 1 |
| ||||||||
Treasury stock $0.01 par value; 2,346,947 and 2,412,267 shares |
|
| — |
|
|
| — |
| ||||||||
Additional paid-in capital |
|
| 1,961 |
|
|
| 1,966 |
|
|
| 1,966 |
|
|
| 1,963 |
|
Retained earnings |
|
| 1,190 |
|
|
| 1,186 |
|
|
| 1,217 |
|
|
| 1,211 |
|
Accumulated other comprehensive loss |
|
| (398 | ) |
|
| (501 | ) |
|
| (414 | ) |
|
| (499 | ) |
Total shareholders' equity |
|
| 2,754 |
|
|
| 2,652 |
|
|
| 2,770 |
|
|
| 2,676 |
|
Total liabilities and shareholders' equity |
|
| 5,830 |
|
|
| 5,654 |
|
|
| 5,667 |
|
|
| 5,680 |
|
The accompanying notes are an integral part of the consolidated financial statements.
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, 2015 |
|
| 62.8 |
|
|
| 1 |
|
|
| 1,966 |
|
|
| 1,186 |
|
|
| (501 | ) |
|
| 2,652 |
|
Stock-based compensation, net of tax |
|
| 0.1 |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 81 |
|
|
| — |
|
|
| 81 |
|
Net derivative gains on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains arising during the period, net of tax of $(14) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23 |
|
|
| 23 |
|
Less: Reclassification adjustments for losses included in net earnings, net of tax of $(10) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14 |
|
|
| 14 |
|
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 61 |
|
|
| 61 |
|
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| 5 |
|
Stock repurchase |
|
| (0.3 | ) |
|
| — |
|
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| (10 | ) |
Cash dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (77 | ) |
|
| — |
|
|
| (77 | ) |
Balance at September 30, 2016 |
|
| 62.6 |
|
|
| 1 |
|
|
| 1,961 |
|
|
| 1,190 |
|
|
| (398 | ) |
|
| 2,754 |
|
|
| 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, 2016 |
|
| 62.6 |
|
|
| 1 |
|
|
| 1,963 |
|
|
| 1,211 |
|
|
| (499 | ) |
|
| 2,676 |
|
Stock-based compensation, net of tax |
|
| 0.1 |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 58 |
|
|
| — |
|
|
| 58 |
|
Net derivative losses on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains arising during the period, net of tax of $(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| 2 |
|
Less: Reclassification adjustments for gains included in net earnings, net of tax of $2 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| (4 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 82 |
|
|
| 82 |
|
Change in unrecognized gains and prior service cost related to pension and post-retirement benefit plans, net of tax of $(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5 |
|
|
| 5 |
|
Cash dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (52 | ) |
|
| — |
|
|
| (52 | ) |
Balance at June 30, 2017 |
|
| 62.7 |
|
|
| 1 |
|
|
| 1,966 |
|
|
| 1,217 |
|
|
| (414 | ) |
|
| 2,770 |
|
The accompanying notes are an integral part of the consolidated financial statements.
DOMTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF DOLLARS)
|
| For the nine months ended |
|
| For the six months ended |
| ||||||||||
|
| September 30, 2016 |
|
| September 30, 2015 |
|
| June 30, 2017 |
|
| June 30, 2016 |
| ||||
|
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 81 |
|
|
| 85 |
|
|
| 58 |
|
|
| 22 |
|
Adjustments to reconcile net earnings to cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 263 |
|
|
| 270 |
|
|
| 159 |
|
|
| 176 |
|
Deferred income taxes and tax uncertainties |
|
| 6 |
|
|
| (50 | ) |
|
| (12 | ) |
|
| (5 | ) |
Impairment of property, plant and equipment |
|
| 29 |
|
|
| 57 |
|
|
| — |
|
|
| 24 |
|
Net gains on disposals of property, plant and equipment |
| �� | — |
|
|
| (15 | ) | ||||||||
Stock-based compensation expense |
|
| 5 |
|
|
| 5 |
|
|
| 3 |
|
|
| 3 |
|
Other |
|
| (3 | ) |
|
| 4 |
|
|
| — |
|
|
| (4 | ) |
Changes in assets and liabilities, excluding effect of acquisition of business |
|
|
|
|
|
|
|
| ||||||||
Changes in assets and liabilities, excluding the effect of acquisition of business |
|
|
|
|
|
|
|
| ||||||||
Receivables |
|
| 19 |
|
|
| (11 | ) |
|
| 11 |
|
|
| 25 |
|
Inventories |
|
| 6 |
|
|
| (70 | ) |
|
| 10 |
|
|
| 18 |
|
Prepaid expenses |
|
| (5 | ) |
|
| (3 | ) |
|
| (4 | ) |
|
| (13 | ) |
Trade and other payables |
|
| (53 | ) |
|
| 8 |
|
|
| (35 | ) |
|
| (8 | ) |
Income and other taxes |
|
| (18 | ) |
|
| 30 |
|
|
| 21 |
|
|
| (16 | ) |
Difference between employer pension and other post-retirement contributions and pension and other post-retirement expense |
|
| (16 | ) |
|
| 2 |
|
|
| — |
|
|
| (3 | ) |
Other assets and other liabilities |
|
| (4 | ) |
|
| 4 |
|
|
| 1 |
|
|
| (4 | ) |
Cash flows provided from operating activities |
|
| 310 |
|
|
| 316 |
| ||||||||
Cash flows from operating activities |
|
| 212 |
|
|
| 215 |
| ||||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| (302 | ) |
|
| (202 | ) |
|
| (71 | ) |
|
| (219 | ) |
Proceeds from disposals of property, plant and equipment |
|
| — |
|
|
| 35 |
| ||||||||
Acquisition of business, net of cash acquired |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) |
Other |
|
| 1 |
|
|
| 9 |
| ||||||||
Cash flows used for investing activities |
|
| (302 | ) |
|
| (158 | ) |
|
| (71 | ) |
|
| (220 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (76 | ) |
|
| (75 | ) |
|
| (52 | ) |
|
| (50 | ) |
Stock repurchase |
|
| (10 | ) |
|
| (50 | ) |
|
| — |
|
|
| (10 | ) |
Net change in bank indebtedness |
|
| 1 |
|
|
| (9 | ) |
|
| (12 | ) |
|
| 1 |
|
Change in revolving bank credit facility |
|
| 60 |
|
|
| 75 |
| ||||||||
Change in revolving credit facility |
|
| (30 | ) |
|
| (50 | ) | ||||||||
Proceeds from receivables securitization facility |
|
| 140 |
|
|
| — |
|
|
| 25 |
|
|
| 120 |
|
Repayments of receivables securitization facility |
|
| (40 | ) |
|
| — |
|
|
| (15 | ) |
|
| (20 | ) |
Issuance of long-term debt |
|
| — |
|
|
| 300 |
| ||||||||
Repayments of long-term debt |
|
| (40 | ) |
|
| (439 | ) |
|
| (63 | ) |
|
| (1 | ) |
Other |
|
| (3 | ) |
|
| 1 |
|
|
| (1 | ) |
|
| (1 | ) |
Cash flows provided from (used for) financing activities |
|
| 32 |
|
|
| (197 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| 40 |
|
|
| (39 | ) | ||||||||
Cash flows used for financing activities |
|
| (148 | ) |
|
| (11 | ) | ||||||||
Net decrease in cash and cash equivalents |
|
| (7 | ) |
|
| (16 | ) | ||||||||
Impact of foreign exchange on cash |
|
| 2 |
|
|
| (7 | ) |
|
| 6 |
|
|
| 1 |
|
Cash and cash equivalents at beginning of period |
|
| 126 |
|
|
| 174 |
|
|
| 125 |
|
|
| 126 |
|
Cash and cash equivalents at end of period |
|
| 168 |
|
|
| 128 |
|
|
| 124 |
|
|
| 111 |
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash payments for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (including $40 million of redemption premiums in 2015) |
|
| 50 |
|
|
| 121 |
| ||||||||
Income taxes paid, net |
|
| 37 |
|
|
| 16 |
| ||||||||
Interest |
|
| 31 |
|
|
| 32 |
| ||||||||
Income taxes |
|
| 15 |
|
|
| 27 |
|
The accompanying notes are an integral part of the consolidated financial statements.
INDEX FOR NOTES TO CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 | 8 | |
|
|
|
NOTE 2 | 9 | |
|
|
|
NOTE 3 | DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT | 12 |
|
|
|
NOTE 4 | 17 | |
|
|
|
NOTE 5 | 18 | |
|
|
|
NOTE 6 | 19 | |
|
|
|
NOTE 7 | 20 | |
|
|
|
NOTE 8 | 21 | |
|
|
|
NOTE 9 | 22 | |
|
|
|
NOTE 10 | 23 | |
|
|
|
NOTE 11 | CLOSURE AND RESTRUCTURING COSTS AND LIABILITY AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT | 24 |
| ||
NOTE 12 |
| 25 |
|
|
|
NOTE 13 |
|
|
|
|
|
NOTE 14 | 28 | |
|
|
|
NOTE 15 |
| |
|
|
|
NOTE 16 |
| 32 |
|
|
|
|
| |
|
|
|
|
|
7
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
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 ninesix 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, 2015,2016, as filed with the Securities and Exchange Commission. The December 31, 20152016 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
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING CHANGES IMPLEMENTED
PRESENTATION OF DEBT ISSUANCE COSTSINVENTORY
In AprilJuly 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-03, “Simplifying2015-11, “Simplifying the PresentationMeasurement of Debt Issuance Costs,Inventory,” which requires debt issuancesimplifies the measurement of inventories valued under FIFO – first-in, first-out – and moving average methods. Under this new guidance, inventories valued under these methods would be valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices less reasonable costs to be presented insell the balance sheet as a direct deduction frominventory. This ASU does not change the carrying value ofmeasurement principles for inventories valued under the associated debt liability, consistent with the presentation of a debt discount. In August 2015, the FASB also issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which allows debt issuance costs associated with line-of-credit arrangements to be presented as an asset.
LIFO – last-in, first-out – method.
The Company adopted the new requirementsguidance on January 1, 2017 with no impact on the consolidated financial statements.
SHARE-BASED PAYMENTS
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.
The Company adopted the new guidance on January 1, 2017 with retrospective application. The effect of this change in accounting policyno significant impact on our Consolidated Balance Sheet as at December 31, 2015 was a reduction of $9 million in Other assets and Long-term debt.the consolidated financial statements.
FUTURE ACCOUNTING CHANGES
REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the FASB issued ASU 2014-09, “Revenue“Revenue from Contracts with Customers.” The core principal of this guidelineguidance is that an entity should recognize revenue, to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration for which the entity is entitled to, in exchange for those goods and services. This new guidance will supersede the revenue recognition requirements found in topic 605.
ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period. Early adoption is permitted only for annual and interim periods beginning after December 15, 2016.
Entities are permitted to adopt the new revenue standard by restating all prior periods under the full retrospective approach following ASC 250 “Accounting Changes and Error Corrections” or entities can elect to use a modified retrospective approach. Under the modified retrospective approach, entities will recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings in the period of initial application and comparative prior year periods would not be adjusted.
The Company is currently evaluating these changes to determine how theyassessing the impact that the guidance will impacthave on the consolidated financial statements.
INVENTORY
In July 2015,statements and related disclosures. The Company currently expects to adopt the FASB issued ASU 2015-11, “Simplifyingnew revenue standards in its first quarter of 2018 utilizing the Measurement of Inventory,” which simplifiesfull retrospective transition method. Further, the measurement of inventories valuedCompany expects to identify similar performance obligations under FIFO – first-in, first-out – and moving average methods. Under thisthe new guidance inventories valued under these methods would be valued atas compared with deliverables previously identified. As a result, the lowerCompany expects the timing and amount of cost or net realizable value. Net realizable value is defined asits revenue to remain substantially the estimated selling costs less reasonable costs to sell the inventory. This ASU does not change the measurement principles for inventories valued under the LIFO – last-in, first-out – method. The amendments in the update are effective for interim and annual periods beginning after December 15, 2016. The amendments should be applied prospectively and early adoption is permitted.
same.
The Company does not expect this new guidance to have a material impact on the consolidated financial statements.statements aside from the additional required disclosures related to revenue in the notes thereto.
.
9
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS
In January 2016, the FASB issued ASU 2016-01, “Recognition“Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.
The amendments in this update are effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. To adopt the amendments, the Companycompanies will be required to make a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective. Early adoption is permitted.
The Company does not expect this new guidance to have a material impact on the consolidated financial statements.
LEASES
In February 2016, the FASB issued ASU 2016-02, “Leases,“Leases,” which requires lessees to recognize a right-of-use asset and a lease liability for all of their leases with a lease term greater than 12 months while continuing to recognize expenses in the statement of earnings in a manner similar to current accounting standards. For lessors, the new standard modifies the classification criteria and the accounting for sales-type and direct financing leases.
As a lessee, Domtar’s various leases under existing guidance are classified as operating leases that are not recorded on the balance sheet but are recorded in the statement of earnings as expense is incurred. Upon adoption of the new guidance, the Company will be required to record substantially all leases on the Consolidated Balance Sheets as a right-of-use asset and a lease liability. The timing of expense recognition and classification in the Consolidated Statements of Earnings and Comprehensive Income could change based on the classification of leases as either operating or financing.
This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted as of the beginning of an interim or annual reporting period.
The Company will adopt the ASU on January 1, 2019 using the modified retrospective approach required by the guidance. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
SHARE-BASED PAYMENTS
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based payment transactions,statements, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted as of the beginning of an interim or annual reporting period.
The Company does not expect this new guidance to haveanalyzing all contracts that contain a material impact on the consolidated financial statements.lease.
DERIVATIVES AND HEDGING
In March 2016, the FASB issued ASU 2016-05, “Effect“Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships,” which clarifies that "aa change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument"instrument or "aa change in a critical term of the hedging relationship." As long as all other hedge accounting criteria in ASC 815 are met, a hedging relationship in which the hedging derivative instrument is novated would not be discontinued or require redesignation. This clarification applies to both cash flow and fair value hedging relationships. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted as of the beginning of an interim or annual reporting period.
The Company does not expect this new guidance to have a material impact on the consolidated financial statements.
10
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
CLASSIFICATION OF CASH FLOWS
In August 2016, the FASB issued ASU 2016-15, “Statement“Statement of Cash Flows”Flows,” which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The guidance must be applied retrospectively to all periods presented but it may be applied prospectively if retrospective application would be impracticable. Early adoption is permitted.
The Company does not expect this new guidance to have a material impact on the consolidated financial statements.
GOODWILL IMPAIRMENT
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes the requirement for an entity to calculate the implied fair value of goodwill in measuring a goodwill impairment loss, referred to as the Step II test. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount for which the carrying value exceeds the reporting unit’s fair value. The impairment loss recognized should be recorded against goodwill and should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or any interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests with measurement dates after January 1, 2017.
The Company expects to adopt this new guidance concurrently with its 2017 annual goodwill impairment test.
RETIREMENT BENEFITS
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires an entity to present the service cost component of the net periodic benefit cost with other employee compensation costs in operating income. Only the service cost components will be eligible for capitalization in assets. The other components of the net periodic benefit cost (i.e., interest expense, expected return on plan assets, amortization of actuarial gains or losses and amortization of prior year service costs) will be presented outside of any subtotal of operating income. An appropriate disclosure of the line(s) used to present other components of net periodic benefit costs is required if the components are not presented separately in the statement of earnings. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued or made available for issuance.
The Company will adopt the ASU on January 1, 2018 using a retrospective approach for the presentation of the service cost component and the other components of net periodic benefit costs in the Consolidated Statement of Earnings and prospectively for the capitalization of the service cost component of net periodic benefit costs in assets. The guidance includes a practical expedient that permits an entity to estimate amounts for comparative periods using the information previously disclosed in its pension plans and other post-retirement benefit plans footnote.
While the Company is still evaluating the impact of adopting this new guidance, it does not expect this new guidance to have a material impact on the consolidated earnings.
11
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
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 periods 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 SeptemberJune 30, 2016,2017, one of Domtar’s Pulp and Paper segment customers located in the United StatesU.S. represented 12% ($77 million) (2015or $74 million (2016 – 12% ($78or $74 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 attempts to minimize 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, bankrevolving 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.
12
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3 – DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
COST RISK
Cash flow hedges:
The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. 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 60 months.
12
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. 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 SeptemberJune 30, 20162017 to hedge forecasted purchases:
Commodity |
| Notional contractual quantity under derivative contracts MMBTU(2) |
| Notional contractual value under derivative contracts (in millions of dollars) |
| Percentage of forecasted purchases under derivative contracts |
|
| Notional contractual quantity under derivative contracts MMBTU(3) |
|
| Notional contractual value under derivative contracts (in millions of dollars) |
| Percentage of forecasted purchases under derivative contracts |
| |||||||||||
Natural Gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 (1) |
| 4,620,000 |
|
| $ | 14 |
|
|
|
| 80% |
| ||||||||||||||
2017 |
| 8,980,000 |
|
| $ | 28 |
|
|
|
| 34% |
| ||||||||||||||
2017 (1) |
|
| 4,255,000 |
|
|
| $ | 13 |
|
|
|
| 35% |
| ||||||||||||
2018 |
| 5,085,000 |
|
| $ | 15 |
|
|
|
| 19% |
|
|
| 12,695,000 |
|
|
| $ | 38 |
|
|
|
| 50% |
|
2019 |
| 6,560,000 |
|
| $ | 20 |
|
|
|
| 25% |
|
|
| 9,175,000 |
|
|
| $ | 28 |
|
|
|
| 36% |
|
2020 |
| 5,750,000 |
|
| $ | 18 |
|
|
|
| 22% |
|
|
| 5,750,000 |
|
|
| $ | 18 |
|
|
|
| 23% |
|
2021 |
| 2,930,000 |
|
| $ | 10 |
|
|
|
| 15% |
|
|
| 3,920,000 |
|
|
| $ | 12 |
|
|
|
| 15% |
|
2022 (2) |
|
| 2,070,000 |
|
|
| $ | 6 |
|
|
|
| 15% |
|
(1) | Represents the remaining |
(2) | Represents the first six months of 2022 |
(3) | MMBTU: Millions of British thermal units |
The natural gas derivative contracts were fully effective as of SeptemberJune 30, 2016.2017. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20162017 resulting from hedge ineffectiveness (three and ninesix months ended SeptemberJune 30, 20152016 – 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. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdon’s June 23, 2016 referendum in which voters approved the United Kingdom’s exit from the European Union, commonly referred to as “Brexit.” 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 the Company’s Canadian subsidiary over the next 24 months. Derivatives are usedmonths and to hedge a portion of forecasted sales by its U.S. subsidiaries in Euros and in British pounds over the next 126 months. Derivatives are also currently used to hedge a portion of forecasted sales in British pounds and Norwegian krone and a portion of forecasted purchases in U.S. dollars and Swedish krona by its European subsidiaries over a period of betweenthe next 12 to 24 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in
13
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3 – DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
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.
13
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of SeptemberJune 30, 20162017 to hedge forecasted purchases and sales:
Currency exposure hedged |
| Business Segment |
| Year of maturity |
| Notional contractual value |
| Percentage of forecasted net exposures under contracts |
|
| Average Protection rate |
| Average Obligation rate | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDN/USD |
| Pulp and Paper |
|
|
|
|
|
|
|
|
| 1 USD = |
| 1 USD = |
USD/Euro |
| Personal Care |
|
|
|
|
|
|
|
|
| 1 Euro = |
| 1 Euro = |
|
|
|
|
|
| |||||||||
| ||||||||||||||
|
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||
|
|
|
| 2018 |
|
|
|
|
|
|
|
|
|
|
CDN/USD |
| Pulp and Paper |
|
|
|
|
|
|
|
|
| 1 USD = |
| 1 USD = |
USD/Euro |
| Personal Care |
|
|
|
|
|
|
|
|
| 1 Euro = |
| 1 Euro = |
2019 | ||||||||||||||
CDN/USD | Pulp and Paper | 101 CDN | 13% | 1 USD = 1.2897 | 1 USD = 1.3471 |
(1)Represents the remaining six months of 2017
The foreign exchange derivative contracts were fully effective as of SeptemberJune 30, 2016.2017. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20162017 resulting from hedge ineffectiveness (three and ninesix months ended SeptemberJune 30, 2015 -2016 – 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. |
14
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3 –3. 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)(b) below) at SeptemberJune 30, 20162017 and December 31, 2015,2016, 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: |
| September 30, 2016 |
|
| Quoted prices in active markets for identical assets (Level 1) |
|
| Significant observable inputs (Level 2) |
|
| Significant unobservable inputs (Level 3) |
|
| Balance sheet classification |
| June 30, 2017 |
|
| 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 as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 18 |
|
|
| — |
|
|
| 18 |
|
|
| — |
| (a) | Prepaid expenses |
|
| 13 |
|
|
| — |
|
|
| 13 |
|
|
| — |
| (a) | Prepaid expenses |
Natural gas swap contracts |
|
| 3 |
|
|
| — |
|
|
| 3 |
|
|
| — |
| (a) | Prepaid expenses |
|
| 3 |
|
|
| — |
|
|
| 3 |
|
|
| — |
| (a) | Prepaid expenses |
Currency derivatives |
|
| 8 |
|
|
| — |
|
|
| 8 |
|
|
| — |
| (a) | Other assets |
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| — |
| (a) | Other assets |
Natural gas swap contracts |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Other assets | ||||||||||||||||||
Total Assets |
|
| 31 |
|
|
| — |
|
|
| 31 |
|
|
| — |
|
|
|
|
| 22 |
|
|
| — |
|
|
| 22 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 12 |
|
|
| — |
|
|
| 12 |
|
|
| — |
| (a) | Trade and other payables |
|
| 3 |
|
|
| — |
|
|
| 3 |
|
|
| — |
| (a) | Trade and other payables |
Natural gas swap contracts |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
| (a) | Trade and other payables |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Trade and other payables |
Currency derivatives |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
|
| 3 |
|
|
| — |
|
|
| 3 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
Natural gas swap contracts |
|
| 5 |
|
|
| — |
|
|
| 5 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
Total Liabilities |
|
| 25 |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
|
|
| 12 |
|
|
| — |
|
|
| 12 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation - liability awards |
|
| 2 |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
| Trade and other payables | ||||||||||||||||||
Stock-based compensation - liability awards |
|
| 15 |
|
|
| 15 |
|
|
| — |
|
|
| — |
|
| Other liabilities and deferred credits | ||||||||||||||||||
Long-term debt |
|
| 1,446 |
|
|
| — |
|
|
| 1,446 |
|
|
| — |
| (c) | Long-term debt |
|
| 1,272 |
|
|
| — |
|
|
| 1,272 |
|
|
| — |
| (b) | Long-term debt |
The net cumulative loss recorded in OtherAccumulated other comprehensive income (loss)loss relating to natural gas contracts of $4is $3 million at SeptemberJune 30, 2016,2017, of which a gain of $1 million will be recognized in Cost of sales upon maturity of the derivatives over the next 6012 months at the then prevailing values, which may be different from those at SeptemberJune 30, 2016.2017.
The net cumulative gain recorded in OtherAccumulated other comprehensive income (loss)loss relating to currency options and forwards hedging forecasted purchases is $13 million at June 30, 2017, of which a gain of $10 million at September 30, 2016, will be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 2412 months at the then prevailing values, which may be different from those at SeptemberJune 30, 2016.
2017.
15
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 3 –3. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)
Fair Value of financial instruments at: |
| December 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 |
| December 31, 2016 |
|
| 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 as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| — |
| (a) | Prepaid expenses |
|
| 18 |
|
|
| — |
|
|
| 18 |
|
|
| — |
| (a) | Prepaid expenses |
Natural gas swap contracts |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Prepaid expenses |
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| — |
| (a) | Prepaid expenses |
Currency derivatives |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Other assets |
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| — |
| (a) | Other assets |
Natural gas swap contracts |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Other assets |
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
| (a) | Other assets |
Total Assets |
|
| 10 |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
|
|
| 32 |
|
|
| — |
|
|
| 32 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives |
|
| 39 |
|
|
| — |
|
|
| 39 |
|
|
| — |
| (a) | Trade and other payables |
|
| 10 |
|
|
| — |
|
|
| 10 |
|
|
| — |
| (a) | Trade and other payables |
Natural gas swap contracts |
|
| 14 |
|
|
| — |
|
|
| 14 |
|
|
| — |
| (a) | Trade and other payables |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
| (a) | Trade and other payables |
Currency derivatives |
|
| 10 |
|
|
| — |
|
|
| 10 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
Natural gas swap contracts |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
| (a) | Other liabilities and deferred credits |
Total Liabilities |
|
| 67 |
|
|
| — |
|
|
| 67 |
|
|
| — |
|
|
|
|
| 21 |
|
|
| — |
|
|
| 21 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset backed notes ("ABN") |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
| (b) | Other assets | ||||||||||||||||||
Stock-based compensation - liability awards |
|
| 2 |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
| Trade and other payables | ||||||||||||||||||
Stock-based compensation - liability awards |
|
| 17 |
|
|
| 17 |
|
|
| — |
|
|
| — |
|
| Other liabilities and deferred credits | ||||||||||||||||||
Long-term debt |
|
| 1,261 |
|
|
| — |
|
|
| 1,261 |
|
|
| — |
| (c) | Long-term debt |
|
| 1,313 |
|
|
| — |
|
|
| 1,313 |
|
|
| — |
| (b) | Long-term debt |
(a) | Fair value of the Company’s derivatives are 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) |
|
| Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at |
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.
16
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
EARNINGS PER COMMON SHARE
The following table provides the reconciliation between basic and diluted earnings per common share:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||||||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||
Net earnings |
| $ | 59 |
|
| $ | 11 |
|
| $ | 81 |
|
| $ | 85 |
|
| $ | 38 |
|
| $ | 18 |
|
| $ | 58 |
|
| $ | 22 |
|
Weighted average number of common shares outstanding (millions) |
|
| 62.6 |
|
|
| 62.9 |
|
|
| 62.6 |
|
|
| 63.4 |
|
|
| 62.6 |
|
|
| 62.6 |
|
|
| 62.6 |
|
|
| 62.7 |
|
Effect of dilutive securities (millions) |
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
Weighted average number of diluted common shares outstanding (millions) |
|
| 62.7 |
|
|
| 63.0 |
|
|
| 62.7 |
|
|
| 63.5 |
|
|
| 62.7 |
|
|
| 62.7 |
|
|
| 62.7 |
|
|
| 62.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per common share (in dollars) |
| $ | 0.94 |
|
| $ | 0.17 |
|
| $ | 1.29 |
|
| $ | 1.34 |
|
| $ | 0.61 |
|
| $ | 0.29 |
|
| $ | 0.93 |
|
| $ | 0.35 |
|
Diluted net earnings per common share (in dollars) |
| $ | 0.94 |
|
| $ | 0.17 |
|
| $ | 1.29 |
|
| $ | 1.34 |
|
| $ | 0.61 |
|
| $ | 0.29 |
|
| $ | 0.93 |
|
| $ | 0.35 |
|
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:
|
| For the three months ended |
|
| For the nine months ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
| ||||
Options |
|
| 412,372 |
|
|
| 110,219 |
|
|
| 412,372 |
|
|
| 137,191 |
|
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Options |
|
| 517,246 |
|
|
| 314,287 |
|
|
| 419,161 |
|
|
| 412,372 |
|
17
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and ninesix months ended SeptemberJune 30, 2016,2017, the pension expense was $11$8 million and $29$19 million, respectively (2015(2016 – $9$8 million and $24$18 million, respectively).
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 January 1, 1998 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. Unionized and non-union hourly employees in the U.S. who 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 |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||||||||||||
|
| September 30, 2016 |
|
| September 30, 2016 |
|
| June 30, 2017 |
|
| June 30, 2017 |
| ||||||||||||||||||||
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Service cost |
|
| 7 |
|
|
| 1 |
|
|
| 23 |
|
|
| 2 |
|
|
| 7 |
|
|
| 1 |
|
|
| 15 |
|
|
| 1 |
|
Interest expense |
|
| 12 |
|
|
| — |
|
|
| 37 |
|
|
| 2 |
|
|
| 13 |
|
|
| 1 |
|
|
| 25 |
|
|
| 2 |
|
Expected return on plan assets |
|
| (19 | ) |
|
| — |
|
|
| (58 | ) |
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| (40 | ) |
|
| — |
|
Amortization of net actuarial loss |
|
| 1 |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
Amortization of prior year service costs |
|
| 2 |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
Net periodic benefit cost |
|
| 3 |
|
|
| 1 |
|
|
| 9 |
|
|
| 4 |
|
|
| 4 |
|
|
| 2 |
|
|
| 7 |
|
|
| 3 |
|
Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||||||||||||
|
| September 30, 2015 |
|
| September 30, 2015 |
|
| June 30, 2016 |
|
| June 30, 2016 |
| ||||||||||||||||||||
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
|
| Pension plans |
|
| Other post-retirement benefit plans |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Service cost |
|
| 9 |
|
|
| — |
|
|
| 27 |
|
|
| 2 |
|
|
| 8 |
|
|
| 1 |
|
|
| 16 |
|
|
| 1 |
|
Interest expense |
|
| 16 |
|
|
| 1 |
|
|
| 49 |
|
|
| 3 |
|
|
| 13 |
|
|
| 1 |
|
|
| 25 |
|
|
| 2 |
|
Expected return on plan assets |
|
| (23 | ) |
|
| — |
|
|
| (70 | ) |
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| (39 | ) |
|
| — |
|
Amortization of net actuarial loss |
|
| 1 |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
Amortization of prior year service costs |
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
Net periodic benefit cost |
|
| 4 |
|
|
| 1 |
|
|
| 13 |
|
|
| 5 |
|
|
| 3 |
|
|
| 2 |
|
|
| 6 |
|
|
| 3 |
|
For the three and ninesix months ended SeptemberJune 30, 2016,2017, the Company contributed $18$3 million and $27$6 million, respectively (2015(2016 – $5 million and $11$9 million, respectively) to the pension plans and $1 million and $3$2 million, respectively (2015(2016 – $1 million and $4$2 million, respectively) to the other post-retirement benefit plans.
18
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
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 |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||||||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Gain on sale of property, plant and equipment (1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15 | ) | ||||||||||||||||
Bad debt expense |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| 4 |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
Environmental provision |
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
Litigation settlement |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
Foreign exchange loss (gain) |
|
| 1 |
|
|
| (3 | ) |
|
| 5 |
|
|
| (3 | ) | ||||||||||||||||
Foreign exchange loss |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 4 |
| ||||||||||||||||
Other |
|
| (1 | ) |
|
| — |
|
|
| (3 | ) |
|
| 2 |
|
|
| (1 | ) |
|
| (2 | ) |
|
| (3 | ) |
|
| (2 | ) |
Other operating loss (income), net |
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| (8 | ) | ||||||||||||||||
Other operating loss, net |
|
| 2 |
|
|
| — |
|
|
| 1 |
|
|
| 4 |
|
|
|
19
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
INCOME TAXES
InFor the thirdsecond quarter of 2016,2017, the Company’s income tax expense was $16$9 million, consisting of a current income tax expense of $5$17 million and a deferred income tax expensebenefit of $11$8 million. This compares to an income tax benefitexpense of $14$6 million in the thirdsecond quarter of 2015,2016, consisting of a current income tax expense of $4$8 million and a deferred income tax benefit of $18$2 million. The effective tax rate was 21%19% compared with an effective tax rate of 467%25% in the thirdsecond quarter of 2015.2016. The effective tax rates for both the third quarter of 2016 and the third quarter of 2015 were impacted by the finalization of certain estimates in connection with the filing of our 2015 and 2014 income tax returns, respectively. Additionally, the effective tax rate for the thirdsecond quarter of 20152017 was favorably impacted by enacted law changes in several U.S. states and by the impairmentrecognition of property, plant, and equipment charges occurring in a high-tax jurisdiction.additional tax credits associated with the filing of certain 2016 income tax returns.
InFor the first nine monthshalf of 2016,2017, the Company’s income tax expense was $19amounted to $14 million, consisting of current income tax expense of $13 million and deferred income tax expense of $6 million. This compares to an income tax benefit of $6 million in the first nine months of 2015, consisting of a current income tax expense of $44$26 million and a deferred income tax benefit of $50$12 million. This compares to an income tax expense of $3 million in the first half of 2016, consisting of a current income tax expense of $8 million and a deferred income tax benefit of $5 million. The effective tax rate was 19% compared to an effective tax rate of (8)%12% in the first nine monthshalf of 2015. 2016. The effective tax rates for both the first nine months of 2016 and the first nine months of 2015 were impacted by the finalization of certain estimates in connection with the filing of our 2015 and 2014 income tax returns, respectively. Additionally, the effective tax rate for the first nine monthshalf of 2017 was favorably impacted by the recognition of previously unrecognized tax benefits due to a statute expiration in a foreign jurisdiction and also a U.S. state tax audit finalization, enacted law changes in several U.S. states, and the recognition of additional tax credits associated with the filing of certain 2016 income tax returns. The effective tax rate for the first half of 2016 was impacted by the approval of a state tax credit in the U.S. The effective tax rate for the first nine months of 2015 was impacted by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations, by enacted law changes in several U.S. states, and by the impairment of property, plant, and equipment charges occurring in a high-tax jurisdiction.
20
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
INVENTORIES
The following table presents the components of inventories:
|
| September 30, |
|
| December 31, |
| June 30, |
|
| December 31, | ||
|
| 2016 |
|
| 2015 |
| 2017 |
|
| 2016 | ||
|
| $ |
|
| $ |
| $ |
|
| $ | ||
Work in process and finished goods |
|
| 417 |
|
| 432 |
|
| 405 |
|
| 413 |
Raw materials |
|
| 141 |
|
| 130 |
|
| 135 |
|
| 132 |
Operating and maintenance supplies |
|
| 212 |
|
| 204 |
|
| 219 |
|
| 214 |
|
|
| 770 |
|
| 766 |
|
| 759 |
|
| 759 |
21
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
GOODWILL
The carrying value and any changesChanges in the carrying value of goodwill are as follows:
|
|
|
| |
|
| $ |
| |
Balance at December 31, |
|
|
|
|
Effect of foreign currency exchange rate change |
|
|
|
|
Balance at end of period |
|
|
|
|
|
|
|
|
|
The goodwill at SeptemberJune 30, 20162017 is entirely related to the Personal Care segment.
22
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
INTANGIBLE ASSETS
The following table presents the components of intangible assets:
|
|
|
| September 30, |
|
| December 31, |
| ||||||||||||||||||||||||||||||||||||||||||||
|
|
|
| 2016 |
|
| 2015 |
|
|
|
| June 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||||||||||||||||||||
|
| Estimated useful lives (in years) |
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
|
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
|
| Estimated useful lives (in years) |
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
|
| Gross carrying amount |
|
| Accumulated amortization |
|
| Net |
| ||||||||||||
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||||||
Definite-lived intangible assets subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water rights |
| 40 |
|
| 7 |
|
|
| (1 | ) |
|
| 6 |
|
|
| 7 |
|
|
| (1 | ) |
|
| 6 |
|
| 40 |
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
|
| 3 |
|
|
| (1 | ) |
|
| 2 |
|
Customer relationships |
| 10 - 40 |
|
| 360 |
|
|
| (58 | ) |
|
| 302 |
|
|
| 354 |
|
|
| (46 | ) |
|
| 308 |
|
| 10 – 40 |
|
| 383 |
|
|
| (70 | ) |
|
| 313 |
|
|
| 369 |
|
|
| (60 | ) |
|
| 309 |
|
Technology |
| 7 - 20 |
|
| 8 |
|
|
| (3 | ) |
|
| 5 |
|
|
| 8 |
|
|
| (2 | ) |
|
| 6 |
|
| 7 – 20 |
|
| 8 |
|
|
| (3 | ) |
|
| 5 |
|
|
| 8 |
|
|
| (3 | ) |
|
| 5 |
|
Non-Compete |
| 9 |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
| 9 |
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
License rights |
| 12 |
|
| 28 |
|
|
| (7 | ) |
|
| 21 |
|
|
| 28 |
|
|
| (6 | ) |
|
| 22 |
|
| 12 |
|
| 29 |
|
|
| (10 | ) |
|
| 19 |
|
|
| 28 |
|
|
| (8 | ) |
|
| 20 |
|
|
|
|
|
| 404 |
|
|
| (69 | ) |
|
| 335 |
|
|
| 398 |
|
|
| (55 | ) |
|
| 343 |
|
|
|
|
| 424 |
|
|
| (85 | ) |
|
| 339 |
|
|
| 409 |
|
|
| (72 | ) |
|
| 337 |
|
Indefinite-lived intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water rights |
|
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
| ||||||||||||||||||||||||||
Trade names |
|
|
|
| 221 |
|
|
| — |
|
|
| 221 |
|
|
| 215 |
|
|
| — |
|
|
| 215 |
|
|
|
|
| 237 |
|
|
| — |
|
|
| 237 |
|
|
| 225 |
|
|
| — |
|
|
| 225 |
|
License rights |
|
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
Catalog rights |
|
|
|
| 38 |
|
|
| — |
|
|
| 38 |
|
|
| 37 |
|
|
| — |
|
|
| 37 |
|
|
|
|
| 39 |
|
|
| — |
|
|
| 39 |
|
|
| 36 |
|
|
| — |
|
|
| 36 |
|
Total |
|
|
|
| 669 |
|
|
| (69 | ) |
|
| 600 |
|
|
| 656 |
|
|
| (55 | ) |
|
| 601 |
|
|
|
|
| 710 |
|
|
| (85 | ) |
|
| 625 |
|
|
| 680 |
|
|
| (72 | ) |
|
| 608 |
|
Amortization expense related to intangible assets for the three and ninesix months ended SeptemberJune 30, 20162017 was $5 million and $14$10 million, respectively (2015(2016 – $5$4 million and $14$9 million, respectively).
Amortization expense for the next five years related to intangible assets is expected to be as follows:
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2019 |
|
| 2020 |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Amortization expense related to intangible assets |
|
| 19 |
|
|
| 19 |
|
|
| 19 |
|
|
| 18 |
|
|
| 18 |
|
|
| 2017 |
|
| 2018 |
|
| 2019 |
|
| 2020 |
|
| 2021 |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Amortization expense related to intangible assets |
|
| 21 |
|
|
| 21 |
|
|
| 21 |
|
|
| 21 |
|
|
| 20 |
|
23
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
CLOSURE AND RESTRUCTURING COSTS AND LIABILITY AND IMPAIRMENT 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.
Plymouth, North Carolina mill
On September 23, 2016, the Company announced a plan to optimize fluff pulp manufacturing at the Plymouth, North Carolina mill. The restructuring, which is expected to be completed by mid-2017, includes the permanent closure of a pulp dryer and idling of related assets, in addition to a workforce reduction of approximately 100 positions. The streamlining process will also right-size the mill to an annualized production target of approximately 380,000 metric tons of fluff pulp. The Company recorded $5 million of severance and termination costs under Closure and restructuring costs during the third quarter of 2016.
Ashdown, Arkansas mill
On December 10, 2014, the Company announced a project to convert a paper machine at theits 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 Company also invested in a pulp bale line that will provide flexibility to manufacture papergrade softwood pulp, contingent on market conditions. The conversion work commenced during the second quarter of 2016 and the production of bale softwood pulp began in the third quarter of 2016. The fluff qualification period is set to begin in the fourth quarter of 2016. The fluff pulp line 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 resulted in the permanent reduction of 364,000 short tons of annual uncoated freesheet production capacity on March 31, 2016.
The Company recorded $5$3 million and $29$24 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively, of accelerated depreciation under Impairment of property, plant and equipment on the Consolidated Statement of Earnings and Comprehensive Income (Loss).Income. The Company also recorded $5 million and $26$21 million of costs related to the fluff pulp conversion outage under Closure and restructuring costs forduring the three and nine months ended September 30,second quarter of 2016. During the first quarter of 2016, the Company recorded $1 million of severance and termination costs under Closure and restructuring costs.
The Company recorded $20 million and $57 million for the three and nine months ended September 30, 2015, respectively, of accelerated depreciation under Impairment of property, plant and equipment on the Consolidated Statement of Earnings and Comprehensive Income (Loss). For the three and nine months ended September 30, 2015, the Company recorded $1 million and $2 million, respectively, of severance and termination costs under Closure and restructuring costs.
Other costs
For the three and ninesix months ended SeptemberJune 30, 2016, other costs related to previous and ongoing closures include nil and $1 million, respectively, of severance and termination costs related to Pulp and Paper.
For the three and nine months ended September 30, 2015, other costs related to previous and ongoing closures include nil and $1 million, respectively, of severance and termination costs related to Personal Care.
At September 30, 2016, the Company’s provision for closure and restructuring costs is $8 million. This provision is comprised of severance and termination costs, all related to Pulp and Paper.
24
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 2016
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 12.
_________________
BANK FACILITY
On August 18, 2016, the Company amended and restated its existing unsecured Amended and Restated Credit Agreement, dated October 3, 2014 (the “Existing Credit Agreement”; as so amended and restated, the “2016 Credit Agreement”), among the Company and certain of its subsidiaries (including certain Canadian and European subsidiaries that were not borrowers under the Existing Credit Agreement) as borrowers, and the lenders and agents party thereto. The 2016 Credit Agreement matures on August 18, 2021.
The maximum aggregate amount of availability under the 2016 Credit Agreement is $700 million, an increase of $100 million from the Existing Credit Agreement of $600 million. Borrowings under the 2016 Credit Agreement will bear interest at the same rates as borrowings under the Existing Credit Agreement.
Borrowings by U.S. borrowers under the 2016 Credit Agreement are guaranteed by the Company and its significant domestic subsidiaries. Borrowings by foreign borrowers under the 2016 Credit Agreement are guaranteed by the Company, the Company’s significant domestic subsidiaries and certain of the Company’s foreign significant subsidiaries. Unlike the Existing Credit Agreement, no insignificant subsidiaries guarantee obligations of the borrowers under the 2016 Credit Agreement.
The 2016 Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying material acquisitions). The other terms of the 2016 Credit Agreement are generally consistent with the terms of the Existing Credit Agreement.
TERM LOAN
On August 18, 2016, the Company entered into an amendment (the “Amendment”) to its Term Loan Agreement, dated July 20, 2015, pursuant to which, among other things, certain subsidiaries of the Company were designated as “insignificant subsidiaries” and were released from their guarantees of the borrower’s obligations under the Term Loan Agreement, as amended by the Amendment.
UNSECURED NOTES
The Company’s 9.5% Notes, in the aggregate principal amount of $39 million, matured on August 1, 2016.
25
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT
The following table presents the changes in Accumulated other comprehensive loss by component(1) for the periodssix months ended SeptemberJune 30, 20162017 and the year ended December 31, 2015:2016:
|
| Net derivative (losses) gains on cash flow hedges |
|
| Pension items(2) |
|
| Post-retirement benefit items(2) |
|
| Foreign currency items |
|
| Total |
|
| Net derivative (losses) gains on cash flow hedges |
|
| Pension items(2) |
|
| Post-retirement benefit items(2) |
|
| Foreign currency items |
|
| Total |
| ||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
|
|
|
|
|
|
| $ |
| |||||||||||||
Balance at December 31, 2014 |
|
| (15 | ) |
|
| (192 | ) |
|
| (13 | ) |
|
| (48 | ) |
|
| (268 | ) | ||||||||||||||||||||
Natural gas swap contracts |
|
| (8 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (8 | ) | |||||||||||||||||||||||
Currency options |
|
| (40 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (40 | ) | |||||||||||||||||||||||
Foreign exchange forward contracts |
|
| 7 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 7 |
| |||||||||||||||||||||||
Net (gain) loss |
| N/A |
|
|
| (5 | ) |
|
| 3 |
|
| N/A |
|
|
| (2 | ) | ||||||||||||||||||||||
Foreign currency items |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (223 | ) |
|
| (223 | ) | |||||||||||||||||||||||
Other comprehensive (loss) income before reclassifications |
|
| (41 | ) |
|
| (5 | ) |
|
| 3 |
|
|
| (223 | ) |
|
| (266 | ) | ||||||||||||||||||||
Amounts reclassified from Accumulated other comprehensive loss |
|
| 26 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| 33 |
| ||||||||||||||||||||
Net current period other comprehensive (loss) income |
|
| (15 | ) |
|
| 2 |
|
|
| 3 |
|
|
| (223 | ) |
|
| (233 | ) | ||||||||||||||||||||
Balance at December 31, 2015 |
|
| (30 | ) |
|
| (190 | ) |
|
| (10 | ) |
|
| (271 | ) |
|
| (501 | ) |
|
| (30 | ) |
|
| (190 | ) |
|
| (10 | ) |
|
| (271 | ) |
|
| (501 | ) |
Natural gas swap contracts |
|
| — |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| — |
|
|
| 4 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 4 |
| ||||||
Net investment hedge |
|
| (1 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (1 | ) |
|
| (1 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (1 | ) | ||||||
Currency options |
|
| 12 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 12 |
|
|
| 8 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 8 |
| ||||||
Foreign exchange forward contracts |
|
| 12 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 12 |
|
|
| 16 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 16 |
| ||||||
Net gain |
| N/A |
|
|
| (38 | ) |
|
| (1 | ) |
| N/A |
|
|
| (39 | ) | ||||||||||||||||||||||
Foreign currency items |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (7 | ) |
|
| (7 | ) | |||||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
|
| 27 |
|
|
| (38 | ) |
|
| (1 | ) |
|
| (7 | ) |
|
| (19 | ) | ||||||||||||||||||||
Amounts reclassified from Accumulated other comprehensive loss |
|
| 14 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| 21 |
| ||||||||||||||||||||
Net current period other comprehensive income (loss) |
|
| 41 |
|
|
| (31 | ) |
|
| (1 | ) |
|
| (7 | ) |
|
| 2 |
| ||||||||||||||||||||
Balance at December 31, 2016 |
|
| 11 |
|
|
| (221 | ) |
|
| (11 | ) |
|
| (278 | ) |
|
| (499 | ) | ||||||||||||||||||||
Natural gas swap contracts |
|
| (4 | ) |
| N/A |
|
| N/A |
|
| N/A |
|
|
| (4 | ) | |||||||||||||||||||||||
Currency options |
|
| 6 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 6 |
| |||||||||||||||||||||||
Foreign currency items |
| N/A |
|
| N/A |
|
| N/A |
|
|
| 61 |
|
|
| 61 |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| 82 |
|
|
| 82 |
| ||||||
Other comprehensive income before reclassifications |
|
| 23 |
|
|
| — |
|
|
| — |
|
|
| 61 |
|
|
| 84 |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
| 82 |
|
|
| 84 |
|
Amounts reclassified from Accumulated other comprehensive loss |
|
| 14 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| 19 |
|
|
| (4 | ) |
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Net current period other comprehensive income |
|
| 37 |
|
|
| 5 |
|
|
| — |
|
|
| 61 |
|
|
| 103 |
| ||||||||||||||||||||
Balance at September 30, 2016 |
|
| 7 |
|
|
| (185 | ) |
|
| (10 | ) |
|
| (210 | ) |
|
| (398 | ) | ||||||||||||||||||||
Net current period other comprehensive (loss) income |
|
| (2 | ) |
|
| 5 |
|
|
| — |
|
|
| 82 |
|
|
| 85 |
| ||||||||||||||||||||
Balance at June 30, 2017 |
|
| 9 |
|
|
| (216 | ) |
|
| (11 | ) |
|
| (196 | ) |
|
| (414 | ) |
(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. |
2625
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 13.12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)
The following table presents reclassifications out of Accumulated other comprehensive loss:
Details about Accumulated other comprehensive loss components |
| Amount reclassified from Accumulated other comprehensive loss |
|
|
| Amounts reclassified from Accumulated other comprehensive loss(1) |
|
| ||||||||||
|
| For the three months ended |
|
|
| For the three months ended |
|
| ||||||||||
|
| September 30, 2016 |
|
| September 30, 2015 |
|
|
| June 30, 2017 |
|
| June 30, 2016 |
|
| ||||
Net derivative gains on cash flow hedges |
|
|
|
|
|
|
|
|
| |||||||||
|
| $ |
|
| $ |
|
| |||||||||||
Net derivative (losses) gains on cash flow hedge |
|
|
|
|
|
|
|
|
| |||||||||
Natural gas swap contracts |
|
| 2 |
|
|
| 2 |
| (1) |
|
| — |
|
|
| 5 |
| (2) |
Currency options and forwards |
|
| 1 |
|
|
| 10 |
| (1) |
|
| (1 | ) |
|
| 3 |
| (2) |
Total before tax |
|
| 3 |
|
|
| 12 |
|
|
|
| (1 | ) |
|
| 8 |
|
|
Tax expense |
|
| (2 | ) |
|
| (5 | ) |
|
|
| — |
|
|
| (3 | ) |
|
Net of tax |
|
| 1 |
|
|
| 7 |
|
|
|
| (1 | ) |
|
| 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior year service cost |
|
| 2 |
|
|
| 2 |
| (2) |
|
| 4 |
|
|
| 3 |
| (3) |
Tax expense |
|
| — |
|
|
| (1 | ) |
|
|
| (1 | ) |
|
| (1 | ) |
|
Net of tax |
|
| 2 |
|
|
| 1 |
|
|
|
| 3 |
|
|
| 2 |
|
|
Details about Accumulated other comprehensive loss components |
| Amount reclassified from Accumulated other comprehensive loss |
| Amounts reclassified from Accumulated other comprehensive loss(1) |
|
| ||||||||||||
|
| For the nine months ended |
| For the six months ended |
|
| ||||||||||||
|
| September 30, 2016 |
|
| September 30, 2015 |
| June 30, 2017 |
|
| June 30, 2016 |
|
| ||||||
Net derivative gains on cash flow hedges |
|
|
|
|
|
|
|
|
| |||||||||
|
| $ |
|
| $ |
|
| |||||||||||
Net derivative (losses) gains on cash flow hedges |
|
|
|
|
|
|
|
|
| |||||||||
Natural gas swap contracts |
|
| 12 |
|
|
| 11 |
| (1) |
|
| (1 | ) |
|
| 10 |
| (2) |
Currency options and forwards |
|
| 12 |
|
|
| 20 |
| (1) |
|
| (5 | ) |
|
| 11 |
| (2) |
Total before tax |
|
| 24 |
|
|
| 31 |
|
|
|
| (6 | ) |
|
| 21 |
|
|
Tax expense |
|
| (10 | ) |
|
| (13 | ) |
| |||||||||
Tax benefit (expense) |
|
| 2 |
|
|
| (8 | ) |
| |||||||||
Net of tax |
|
| 14 |
|
|
| 18 |
|
|
|
| (4 | ) |
|
| 13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss and prior year service cost |
|
| 7 |
|
|
| 7 |
| (2) |
|
| 7 |
|
|
| 5 |
| (3) |
Tax expense |
|
| (2 | ) |
|
| (2 | ) |
|
|
| (2 | ) |
|
| (2 | ) |
|
Net of tax |
|
| 5 |
|
|
| 5 |
|
|
|
| 5 |
|
|
| 3 |
|
|
(1) | Amounts in parentheses indicate losses. |
(2) | These amounts are included in Cost of Sales in the Consolidated Statements of Earnings and Comprehensive |
| These amounts are included in the computation of net periodic benefit |
2726
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
SHAREHOLDERS’ EQUITY
On February 22, 2016,21, 2017 and May 3, 2016 and August 2, 2016,2017, the Company’s Board of Directors approved a quarterly dividend of $0.40, $0.415 and $0.415 per share, respectively, to be paid to holders of the Company’s common stock. Total dividendsDividends of approximately $25 million, $26 million and $26 million, respectively, were paid on April 15, 2016,17, 2017 and July 15, 2016 and October 17, 2016,2017, respectively, to shareholders of record on April 4, 2016,3, 2017 and July 5, 2016 and October 3, 2016,2017, respectively.
On NovemberAugust 1, 2016,2017, the Company’s Board of Directors approved a quarterly dividend of $0.415 per share to be paid to holders of the Company’s common stock. This dividend is to be paid on January 17,October 16, 2017, to shareholders of record on January 3,October 2, 2017.
STOCK REPURCHASE PROGRAM
The Company’s Board of Directors has authorized a stock repurchase program (the “Program”) of up 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. 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 and awards, and to improve shareholders’ returns.
The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company may enter 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 would require the Company to make up-front payments to the counterparty financial institutions, which would result 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 nine monthshalf of 2017, there were no shares repurchased under the Program.
During the first half of 2016, the Company repurchased 304,915 shares at an average price of $32.21 for a total cost of $10 million.
During the first nine months of 2015, the Company repurchased 1,210,932 shares at an average price of $41.40 for a total cost of $50 million.
Since the inception of the Program, the Company has repurchased 24,853,827 shares at an average price of $39.33 for a total cost of $977 million. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.
2827
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
COMMITMENTS AND CONTINGENCIES
ENVIRONMENT
The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities.
On February 16, 2010, the government of British Columbia issued a Remediation Order to Seaspan International Ltd. (“Seaspan”) and the Company, in order to define and implement an actiona remediation plan to address soil, sediment and groundwater issues. Working with authorities, Seaspan and the Company selected a remedial plan and obtained permitting approval on May 14, 2015 from the Vancouver Fraser Port Authority. It is anticipated that construction will beginConstruction began in January 2017. The Company has previously recorded an environmental reserve to address its estimated exposure. The possible losscost 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:
|
|
|
| |
|
| $ |
| |
Balance at beginning of year |
|
|
|
|
Additions |
|
|
|
|
Environmental spending |
|
| (3 | ) |
Effect of foreign currency exchange rate change |
|
|
|
|
Balance at end of period |
|
|
|
|
The U.S. Environmental Protection Agency (“EPA”) and/or various state agencies have notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws 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.
Climate change regulation
Various national and local laws and regulations have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments. The Company does not expect to be disproportionately affected by these measures compared with other pulp and paper producers located in these jurisdictions.
In theThe United States EPA’sEPA Clean Power Plan requires states to develop compliance plans to reduce greenhouse gases (“GHG”) emissions beginning in 2022 from existing electric utilities. The Clean Power Plan requirements could result in significant changes to state energy resources and increase the cost of purchased energy in most states. The final ruleregulation is being litigated and has been stayed. President Trump issued an Executive Order on February 9, 2016, the U.S. Supreme Court stayed the implementation ofMarch 28, 2017, directing his Administration to review and then suspend, revise, or rescind the Clean Power Plan, untilas appropriate and consistent with law. As a result, the litigation is resolved. Oral argument was held before an en banc panel of the U.S. Court of Appeals forEPA filed a motion with the D.C. Circuit to hold the case in abeyance while it reconsiders the rule, which the D.C. Circuit granted in part to allow time for additional briefing on September 27, 2016,how and a final decision is expected within months, although subsequent appeals towhether the U.S. Supreme Court are likely. Thelitigation should proceed. Regardless of the outcome of the litigation and/or the Executive Order, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.
The EPAGovernment of Canada is also developingreviewing national policies to further reduce greenhouse gases (“GHG”) and has announced its intent to impose a biogeniccost on carbon accounting framework to account for carbon dioxide emissions from biomass fuels for Clean Air Act permitting and other regulatory purposes.emissions. The Company does not expect its facilities to be disproportionately affected by any future EPAthese measures compared with other pulp and paper producers in the United States.Canada.
2928
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 15.14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Government of Canada is reviewing national policies to further GHG reductions and possibly establish a uniform national carbon price.
The provinceprovinces of Quebec has aand Ontario have GHG cap-and-trade systemsystems with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The province of Ontario has finalized a cap-and-trade program with the first compliance period beginning January 1, 2017 through 2020. The Company does not expect to be disproportionately affected compared to the other large pulp and paper producers located in these provinces.
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 SeptemberJune 30, 2016,2017, 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,On October 15, 2015, the Competition Directorate of Spain’s National Commission of Markets and Competition (“CNMC”) initiated a formal investigation of alleged violations of Spanish competition laws in the market for heavy adult incontinence products in Spain.
On October 15, 2015, the Competition Directorate of the CNMC filed a Statement of Objections against a number of industry participants alleging the existence of a series of agreements between manufacturers, distributors and pharmacists to fix prices and to allocate margins for heavy adult incontinence products within the pharmacy channel in Spain during the period from December 1996 through January 2014. Among the parties named in the Statement of Objections arewas Indas, which the Company acquired in January 2014, and two of its affiliates.
On January 4, 2016, the Competition Directorate issued a proposed decision confirming the allegations of the Statement of Objections. The proposed decision recommended the imposition of fines on the parties without recommending the amount of any fines. The Company recorded a €0.2 million ($0.2 million) provision in the fourth quarter of 2015 in Other operating loss, (income), net.
On May 26, 2016, the CNMC rendered its final decision, which declared that a number of manufacturers of adult heavy incontinence products, the sector association and certain individuals participated in price fixing during the period from December 1996 through January 2014. Indas and one of its subsidiaries were fined a total of €13.5 million ($14.9 million) for their participation. A provision was recorded in the second quarter of 2016 in the amount of €13.3 million ($14.7 million) in Other operating loss, (income), net.
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 iswas backed by a retained purchase price of €3 million ($3.3 million) and bank guarantees of €9 million ($9.9 million).
On June 27, 2016, in light of the CNMC decision, the sellers, in terms of their indemnity obligations, have agreed to the appropriation by the Company of the retained purchase price and the release of the bank guarantees. Accordingly, a recovery of €12 million ($13.2 million) was recorded in the second quarter of 2016 and included in Other operating loss, (income), net.
In July 2016, the fines were paid and Indas and two of its affiliates named in the final decision appealed the decision to the Spanish courts.
The Company purchased limited insurance coverage with respect to the purchase agreement, and will seekis seeking to recover the remaining €1.5 million ($1.7 million) under the insurance policy. Any recovery from the insurers would be recorded in the period when the proceeds are received.
30
29
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 15.14. 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 SeptemberJune 30, 2016,2017, 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 SeptemberJune 30, 2016,2017, the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.
3130
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
SEGMENT DISCLOSURES
The Company’s two reportable segments described below also represent its two operating segments. 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 – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.
Personal Care – consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.
An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:
|
| For the three months ended |
|
| For the nine months ended |
|
| For the three months ended |
|
| For the six months ended |
| ||||||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| ||||||||
SEGMENT DATA |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Sales by segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Pulp and Paper |
|
| 1,054 |
|
|
| 1,092 |
|
|
| 3,193 |
|
|
| 3,348 |
|
|
| 999 |
|
|
| 1,054 |
|
|
| 2,072 |
|
|
| 2,139 |
|
Personal Care |
|
| 231 |
|
|
| 214 |
|
|
| 675 |
|
|
| 648 |
|
|
| 241 |
|
|
| 228 |
|
|
| 490 |
|
|
| 444 |
|
Total for reportable segments |
|
| 1,285 |
|
|
| 1,306 |
|
|
| 3,868 |
|
|
| 3,996 |
|
|
| 1,240 |
|
|
| 1,282 |
|
|
| 2,562 |
|
|
| 2,583 |
|
Intersegment sales |
|
| (15 | ) |
|
| (14 | ) |
|
| (44 | ) |
|
| (46 | ) |
|
| (16 | ) |
|
| (15 | ) |
|
| (34 | ) |
|
| (29 | ) |
Consolidated sales |
|
| 1,270 |
|
|
| 1,292 |
|
|
| 3,824 |
|
|
| 3,950 |
|
|
| 1,224 |
|
|
| 1,267 |
|
|
| 2,528 |
|
|
| 2,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization and impairment of property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Sales by product group |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Paper |
|
| 734 |
|
|
| 816 |
|
|
| 1,520 |
|
|
| 1,660 |
| ||||||||||||||||
Market pulp |
|
| 249 |
|
|
| 223 |
|
|
| 518 |
|
|
| 450 |
| ||||||||||||||||
Absorbent hygiene products |
|
| 241 |
|
|
| 228 |
|
|
| 490 |
|
|
| 444 |
| ||||||||||||||||
Consolidated sales |
|
| 1,224 |
|
|
| 1,267 |
|
|
| 2,528 |
|
|
| 2,554 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Depreciation and amortization of property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Pulp and Paper |
|
| 71 |
|
|
| 75 |
|
|
| 216 |
|
|
| 224 |
|
|
| 63 |
|
|
| 72 |
|
|
| 127 |
|
|
| 145 |
|
Personal Care |
|
| 16 |
|
|
| 14 |
|
|
| 47 |
|
|
| 46 |
|
|
| 16 |
|
|
| 15 |
|
|
| 32 |
|
|
| 31 |
|
Total for reportable segments |
|
| 87 |
|
|
| 89 |
|
|
| 263 |
|
|
| 270 |
|
|
| 79 |
|
|
| 87 |
|
|
| 159 |
|
|
| 176 |
|
Impairment of property, plant and equipment - Pulp and Paper |
|
| 5 |
|
|
| 20 |
|
|
| 29 |
|
|
| 57 |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| 24 |
|
Consolidated depreciation and amortization and impairment of property, plant and equipment |
|
| 92 |
|
|
| 109 |
|
|
| 292 |
|
|
| 327 |
|
|
| 79 |
|
|
| 90 |
|
|
| 159 |
|
|
| 200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp and Paper |
|
| 89 |
|
|
| 54 |
|
|
| 143 |
|
|
| 184 |
|
|
| 65 |
|
|
| 35 |
|
|
| 99 |
|
|
| 54 |
|
Personal Care |
|
| 15 |
|
|
| 18 |
|
|
| 44 |
|
|
| 45 |
|
|
| 13 |
|
|
| 15 |
|
|
| 29 |
|
|
| 29 |
|
Corporate |
|
| (12 | ) |
|
| (11 | ) |
|
| (38 | ) |
|
| (35 | ) |
|
| (14 | ) |
|
| (11 | ) |
|
| (22 | ) |
|
| (26 | ) |
Consolidated operating income |
|
| 92 |
|
|
| 61 |
|
|
| 149 |
|
|
| 194 |
|
|
| 64 |
|
|
| 39 |
|
|
| 106 |
|
|
| 57 |
|
Interest expense, net |
|
| 17 |
|
|
| 64 |
|
|
| 49 |
|
|
| 115 |
|
|
| 17 |
|
|
| 15 |
|
|
| 34 |
|
|
| 32 |
|
Earnings (loss) before income taxes |
|
| 75 |
|
|
| (3 | ) |
|
| 100 |
|
|
| 79 |
| ||||||||||||||||
Income tax expense (benefit) |
|
| 16 |
|
|
| (14 | ) |
|
| 19 |
|
|
| (6 | ) | ||||||||||||||||
Earnings before income taxes |
|
| 47 |
|
|
| 24 |
|
|
| 72 |
|
|
| 25 |
| ||||||||||||||||
Income tax expense |
|
| 9 |
|
|
| 6 |
|
|
| 14 |
|
|
| 3 |
| ||||||||||||||||
Net earnings |
|
| 59 |
|
|
| 11 |
|
|
| 81 |
|
|
| 85 |
|
|
| 38 |
|
|
| 18 |
|
|
| 58 |
|
|
| 22 |
|
3231
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
_________________
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), Domtar A.W. LLC, Attends Healthcare Products Inc., EAM Corporation, and Associated Hygienic Products LLC and Home Delivery Incontinent Supplies Co., all 100% owned subsidiaries of the Company (“Guarantor Subsidiaries”), on a joint and several basis. Pursuant to the amendment and restatement of the 2016 Credit Agreement on August 18, 2016, the Guaranteed Debt will not be guaranteed by certain of Domtar’s 100% owned subsidiaries; including Domtar Delaware Holdings Inc. and its foreign subsidiaries, including Attends Healthcare Limited, Domtar Inc. and Laboratorios Indas,Indas. S.A.U.. Also excluded are Ariva Distribution Inc., Domtar Delaware Investments Inc., Domtar Delaware Holdings LLC, Domtar AI Inc., Domtar Personal Care Absorbent Hygiene Inc., Domtar Wisconsin Dam Corp. and Palmetto Enterprises LLC, (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 SeptemberJune 30, 20162017 and December 31, 2015,2016, the Statements of Earnings and Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20162017 and 20152016 and the Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20162017 and 20152016 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.
|
| For the three months ended |
|
| For the three months ended |
| ||||||||||||||||||||||||||||||||||
|
| September 30, 2016 |
|
| June 30, 2017 |
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| ||
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| ||||||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
|
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| ||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||||
Sales |
|
| — |
|
|
| 1,044 |
|
|
| 516 |
|
|
| (290 | ) |
|
| 1,270 |
|
|
| — |
|
|
| 1,011 |
|
|
| 499 |
|
|
| (286 | ) |
|
| 1,224 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 879 |
|
|
| 380 |
|
|
| (290 | ) |
|
| 969 |
|
|
| — |
|
|
| 878 |
|
|
| 376 |
|
|
| (286 | ) |
|
| 968 |
|
Depreciation and amortization |
|
| — |
|
|
| 65 |
|
|
| 22 |
|
|
| — |
|
|
| 87 |
|
|
| — |
|
|
| 58 |
|
|
| 21 |
|
|
| — |
|
|
| 79 |
|
Selling, general and administrative |
|
| 3 |
|
|
| 28 |
|
|
| 76 |
|
|
| — |
|
|
| 107 |
|
|
| 2 |
|
|
| 31 |
|
|
| 78 |
|
|
| — |
|
|
| 111 |
|
Impairment of property, plant and equipment |
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| 5 |
| ||||||||||||||||||||
Closure and restructuring costs |
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| 10 |
| ||||||||||||||||||||
Other operating (income) loss, net |
|
| — |
|
|
| (1 | ) |
|
| 1 |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Other operating loss, net |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
| ||||||||||||||||||||
|
|
| 3 |
|
|
| 986 |
|
|
| 479 |
|
|
| (290 | ) |
|
| 1,178 |
|
|
| 2 |
|
|
| 967 |
|
|
| 477 |
|
|
| (286 | ) |
|
| 1,160 |
|
Operating (loss) income |
|
| (3 | ) |
|
| 58 |
|
|
| 37 |
|
|
| — |
|
|
| 92 |
|
|
| (2 | ) |
|
| 44 |
|
|
| 22 |
|
|
| — |
|
|
| 64 |
|
Interest expense (income), net |
|
| 16 |
|
|
| 51 |
|
|
| (50 | ) |
|
| — |
|
|
| 17 |
|
|
| 16 |
|
|
| 22 |
|
|
| (21 | ) |
|
| — |
|
|
| 17 |
|
(Loss) earnings before income taxes |
|
| (19 | ) |
|
| 7 |
|
|
| 87 |
|
|
| — |
|
|
| 75 |
|
|
| (18 | ) |
|
| 22 |
|
|
| 43 |
|
|
| — |
|
|
| 47 |
|
Income tax (benefit) expense |
|
| (4 | ) |
|
| (3 | ) |
|
| 23 |
|
|
| — |
|
|
| 16 |
|
|
| (5 | ) |
|
| 3 |
|
|
| 11 |
|
|
| — |
|
|
| 9 |
|
Share in earnings of equity accounted investees |
|
| 74 |
|
|
| 64 |
|
|
| — |
|
|
| (138 | ) |
|
| — |
|
|
| 51 |
|
|
| 32 |
|
|
| — |
|
|
| (83 | ) |
|
| — |
|
Net earnings |
|
| 59 |
|
|
| 74 |
|
|
| 64 |
|
|
| (138 | ) |
|
| 59 |
|
|
| 38 |
|
|
| 51 |
|
|
| 32 |
|
|
| (83 | ) |
|
| 38 |
|
Other comprehensive income |
|
| 3 |
|
|
| 7 |
|
|
| 7 |
|
|
| (14 | ) |
|
| 3 |
|
|
| 71 |
|
|
| 76 |
|
|
| 69 |
|
|
| (145 | ) |
|
| 71 |
|
Comprehensive income |
|
| 62 |
|
|
| 81 |
|
|
| 71 |
|
|
| (152 | ) |
|
| 62 |
|
|
| 109 |
|
|
| 127 |
|
|
| 101 |
|
|
| (228 | ) |
|
| 109 |
|
32
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the six months ended |
| |||||||||||||||||
|
| June 30, 2017 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 2,097 |
|
|
| 1,015 |
|
|
| (584 | ) |
|
| 2,528 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 1,848 |
|
|
| 779 |
|
|
| (584 | ) |
|
| 2,043 |
|
Depreciation and amortization |
|
| — |
|
|
| 117 |
|
|
| 42 |
|
|
| — |
|
|
| 159 |
|
Selling, general and administrative |
|
| 4 |
|
|
| 64 |
|
|
| 151 |
|
|
| — |
|
|
| 219 |
|
Other operating (income) loss, net |
|
| — |
|
|
| (2 | ) |
|
| 3 |
|
|
| — |
|
|
| 1 |
|
|
|
| 4 |
|
|
| 2,027 |
|
|
| 975 |
|
|
| (584 | ) |
|
| 2,422 |
|
Operating (loss) income |
|
| (4 | ) |
|
| 70 |
|
|
| 40 |
|
|
| — |
|
|
| 106 |
|
Interest expense (income), net |
|
| 33 |
|
|
| 42 |
|
|
| (41 | ) |
|
| — |
|
|
| 34 |
|
(Loss) earnings before income taxes |
|
| (37 | ) |
|
| 28 |
|
|
| 81 |
|
|
| — |
|
|
| 72 |
|
Income tax (benefit) expense |
|
| (9 | ) |
|
| 5 |
|
|
| 18 |
|
|
| — |
|
|
| 14 |
|
Share in earnings of equity accounted investees |
|
| 86 |
|
|
| 63 |
|
|
| — |
|
|
| (149 | ) |
|
| — |
|
Net earnings |
|
| 58 |
|
|
| 86 |
|
|
| 63 |
|
|
| (149 | ) |
|
| 58 |
|
Other comprehensive income |
|
| 85 |
|
|
| 94 |
|
|
| 85 |
|
|
| (179 | ) |
|
| 85 |
|
Comprehensive income |
|
| 143 |
|
|
| 180 |
|
|
| 148 |
|
|
| (328 | ) |
|
| 143 |
|
|
| For the three months ended |
| |||||||||||||||||
|
| June 30, 2016 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 1,040 |
|
|
| 498 |
|
|
| (271 | ) |
|
| 1,267 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 874 |
|
|
| 410 |
|
|
| (271 | ) |
|
| 1,013 |
|
Depreciation and amortization |
|
| — |
|
|
| 63 |
|
|
| 24 |
|
|
| — |
|
|
| 87 |
|
Selling, general and administrative |
|
| 2 |
|
|
| 25 |
|
|
| 77 |
|
|
| — |
|
|
| 104 |
|
Impairment of property, plant and equipment |
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
Closure and restructuring costs |
|
| — |
|
|
| 21 |
|
|
| — |
|
|
| — |
|
|
| 21 |
|
Other operating loss (income), net |
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
| 3 |
|
|
| 985 |
|
|
| 511 |
|
|
| (271 | ) |
|
| 1,228 |
|
Operating (loss) income |
|
| (3 | ) |
|
| 55 |
|
|
| (13 | ) |
|
| — |
|
|
| 39 |
|
Interest expense (income), net |
|
| 16 |
|
|
| 7 |
|
|
| (8 | ) |
|
| — |
|
|
| 15 |
|
(Loss) earnings before income taxes |
|
| (19 | ) |
|
| 48 |
|
|
| (5 | ) |
|
| — |
|
|
| 24 |
|
Income tax (benefit) expense |
|
| (5 | ) |
|
| 12 |
|
|
| (1 | ) |
|
| — |
|
|
| 6 |
|
Share in earnings of equity accounted investees |
|
| 32 |
|
|
| (4 | ) |
|
| — |
|
|
| (28 | ) |
|
| — |
|
Net earnings (loss) |
|
| 18 |
|
|
| 32 |
|
|
| (4 | ) |
|
| (28 | ) |
|
| 18 |
|
Other comprehensive loss |
|
| (14 | ) |
|
| (25 | ) |
|
| (29 | ) |
|
| 54 |
|
|
| (14 | ) |
Comprehensive income (loss) |
|
| 4 |
|
|
| 7 |
|
|
| (33 | ) |
|
| 26 |
|
|
| 4 |
|
33
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 17.16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2016 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 3,150 |
|
|
| 1,535 |
|
|
| (861 | ) |
|
| 3,824 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 2,725 |
|
|
| 1,168 |
|
|
| (861 | ) |
|
| 3,032 |
|
Depreciation and amortization |
|
| — |
|
|
| 193 |
|
|
| 70 |
|
|
| — |
|
|
| 263 |
|
Selling, general and administrative |
|
| 13 |
|
|
| 80 |
|
|
| 221 |
|
|
| — |
|
|
| 314 |
|
Impairment of property, plant and equipment |
|
| — |
|
|
| 29 |
|
|
| — |
|
|
| — |
|
|
| 29 |
|
Closure and restructuring costs |
|
| — |
|
|
| 33 |
|
|
| — |
|
|
| — |
|
|
| 33 |
|
Other operating loss (income), net |
|
| 1 |
|
|
| (2 | ) |
|
| 5 |
|
|
| — |
|
|
| 4 |
|
|
|
| 14 |
|
|
| 3,058 |
|
|
| 1,464 |
|
|
| (861 | ) |
|
| 3,675 |
|
Operating (loss) income |
|
| (14 | ) |
|
| 92 |
|
|
| 71 |
|
|
| — |
|
|
| 149 |
|
Interest expense (income), net |
|
| 48 |
|
|
| 67 |
|
|
| (66 | ) |
|
| — |
|
|
| 49 |
|
(Loss) earnings before income taxes |
|
| (62 | ) |
|
| 25 |
|
|
| 137 |
|
|
| — |
|
|
| 100 |
|
Income tax (benefit) expense |
|
| (14 | ) |
|
| 1 |
|
|
| 32 |
|
|
| — |
|
|
| 19 |
|
Share in earnings of equity accounted investees |
|
| 129 |
|
|
| 105 |
|
|
| — |
|
|
| (234 | ) |
|
| — |
|
Net earnings |
|
| 81 |
|
|
| 129 |
|
|
| 105 |
|
|
| (234 | ) |
|
| 81 |
|
Other comprehensive income |
|
| 103 |
|
|
| 97 |
|
|
| 63 |
|
|
| (160 | ) |
|
| 103 |
|
Comprehensive income |
|
| 184 |
|
|
| 226 |
|
|
| 168 |
|
|
| (394 | ) |
|
| 184 |
|
|
| For the three months ended |
| |||||||||||||||||
|
| September 30, 2015 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE LOSS |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 1,071 |
|
|
| 528 |
|
|
| (307 | ) |
|
| 1,292 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 975 |
|
|
| 358 |
|
|
| (307 | ) |
|
| 1,026 |
|
Depreciation and amortization |
|
| — |
|
|
| 62 |
|
|
| 27 |
|
|
| — |
|
|
| 89 |
|
Selling, general and administrative |
|
| 2 |
|
|
| 36 |
|
|
| 57 |
|
|
| — |
|
|
| 95 |
|
Impairment of property, plant and equipment |
|
| — |
|
|
| 20 |
|
|
| — |
|
|
| — |
|
|
| 20 |
|
Closure and restructuring costs |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Other operating loss (income), net |
|
| 3 |
|
|
| 1 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
|
| 5 |
|
|
| 1,095 |
|
|
| 438 |
|
|
| (307 | ) |
|
| 1,231 |
|
Operating (loss) income |
|
| (5 | ) |
|
| (24 | ) |
|
| 90 |
|
|
| — |
|
|
| 61 |
|
Interest expense (income), net |
|
| 64 |
|
|
| 7 |
|
|
| (7 | ) |
|
| — |
|
|
| 64 |
|
(Loss) earnings before income taxes |
|
| (69 | ) |
|
| (31 | ) |
|
| 97 |
|
|
| — |
|
|
| (3 | ) |
Income tax (benefit) expense |
|
| (14 | ) |
|
| (45 | ) |
|
| 45 |
|
|
| — |
|
|
| (14 | ) |
Share in earnings of equity accounted investees |
|
| 66 |
|
|
| 52 |
|
|
| — |
|
|
| (118 | ) |
|
| — |
|
Net earnings |
|
| 11 |
|
|
| 66 |
|
|
| 52 |
|
|
| (118 | ) |
|
| 11 |
|
Other comprehensive loss |
|
| (69 | ) |
|
| (67 | ) |
|
| (57 | ) |
|
| 124 |
|
|
| (69 | ) |
Comprehensive loss |
|
| (58 | ) |
|
| (1 | ) |
|
| (5 | ) |
|
| 6 |
|
|
| (58 | ) |
|
| For the six months ended |
| |||||||||||||||||
|
| June 30, 2016 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE INCOME |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 2,106 |
|
|
| 1,019 |
|
|
| (571 | ) |
|
| 2,554 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 1,846 |
|
|
| 788 |
|
|
| (571 | ) |
|
| 2,063 |
|
Depreciation and amortization |
|
| — |
|
|
| 128 |
|
|
| 48 |
|
|
| — |
|
|
| 176 |
|
Selling, general and administrative |
|
| 10 |
|
|
| 52 |
|
|
| 145 |
|
|
| — |
|
|
| 207 |
|
Impairment of property, plant and equipment |
|
| — |
|
|
| 24 |
|
|
| — |
|
|
| — |
|
|
| 24 |
|
Closure and restructuring costs |
|
| — |
|
|
| 23 |
|
|
| — |
|
|
| — |
|
|
| 23 |
|
Other operating loss (income), net |
|
| 1 |
|
|
| (1 | ) |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
|
| 11 |
|
|
| 2,072 |
|
|
| 985 |
|
|
| (571 | ) |
|
| 2,497 |
|
Operating (loss) income |
|
| (11 | ) |
|
| 34 |
|
|
| 34 |
|
|
| — |
|
|
| 57 |
|
Interest expense (income), net |
|
| 32 |
|
|
| 16 |
|
|
| (16 | ) |
|
| — |
|
|
| 32 |
|
(Loss) earnings before income taxes |
|
| (43 | ) |
|
| 18 |
|
|
| 50 |
|
|
| — |
|
|
| 25 |
|
Income tax (benefit) expense |
|
| (10 | ) |
|
| 4 |
|
|
| 9 |
|
|
| — |
|
|
| 3 |
|
Share in earnings of equity accounted investees |
|
| 55 |
|
|
| 41 |
|
|
| — |
|
|
| (96 | ) |
|
| — |
|
Net earnings |
|
| 22 |
|
|
| 55 |
|
|
| 41 |
|
|
| (96 | ) |
|
| 22 |
|
Other comprehensive income |
|
| 100 |
|
|
| 90 |
|
|
| 56 |
|
|
| (146 | ) |
|
| 100 |
|
Comprehensive income |
|
| 122 |
|
|
| 145 |
|
|
| 97 |
|
|
| (242 | ) |
|
| 122 |
|
34
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 17.16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2015 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS |
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
AND COMPREHENSIVE LOSS |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Sales |
|
| — |
|
|
| 3,266 |
|
|
| 1,583 |
|
|
| (899 | ) |
|
| 3,950 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation and amortization |
|
| — |
|
|
| 2,867 |
|
|
| 1,172 |
|
|
| (899 | ) |
|
| 3,140 |
|
Depreciation and amortization |
|
| — |
|
|
| 191 |
|
|
| 79 |
|
|
| — |
|
|
| 270 |
|
Selling, general and administrative |
|
| 10 |
|
|
| 108 |
|
|
| 176 |
|
|
| — |
|
|
| 294 |
|
Impairment of property, plant and equipment |
|
| — |
|
|
| 57 |
|
|
| — |
|
|
| — |
|
|
| 57 |
|
Closure and restructuring costs |
|
| — |
|
|
| 2 |
|
|
| 1 |
|
|
| — |
|
|
| 3 |
|
Other operating loss (income), net |
|
| 4 |
|
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| (8 | ) |
|
|
| 14 |
|
|
| 3,225 |
|
|
| 1,416 |
|
|
| (899 | ) |
|
| 3,756 |
|
Operating (loss) income |
|
| (14 | ) |
|
| 41 |
|
|
| 167 |
|
|
| — |
|
|
| 194 |
|
Interest expense (income), net |
|
| 115 |
|
|
| 21 |
|
|
| (21 | ) |
|
| — |
|
|
| 115 |
|
(Loss) earnings before income taxes |
|
| (129 | ) |
|
| 20 |
|
|
| 188 |
|
|
| — |
|
|
| 79 |
|
Income tax (benefit) expense |
|
| (30 | ) |
|
| (41 | ) |
|
| 65 |
|
|
| — |
|
|
| (6 | ) |
Share in earnings of equity accounted investees |
|
| 184 |
|
|
| 123 |
|
|
| — |
|
|
| (307 | ) |
|
| — |
|
Net earnings |
|
| 85 |
|
|
| 184 |
|
|
| 123 |
|
|
| (307 | ) |
|
| 85 |
|
Other comprehensive loss |
|
| (194 | ) |
|
| (194 | ) |
|
| (179 | ) |
|
| 373 |
|
|
| (194 | ) |
Comprehensive loss |
|
| (109 | ) |
|
| (10 | ) |
|
| (56 | ) |
|
| 66 |
|
|
| (109 | ) |
|
| June 30, 2017 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
CONDENSED CONSOLIDATING BALANCE SHEET |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Assets |
|
|
| |||||||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 1 |
|
|
| 8 |
|
|
| 115 |
|
|
| — |
|
|
| 124 |
|
Receivables |
|
| — |
|
|
| 280 |
|
|
| 333 |
|
|
| — |
|
|
| 613 |
|
Inventories |
|
| — |
|
|
| 521 |
|
|
| 238 |
|
|
| — |
|
|
| 759 |
|
Prepaid expenses |
|
| 9 |
|
|
| 20 |
|
|
| 12 |
|
|
| — |
|
|
| 41 |
|
Income and other taxes receivable |
|
| — |
|
|
| 10 |
|
|
| 14 |
|
|
| (6 | ) |
|
| 18 |
|
Intercompany accounts |
|
| 281 |
|
|
| 289 |
|
|
| 42 |
|
|
| (612 | ) |
|
| — |
|
Total current assets |
|
| 291 |
|
|
| 1,128 |
|
|
| 754 |
|
|
| (618 | ) |
|
| 1,555 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 1,920 |
|
|
| 859 |
|
|
| — |
|
|
| 2,779 |
|
Goodwill |
|
| — |
|
|
| 313 |
|
|
| 256 |
|
|
| — |
|
|
| 569 |
|
Intangible assets, net |
|
| — |
|
|
| 273 |
|
|
| 352 |
|
|
| — |
|
|
| 625 |
|
Investments in affiliates |
|
| 4,156 |
|
|
| 2,798 |
|
|
| — |
|
|
| (6,954 | ) |
|
| — |
|
Intercompany long-term advances |
|
| 6 |
|
|
| 81 |
|
|
| 1,444 |
|
|
| (1,531 | ) |
|
| — |
|
Other assets |
|
| 36 |
|
|
| — |
|
|
| 126 |
|
|
| (23 | ) |
|
| 139 |
|
Total assets |
|
| 4,489 |
|
|
| 6,513 |
|
|
| 3,791 |
|
|
| (9,126 | ) |
|
| 5,667 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
| 48 |
|
|
| 350 |
|
|
| 229 |
|
|
| — |
|
|
| 627 |
|
Intercompany accounts |
|
| 235 |
|
|
| 55 |
|
|
| 322 |
|
|
| (612 | ) |
|
| — |
|
Income and other taxes payable |
|
| 17 |
|
|
| — |
|
|
| 17 |
|
|
| (6 | ) |
|
| 28 |
|
Long-term debt due within one year |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Total current liabilities |
|
| 300 |
|
|
| 405 |
|
|
| 569 |
|
|
| (618 | ) |
|
| 656 |
|
Long-term debt |
|
| 812 |
|
|
| 298 |
|
|
| 93 |
|
|
| — |
|
|
| 1,203 |
|
Intercompany long-term loans |
|
| 588 |
|
|
| 942 |
|
|
| 1 |
|
|
| (1,531 | ) |
|
| — |
|
Deferred income taxes and other |
|
| — |
|
|
| 540 |
|
|
| 160 |
|
|
| (23 | ) |
|
| 677 |
|
Other liabilities and deferred credits |
|
| 19 |
|
|
| 172 |
|
|
| 170 |
|
|
| — |
|
|
| 361 |
|
Shareholders' equity |
|
| 2,770 |
|
|
| 4,156 |
|
|
| 2,798 |
|
|
| (6,954 | ) |
|
| 2,770 |
|
Total liabilities and shareholders' equity |
|
| 4,489 |
|
|
| 6,513 |
|
|
| 3,791 |
|
|
| (9,126 | ) |
|
| 5,667 |
|
35
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 17.16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| September 30, 2016 |
|
| December 31, 2016 |
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| ||||||
CONDENSED CONSOLIDATING BALANCE SHEET |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
|
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| ||||||||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 36 |
|
|
| — |
|
|
| 132 |
|
|
| — |
|
|
| 168 |
|
|
| 17 |
|
|
| 14 |
|
|
| 94 |
|
|
| — |
|
|
| 125 |
|
Receivables |
|
| — |
|
|
| 265 |
|
|
| 351 |
|
|
| — |
|
|
| 616 |
|
|
| — |
|
|
| 305 |
|
|
| 308 |
|
|
| — |
|
|
| 613 |
|
Inventories |
|
| — |
|
|
| 549 |
|
|
| 221 |
|
|
| — |
|
|
| 770 |
|
|
| — |
|
|
| 548 |
|
|
| 211 |
|
|
| — |
|
|
| 759 |
|
Prepaid expenses |
|
| 14 |
|
|
| 22 |
|
|
| 10 |
|
|
| — |
|
|
| 46 |
|
|
| 15 |
|
|
| 19 |
|
|
| 6 |
|
|
| — |
|
|
| 40 |
|
Income and other taxes receivable |
|
| 10 |
|
|
| 13 |
|
|
| 14 |
|
|
| (4 | ) |
|
| 33 |
|
|
| — |
|
|
| 16 |
|
|
| 15 |
|
|
| — |
|
|
| 31 |
|
Intercompany accounts |
|
| 346 |
|
|
| 210 |
|
|
| 190 |
|
|
| (746 | ) |
|
| — |
|
|
| 331 |
|
|
| 184 |
|
|
| 47 |
|
|
| (562 | ) |
|
| — |
|
Total current assets |
|
| 406 |
|
|
| 1,059 |
|
|
| 918 |
|
|
| (750 | ) |
|
| 1,633 |
|
|
| 363 |
|
|
| 1,086 |
|
|
| 681 |
|
|
| (562 | ) |
|
| 1,568 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 2,042 |
|
|
| 845 |
|
|
| — |
|
|
| 2,887 |
|
|
| — |
|
|
| 2,000 |
|
|
| 825 |
|
|
| — |
|
|
| 2,825 |
|
Goodwill |
|
| — |
|
|
| 296 |
|
|
| 252 |
|
|
| — |
|
|
| 548 |
|
|
| — |
|
|
| 313 |
|
|
| 237 |
|
|
| — |
|
|
| 550 |
|
Intangible assets, net |
|
| — |
|
|
| 248 |
|
|
| 352 |
|
|
| — |
|
|
| 600 |
|
|
| — |
|
|
| 279 |
|
|
| 329 |
|
|
| — |
|
|
| 608 |
|
Investments in affiliates |
|
| 4,050 |
|
|
| 2,835 |
|
|
| — |
|
|
| (6,885 | ) |
|
| — |
|
|
| 3,976 |
|
|
| 2,678 |
|
|
| — |
|
|
| (6,654 | ) |
|
| — |
|
Intercompany long-term advances |
|
| 6 |
|
|
| 80 |
|
|
| 1,401 |
|
|
| (1,487 | ) |
|
| — |
|
|
| 6 |
|
|
| 80 |
|
|
| 1,411 |
|
|
| (1,497 | ) |
|
| — |
|
Other assets |
|
| 11 |
|
|
| 18 |
|
|
| 133 |
|
|
| — |
|
|
| 162 |
|
|
| 15 |
|
|
| 18 |
|
|
| 103 |
|
|
| (7 | ) |
|
| 129 |
|
Total assets |
|
| 4,473 |
|
|
| 6,578 |
|
|
| 3,901 |
|
|
| (9,122 | ) |
|
| 5,830 |
|
|
| 4,360 |
|
|
| 6,454 |
|
|
| 3,586 |
|
|
| (8,720 | ) |
|
| 5,680 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness |
|
| — |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| 12 |
| ||||||||||||||||||||
Trade and other payables |
|
| 49 |
|
|
| 389 |
|
|
| 207 |
|
|
| — |
|
|
| 645 |
|
|
| 48 |
|
|
| 391 |
|
|
| 217 |
|
|
| — |
|
|
| 656 |
|
Intercompany accounts |
|
| 135 |
|
|
| 200 |
|
|
| 411 |
|
|
| (746 | ) |
|
| — |
|
|
| 136 |
|
|
| 115 |
|
|
| 311 |
|
|
| (562 | ) |
|
| — |
|
Income and other taxes payable |
|
| — |
|
|
| — |
|
|
| 29 |
|
|
| (4 | ) |
|
| 25 |
|
|
| 16 |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| 22 |
|
Long-term debt due within one year |
|
| 63 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 63 |
|
|
| 63 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 63 |
|
Total current liabilities |
|
| 247 |
|
|
| 589 |
|
|
| 647 |
|
|
| (750 | ) |
|
| 733 |
|
|
| 263 |
|
|
| 518 |
|
|
| 534 |
|
|
| (562 | ) |
|
| 753 |
|
Long-term debt |
|
| 901 |
|
|
| 300 |
|
|
| 108 |
|
|
| — |
|
|
| 1,309 |
|
|
| 841 |
|
|
| 299 |
|
|
| 78 |
|
|
| — |
|
|
| 1,218 |
|
Intercompany long-term loans |
|
| 553 |
|
|
| 934 |
|
|
| — |
|
|
| (1,487 | ) |
|
| — |
|
|
| 560 |
|
|
| 937 |
|
|
| — |
|
|
| (1,497 | ) |
|
| — |
|
Deferred income taxes and other |
|
| — |
|
|
| 548 |
|
|
| 144 |
|
|
| — |
|
|
| 692 |
|
|
| — |
|
|
| 556 |
|
|
| 126 |
|
|
| (7 | ) |
|
| 675 |
|
Other liabilities and deferred credits |
|
| 18 |
|
|
| 157 |
|
|
| 167 |
|
|
| — |
|
|
| 342 |
|
|
| 20 |
|
|
| 168 |
|
|
| 170 |
|
|
| — |
|
|
| 358 |
|
Shareholders' equity |
|
| 2,754 |
|
|
| 4,050 |
|
|
| 2,835 |
|
|
| (6,885 | ) |
|
| 2,754 |
|
|
| 2,676 |
|
|
| 3,976 |
|
|
| 2,678 |
|
|
| (6,654 | ) |
|
| 2,676 |
|
Total liabilities and shareholders' equity |
|
| 4,473 |
|
|
| 6,578 |
|
|
| 3,901 |
|
|
| (9,122 | ) |
|
| 5,830 |
|
|
| 4,360 |
|
|
| 6,454 |
|
|
| 3,586 |
|
|
| (8,720 | ) |
|
| 5,680 |
|
36
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 17.16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| December 31, 2015 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| Non- |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Guarantor |
|
| Guarantor |
|
| Consolidating |
|
|
|
|
| |||
CONDENSED CONSOLIDATING BALANCE SHEET |
| Parent |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 49 |
|
|
| 2 |
|
|
| 75 |
|
|
| — |
|
|
| 126 |
|
Receivables |
|
| — |
|
|
| 384 |
|
|
| 243 |
|
|
| — |
|
|
| 627 |
|
Inventories |
|
| — |
|
|
| 556 |
|
|
| 210 |
|
|
| — |
|
|
| 766 |
|
Prepaid expenses |
|
| 8 |
|
|
| 7 |
|
|
| 6 |
|
|
| — |
|
|
| 21 |
|
Income and other taxes receivable |
|
| — |
|
|
| 13 |
|
|
| 11 |
|
|
| (10 | ) |
|
| 14 |
|
Intercompany accounts |
|
| 764 |
|
|
| 4,776 |
|
|
| 16 |
|
|
| (5,556 | ) |
|
| — |
|
Total current assets |
|
| 821 |
|
|
| 5,738 |
|
|
| 561 |
|
|
| (5,566 | ) |
|
| 1,554 |
|
Property, plant and equipment, net |
|
| — |
|
|
| 2,018 |
|
|
| 817 |
|
|
| — |
|
|
| 2,835 |
|
Goodwill |
|
| — |
|
|
| 296 |
|
|
| 243 |
|
|
| — |
|
|
| 539 |
|
Intangible assets, net |
|
| — |
|
|
| 254 |
|
|
| 347 |
|
|
| — |
|
|
| 601 |
|
Investments in affiliates |
|
| 8,005 |
|
|
| 2,050 |
|
|
| — |
|
|
| (10,055 | ) |
|
| — |
|
Intercompany long-term advances |
|
| 6 |
|
|
| 88 |
|
|
| 621 |
|
|
| (715 | ) |
|
| — |
|
Other assets |
|
| 15 |
|
|
| 10 |
|
|
| 115 |
|
|
| (15 | ) |
|
| 125 |
|
Total assets |
|
| 8,847 |
|
|
| 10,454 |
|
|
| 2,704 |
|
|
| (16,351 | ) |
|
| 5,654 |
|
Liabilities and shareholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables |
|
| 61 |
|
|
| 456 |
|
|
| 203 |
|
|
| — |
|
|
| 720 |
|
Intercompany accounts |
|
| 4,685 |
|
|
| 722 |
|
|
| 149 |
|
|
| (5,556 | ) |
|
| — |
|
Income and other taxes payable |
|
| 4 |
|
|
| 24 |
|
|
| 9 |
|
|
| (10 | ) |
|
| 27 |
|
Long-term debt due within one year |
|
| 38 |
|
|
| 1 |
|
|
| 2 |
|
|
| — |
|
|
| 41 |
|
Total current liabilities |
|
| 4,788 |
|
|
| 1,203 |
|
|
| 363 |
|
|
| (5,566 | ) |
|
| 788 |
|
Long-term debt |
|
| 901 |
|
|
| 301 |
|
|
| 8 |
|
|
| — |
|
|
| 1,210 |
|
Intercompany long-term loans |
|
| 490 |
|
|
| 225 |
|
|
| — |
|
|
| (715 | ) |
|
| — |
|
Deferred income taxes and other |
|
| — |
|
|
| 535 |
|
|
| 131 |
|
|
| (12 | ) |
|
| 654 |
|
Other liabilities and deferred credits |
|
| 16 |
|
|
| 185 |
|
|
| 152 |
|
|
| (3 | ) |
|
| 350 |
|
Shareholders' equity |
|
| 2,652 |
|
|
| 8,005 |
|
|
| 2,050 |
|
|
| (10,055 | ) |
|
| 2,652 |
|
Total liabilities and shareholders' equity |
|
| 8,847 |
|
|
| 10,454 |
|
|
| 2,704 |
|
|
| (16,351 | ) |
|
| 5,654 |
|
|
| For the six months ended |
| |||||||||||||||||
|
| June 30, 2017 |
| |||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| Parent |
|
| Guarantor Subsidiaries |
|
| Non- Guarantor Subsidiaries |
|
| Consolidating Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 58 |
|
|
| 86 |
|
|
| 63 |
|
|
| (149 | ) |
|
| 58 |
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
| 77 |
|
|
| (107 | ) |
|
| 35 |
|
|
| 149 |
|
|
| 154 |
| |
Cash flows provided from (used for) operating activities |
|
| 135 |
|
|
| (21 | ) |
|
| 98 |
|
|
| — |
|
|
| 212 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| — |
|
|
| (39 | ) |
|
| (32 | ) |
|
| — |
|
|
| (71 | ) |
Cash flows used for investing activities |
|
| — |
|
|
| (39 | ) |
|
| (32 | ) |
|
| — |
|
|
| (71 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (52 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (52 | ) |
Net change in bank indebtedness |
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| (12 | ) |
Change in revolving credit facility |
|
| (30 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (30 | ) |
Proceeds from receivables securitization facility |
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
| 25 |
|
Repayments of receivables securitization facility |
|
| — |
|
|
| — |
|
|
| (15 | ) |
|
| — |
|
|
| (15 | ) |
Repayments of long-term debt |
|
| (63 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (63 | ) |
Increase in long-term advances to related parties |
|
| (5 | ) |
|
| — |
|
|
| (61 | ) |
|
| 66 |
|
|
| — |
|
Decrease in long-term advances to related parties |
|
| — |
|
|
| 66 |
|
|
| — |
|
|
| (66 | ) |
|
| — |
|
Other |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
Cash flows (used for) provided from financing activities |
|
| (151 | ) |
|
| 54 |
|
|
| (51 | ) |
|
| — |
|
|
| (148 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (16 | ) |
|
| (6 | ) |
|
| 15 |
|
|
| — |
|
|
| (7 | ) |
Impact of foreign exchange on cash |
|
| — |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| 6 |
|
Cash and cash equivalents at beginning of period |
|
| 17 |
|
|
| 14 |
|
|
| 94 |
|
|
| — |
|
|
| 125 |
|
Cash and cash equivalents at end of period |
|
| 1 |
|
|
| 8 |
|
|
| 115 |
|
|
| — |
|
|
| 124 |
|
37
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20162017
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 17.16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
| |||||||||||||||||
|
| September 30, 2016 |
| |||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| Parent |
|
| Guarantor Subsidiaries |
|
| Non- Guarantor Subsidiaries |
|
| Consolidating Adjustments |
|
| Consolidated |
| |||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 81 |
|
|
| 129 |
|
|
| 105 |
|
|
| (234 | ) |
|
| 81 |
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
| (4,288 | ) |
|
| 4,168 |
|
|
| 115 |
|
|
| 234 |
|
|
| 229 |
| |
Cash flows (used for) provided from operating activities |
|
| (4,207 | ) |
|
| 4,297 |
|
|
| 220 |
|
|
| — |
|
|
| 310 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| — |
|
|
| (246 | ) |
|
| (56 | ) |
|
| — |
|
|
| (302 | ) |
Acquisition of business, net of cash acquired |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) |
Other |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Cash flows used for investing activities |
|
| — |
|
|
| (247 | ) |
|
| (55 | ) |
|
| — |
|
|
| (302 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (76 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (76 | ) |
Stock repurchase |
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
Net change in bank indebtedness |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Change in revolving bank credit facility |
|
| 60 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 60 |
|
Proceeds from receivables securitization facility |
|
| — |
|
|
| — |
|
|
| 140 |
|
|
| — |
|
|
| 140 |
|
Repayments of receivables securitization facility |
|
| — |
|
|
| — |
|
|
| (40 | ) |
|
| — |
|
|
| (40 | ) |
Repayments of long-term debt |
|
| (38 | ) |
|
| (1 | ) |
|
| (1 | ) |
|
| — |
|
|
| (40 | ) |
Increase in long-term advances to related parties |
|
| — |
|
|
| (4,052 | ) |
|
| (209 | ) |
|
| 4,261 |
|
|
| — |
|
Decrease in long-term advances to related parties |
|
| 4,261 |
|
|
| — |
|
|
| — |
|
|
| (4,261 | ) |
|
| — |
|
Other |
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
Cash flows provided from (used for) financing activities |
|
| 4,194 |
|
|
| (4,052 | ) |
|
| (110 | ) |
|
| — |
|
|
| 32 |
|
Net (decrease) increase in cash and cash equivalents |
|
| (13 | ) |
|
| (2 | ) |
|
| 55 |
|
|
| — |
|
|
| 40 |
|
Impact of foreign exchange on cash |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
Cash and cash equivalents at beginning of period |
|
| 49 |
|
|
| 2 |
|
|
| 75 |
|
|
| — |
|
|
| 126 |
|
Cash and cash equivalents at end of period |
|
| 36 |
|
|
| — |
|
|
| 132 |
|
|
| — |
|
|
| 168 |
|
38
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 17. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
|
| For the nine months ended |
|
| For the six months ended |
| ||||||||||||||||||||||||||||||||||
|
| September 30, 2015 |
|
| June 30, 2016 |
| ||||||||||||||||||||||||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS |
| Parent |
|
| Guarantor Subsidiaries |
|
| Non- Guarantor Subsidiaries |
|
| Consolidating Adjustments |
|
| Consolidated |
|
| Parent |
|
| Guarantor Subsidiaries |
|
| Non- Guarantor Subsidiaries |
|
| Consolidating Adjustments |
|
| Consolidated |
| ||||||||||
| �� | $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
| 85 |
|
|
| 184 |
|
|
| 123 |
|
|
| (307 | ) |
|
| 85 |
|
|
| 22 |
|
|
| 55 |
|
|
| 41 |
|
|
| (96 | ) |
|
| 22 |
|
Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings | Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
| 231 |
|
|
| (320 | ) |
|
| 13 |
|
|
| 307 |
|
|
| 231 |
| Changes in operating and intercompany assets and liabilities and non-cash items, included in net earnings |
| 24 |
|
|
| 108 |
|
|
| (35 | ) |
|
| 96 |
|
|
| 193 |
|
Cash flows provided from (used for) operating activities |
|
| 316 |
|
|
| (136 | ) |
|
| 136 |
|
|
| — |
|
|
| 316 |
| ||||||||||||||||||||
Cash flows from operating activities |
|
| 46 |
|
|
| 163 |
|
|
| 6 |
|
|
| — |
|
|
| 215 |
| ||||||||||||||||||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| — |
|
|
| (143 | ) |
|
| (59 | ) |
|
| — |
|
|
| (202 | ) |
|
| — |
|
|
| (184 | ) |
|
| (35 | ) |
|
| — |
|
|
| (219 | ) |
Proceeds from disposals of property, plant and equipment |
|
| — |
|
|
| 7 |
|
|
| 28 |
|
|
| — |
|
|
| 35 |
| ||||||||||||||||||||
Other |
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| 9 |
| ||||||||||||||||||||
Acquisition of business, net of cash acquired |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||||||||||||||
Cash flows used for investing activities |
|
| — |
|
|
| (136 | ) |
|
| (22 | ) |
|
| — |
|
|
| (158 | ) |
|
| — |
|
|
| (185 | ) |
|
| (35 | ) |
|
| — |
|
|
| (220 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payments |
|
| (75 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (75 | ) |
|
| (50 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50 | ) |
Stock repurchase |
|
| (50 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50 | ) |
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
Net change in bank indebtedness |
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
Change in revolving bank credit facility |
|
| 75 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 75 |
| ||||||||||||||||||||
Issuance of long-term debt |
|
| — |
|
|
| 300 |
|
|
| — |
|
|
| — |
|
|
| 300 |
| ||||||||||||||||||||
Change in revolving credit facility |
|
| (50 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50 | ) | ||||||||||||||||||||
Proceeds from receivables securitization facility |
|
| — |
|
|
| — |
|
|
| 120 |
|
|
| — |
|
|
| 120 |
| ||||||||||||||||||||
Repayments of receivables securitization facility |
|
| — |
|
|
| — |
|
|
| (20 | ) |
|
| — |
|
|
| (20 | ) | ||||||||||||||||||||
Repayments of long-term debt |
|
| (436 | ) |
|
| (2 | ) |
|
| (1 | ) |
|
| — |
|
|
| (439 | ) |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) |
Increase in long-term advances to related parties |
|
| — |
|
|
| (20 | ) |
|
| (96 | ) |
|
| 116 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (60 | ) |
|
| 60 |
|
|
| — |
|
Decrease in long-term advances to related parties |
|
| 116 |
|
|
| — |
|
|
| — |
|
|
| (116 | ) |
|
| — |
|
|
| 34 |
|
|
| 26 |
|
|
| — |
|
|
| (60 | ) |
|
| — |
|
Other |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
Cash flows (used for) provided from financing activities |
|
| (369 | ) |
|
| 269 |
|
|
| (97 | ) |
|
| — |
|
|
| (197 | ) |
|
| (77 | ) |
|
| 26 |
|
|
| 40 |
|
|
| — |
|
|
| (11 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (53 | ) |
|
| (3 | ) |
|
| 17 |
|
|
| — |
|
|
| (39 | ) |
|
| (31 | ) |
|
| 4 |
|
|
| 11 |
|
|
| — |
|
|
| (16 | ) |
Impact of foreign exchange on cash |
|
| — |
|
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 1 |
|
Cash and cash equivalents at beginning of period |
|
| 79 |
|
|
| 18 |
|
|
| 77 |
|
|
| — |
|
|
| 174 |
|
|
| 49 |
|
|
| 2 |
|
|
| 75 |
|
|
| — |
|
|
| 126 |
|
Cash and cash equivalents at end of period |
|
| 26 |
|
|
| 15 |
|
|
| 87 |
|
|
| — |
|
|
| 128 |
|
|
| 18 |
|
|
| 6 |
|
|
| 87 |
|
|
| — |
|
|
| 111 |
|
39
DOMTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)
(UNAUDITED)
NOTE 18.
_________________
Acquisition of Home Delivery Incontinent Supplies Co.
Effective October 1, 2016, Domtar Corporation completed the acquisition of 100% of the outstanding shares of Home Delivery Incontinent Supplies Co. (“HDIS”), a leading national direct-to-consumer provider of adult incontinence and related products. The purchase price was $53 million, net of cash acquired of $3 million and includes a potential earn-out payment of up to $10 million.
Headquartered in Olivette, Missouri, HDIS provides customers with high-quality products and a personalized service for all of their incontinence needs. HDIS has annual revenues of approximately $65 million, operates a 200,000 square foot distribution center in Olivette, Missouri, as well as two retail locations, in Texarkana, Arkansas and Daytona Beach, Florida and employs approximately 240 people. The results of HDIS’ operations will be included in the Personal Care reportable segment starting October 1, 2016.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with Domtar Corporation’s unaudited interim financial statements and notes thereto included in the Quarterly Report.Report on Form 10-Q. The MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2015,2016, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2016.24, 2017. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,���we,” “us” and “our” refers to Domtar Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is determined on the basis of accounting principles generally accepted in the United States (“GAAP”).States.
The information contained on our website, www.Domtar.comwww.domtar.com, is not incorporated by reference into this Form 10-Q and should in no way be construed as a part of this or any other report that we filedfile with or furnishedfurnish to the SEC.
In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT” refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net earnings (loss), and shipment volumes are based on three and ninesix months ended SeptemberJune 30, 20162017 and 2015.2016. The three month and ninesix month periods are also referred to as the thirdsecond quarter and first nine monthshalf of 20162017 and 2015.2016. Reference to notes refers to footnotes to the consolidated financial statements and notes thereto included in Item 1 of this Form 10-Q.
This MD&A of financial condition and results of operations is intended to provide investors with an understanding of our recent performance, financial condition and outlook. Topics discussed and analyzed include:
Overview
Highlights for the three month and ninesix month periods ended SeptemberJune 30, 2016
Recent Development2017
Outlook
Consolidated Results of Operations and Segment Review
Liquidity and Capital Resources
OVERVIEW
We design, manufacture, market and distribute a wide variety of fiber-based products, including communication papers, specialty and packaging papers, and absorbent hygiene products. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. The majorityMore than 50% of our pulp production is consumed internally to manufacture paper and other consumer products with the balance sold as market pulp. We are the largest integrated marketer of uncoated freesheet paper in North America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers, converters and end-users. We are also a marketer and producer of a broad line of incontinence care products marketed primarily under the Attends®, IncoPack® and Indasec® brand names, as well as infant diapers. To learn more, visit www.Domtar.comwww.domtar.com.
We have two reportable segments as described below, which also represent our two operating segments. 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 our reportable segments.
Pulp and Paper: Our Pulp and Paper segment consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, fluff and hardwood market pulp.
Personal Care: Our Personal Care segment consists of the design, manufacturing, marketing and distribution of absorbent hygiene products.
HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED SEPTEMBERJUNE 30, 2016
2017
Operating income and net earnings increased by 51%64% and 436%111%, respectively, from the thirdsecond quarter of 20152016
Sales decreased by 2%3% from the thirdsecond quarter of 2015.2016. Net average selling prices for pulp and paper were down from the thirdsecond quarter of 2015.2016 while net average selling prices for pulp were up. Our manufactured paper volumes were down while our pulp volumes were up when compared to the thirdsecond quarter of 2015
Recognition of closure and restructuring costs of $10 million, of which $5 million is related to the conversion of a paper machine at our Ashdown mill to a high quality fluff pulp line and $5 million is related to our plan to optimize fluff pulp manufacturing at our Plymouth mill
Recognition of accelerated depreciation of $5 million related to our 2014 decision to convert a paper machine at our Ashdown mill to a high quality fluff pulp line2016.
We paid $26 million in dividends
HIGHLIGHTS FOR THE NINESIX MONTH PERIOD ENDED SEPTEMBERJUNE 30, 20162017
Operating income and net earnings decreasedincreased by 23%86% and 5%164%, respectively, from the first nine monthshalf of 20152016
Sales decreased by 3%1% from the first nine monthshalf of 2015.2016. Net average selling prices for pulp and paper were down from the first nine monthshalf of 2015.2016 while net average selling prices for pulp were flat. Our manufactured paper volumes were down while our pulp volumes were up when compared to the first nine monthshalf of 20152016. Our Personal Care volumes were up, in part due to the acquisition of Home Delivery Incontinent Supplies (“HDIS”) on October 1, 2016
Recognition of closure and restructuring costs of $33 million, of which $27 million is related toA mechanical failure on the conversion of a paper machinelargest turbine generator at our AshdownKamloops mill to a high quality fluff pulp line and $5in the first quarter of 2017 negatively impacted our results by approximately $3 million, is related to our plan to optimize fluff pulp manufacturing at our Plymouth mill
Recognitionnet of accelerated depreciationinsurance proceeds, in the first half of $29 million related to our 2014 decision to convert a paper machine at our Ashdown mill to a high quality fluff pulp line2017
We repurchased $10 million of our common stock and paid $76$52 million in dividends
|
| Three months ended |
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| Nine months ended |
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| Three months ended |
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| Variance |
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| Variance |
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FINANCIAL HIGHLIGHTS |
| September 30, 2016 |
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| September 30, 2015 |
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| September 30, 2016 |
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| September 30, 2015 |
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| June 30, 2017 |
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| June 30, 2016 |
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| June 30, 2017 |
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| June 30, 2016 |
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(In millions of dollars, unless otherwise noted) |
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Sales |
| $ | 1,270 |
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| $ | 1,292 |
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| $ | (22 | ) |
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| -2 | % |
| $ | 3,824 |
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| $ | 3,950 |
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| $ | (126 | ) |
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| -3 | % |
| $ | 1,224 |
|
| $ | 1,267 |
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| $ | (43 | ) |
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| -3 | % |
| $ | 2,528 |
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| $ | 2,554 |
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| $ | (26 | ) |
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| -1 | % |
Operating income | Operating income |
| 92 |
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| 61 |
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| 31 |
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| 51 | % |
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| 149 |
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| 194 |
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| (45 | ) |
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| -23 | % | Operating income |
| 64 |
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| 39 |
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| 25 |
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| 64 | % |
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| 106 |
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| 57 |
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| 49 |
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| 86 | % |
Net earnings |
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| 59 |
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| 11 |
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| 48 |
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| 436 | % |
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| 81 |
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|
| 85 |
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| (4 | ) |
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| -5 | % |
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| 38 |
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| 18 |
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| 20 |
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| 111 | % |
|
| 58 |
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| 22 |
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| 36 |
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| 164 | % |
Net earnings per common share (in dollars)1: |
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Basic |
| $ | 0.94 |
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| $ | 0.17 |
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| $ | 0.77 |
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| 453 | % |
| $ | 1.29 |
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| $ | 1.34 |
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| $ | (0.05 | ) |
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| -4 | % |
| $ | 0.61 |
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| $ | 0.29 |
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| $ | 0.32 |
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|
| 110 | % |
| $ | 0.93 |
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| $ | 0.35 |
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| $ | 0.58 |
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|
| 166 | % |
Diluted |
| $ | 0.94 |
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| $ | 0.17 |
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| $ | 0.77 |
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|
| 453 | % |
| $ | 1.29 |
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| $ | 1.34 |
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| $ | (0.05 | ) |
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| -4 | % |
| $ | 0.61 |
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| $ | 0.29 |
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| $ | 0.32 |
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|
| 110 | % |
| $ | 0.93 |
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| $ | 0.35 |
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| $ | 0.58 |
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| 166 | % |
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| At September 30, 2016 |
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| At December 31, 2015 |
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| At June 30, 2017 |
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| At December 31, 2016 |
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Total assets |
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| $ | 5,830 |
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| $ | 5,654 |
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| $ | 5,667 |
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| $ | 5,680 |
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Total long-term debt, including current portion |
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| $ | 1,372 |
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| $ | 1,251 |
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| $ | 1,204 |
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| $ | 1,281 |
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1 | See Note 4 “Earnings per Common Share” of the financial statements in this Quarterly Report on Form 10-Q for more information on the calculation of net earnings per common share. |
RECENT DEVELOPMENT
Effective October 1, 2016, we completed the acquisition of 100% of the outstanding shares of Home Delivery Incontinent Supplies Co. (“HDIS”), a leading national direct-to-consumer provider of adult incontinence and related products. The purchase price was $53 million, net of cash acquired of $3 million and includes a potential earn-out payment of up to $10 million.
Headquartered in Olivette, Missouri, HDIS provides customers with high-quality products and a personalized service for all of their incontinence needs. HDIS has annual revenues of approximately $65 million, operates a 200,000 square foot distribution center in Olivette, Missouri, as well as two retail locations in Texarkana, Arkansas and Daytona Beach, Florida and employs approximately 240 people. The results of HDIS’ operations will be included in the Personal Care reportable segment starting October 1, 2016.
OUTLOOK
The fourth quarter willFor the remainder of the year, we expect our paper shipments to be negatively impacted by seasonalityin-line with market demand. Our pulp shipments should be higher due to the ramp-up of the Ashdown fluff pulp line, while mix should continue to improve as we convert more volume to fluff pulp. In Personal Care, investments in advertising and mixpromotion in paper. We expect some short-term pricing volatility in pulp,addition to new customer wins should drive higher sales, while raw material unit costs are expected to increase notably for wood, energy and chemicals. Our Personal Care results are expected to continue to benefit from the new customer wins, market growth and cost savings from the new manufacturing platform.marginally.
CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENT REVIEW
This section presents a discussion and analysis of our thirdsecond quarter and first nine monthshalf of 20162017 and 20152016 sales, operating income (loss) and other information relevant to the understanding of our results of operations.
Analysis of Sales |
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ANALYSIS OF SALES |
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By Business Segment |
| Three months ended |
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| Variance |
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| Variance |
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By Business Segment |
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| Variance |
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| Variance |
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|
| September 30, 2016 |
|
| September 30, 2015 |
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| $ |
|
| % |
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| September 30, 2016 |
|
| September 30, 2015 |
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| $ |
|
| % |
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| June 30, 2017 |
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| June 30, 2016 |
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| $ |
|
| % |
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| June 30, 2017 |
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| June 30, 2016 |
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| $ |
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| % |
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Pulp and Paper |
| $ | 1,054 |
|
| $ | 1,092 |
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|
| (38 | ) |
|
| -3% |
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| $ | 3,193 |
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| $ | 3,348 |
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|
| (155 | ) |
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| -5% |
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| $ | 999 |
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| $ | 1,054 |
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|
| (55 | ) |
|
| -5% |
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| $ | 2,072 |
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| $ | 2,139 |
|
|
| (67 | ) |
|
| -3% |
|
Personal Care |
|
| 231 |
|
|
| 214 |
|
|
| 17 |
|
|
| 8% |
|
|
| 675 |
|
|
| 648 |
|
|
| 27 |
|
|
| 4% |
|
|
| 241 |
|
|
| 228 |
|
|
| 13 |
|
|
| 6% |
|
|
| 490 |
|
|
| 444 |
|
|
| 46 |
|
|
| 10% |
|
Total for reportable segments |
|
| 1,285 |
|
|
| 1,306 |
|
|
| (21 | ) |
|
| -2% |
|
|
| 3,868 |
|
|
| 3,996 |
|
|
| (128 | ) |
|
| -3% |
|
|
| 1,240 |
|
|
| 1,282 |
|
|
| (42 | ) |
|
| -3% |
|
|
| 2,562 |
|
|
| 2,583 |
|
|
| (21 | ) |
|
| -1% |
|
Intersegment sales |
|
| (15 | ) |
|
| (14 | ) |
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| (1 | ) |
|
|
|
|
|
| (44 | ) |
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| (46 | ) |
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| 2 |
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| (16 | ) |
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| (15 | ) |
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| (1 | ) |
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| (34 | ) |
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| (29 | ) |
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| (5 | ) |
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Consolidated |
|
| 1,270 |
|
|
| 1,292 |
|
|
| (22 | ) |
|
| -2% |
|
|
| 3,824 |
|
|
| 3,950 |
|
|
| (126 | ) |
|
| -3% |
|
|
| 1,224 |
|
|
| 1,267 |
|
|
| (43 | ) |
|
| -3% |
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| 2,528 |
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|
| 2,554 |
|
|
| (26 | ) |
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| -1% |
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Shipments |
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Paper - manufactured (in thousands of ST) |
|
| 744 |
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| 779 |
|
|
| (35 | ) |
|
| -4% |
|
|
| 2,282 |
|
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| 2,366 |
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|
| (84 | ) |
|
| -4% |
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| 698 |
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| 752 |
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| (54 | ) |
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| -7% |
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| 1,443 |
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| 1,538 |
|
|
| (95 | ) |
|
| -6% |
|
Communication Papers |
|
| 620 |
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|
| 648 |
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| (28 | ) |
|
| -4% |
|
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| 1,904 |
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| 1,970 |
|
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| (66 | ) |
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| -3% |
|
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| 582 |
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| 627 |
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| (45 | ) |
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| -7% |
|
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| 1,204 |
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| 1,284 |
|
|
| (80 | ) |
|
| -6% |
|
Specialty and Packaging |
|
| 124 |
|
|
| 131 |
|
|
| (7 | ) |
|
| -5% |
|
|
| 378 |
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|
| 396 |
|
|
| (18 | ) |
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| -5% |
|
|
| 116 |
|
|
| 125 |
|
|
| (9 | ) |
|
| -7% |
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|
| 239 |
|
|
| 254 |
|
|
| (15 | ) |
|
| -6% |
|
Paper - sourced from third parties (in thousands of ST) |
|
| 35 |
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| 35 |
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| - |
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| -% |
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|
| 96 |
|
|
| 99 |
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|
| (3 | ) |
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| -3% |
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| 26 |
|
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| 29 |
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| (3 | ) |
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| -10% |
|
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| 55 |
|
|
| 61 |
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|
| (6 | ) |
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| -10% |
|
Paper - total (in thousands of ST) |
|
| 779 |
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|
| 814 |
|
|
| (35 | ) |
|
| -4% |
|
|
| 2,378 |
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| 2,465 |
|
|
| (87 | ) |
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| -4% |
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|
| 724 |
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| 781 |
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| (57 | ) |
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| -7% |
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| 1,498 |
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| 1,599 |
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| (101 | ) |
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| -6% |
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Pulp (in thousands of ADMT) |
|
| 369 |
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| 333 |
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| 36 |
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| 11% |
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| 1,098 |
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| 1,028 |
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| 70 |
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| 7% |
|
|
| 383 |
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| 360 |
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| 23 |
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| 6% |
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|
| 836 |
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| 729 |
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| 107 |
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| 15% |
|
Analysis of Changes in Sales |
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ANALYSIS OF CHANGES IN SALES |
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|
| Third quarter of 2016 versus Third quarter of 2015 |
|
| First nine months of 2016 versus First nine months of 2015 |
|
| Second quarter of 2017 versus Second quarter of 2016 |
|
| First half of 2017 versus First half of 2016 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| % Change in Sales due to |
|
| % Change in Sales due to |
|
| % Change in Sales due to |
|
| % Change in Sales due to |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
|
| Net Price |
|
| Volume / Mix |
|
| Currency |
|
| Total |
| ||||||||||||||||
Pulp and Paper |
|
| -2 | % |
|
| -1 | % |
|
| - | % |
|
| -3 | % |
|
| -4 | % |
|
| -1 | % |
|
| - | % |
|
| -5 | % |
|
| -1 | % |
|
| -4 | % |
|
| - | % |
|
| -5 | % |
|
| -1 | % |
|
| -2 | % |
|
| - | % |
|
| -3 | % |
Personal Care |
|
| -3 | % |
|
| 11 | % |
|
| - | % |
|
| 8 | % |
|
| -3 | % |
|
| 7 | % |
|
| - | % |
|
| 4 | % |
|
| -1 | % |
|
| 9 | % | (a) |
| -2 | % |
|
| 6 | % |
|
| -2 | % |
|
| 14 | % | (a) |
| -2 | % |
|
| 10 | % |
Consolidated sales |
|
| -3 | % |
|
| 1 | % |
|
| - | % |
|
| -2 | % |
|
| -3 | % |
|
| - | % |
|
| - | % |
|
| -3 | % |
|
| -1 | % |
|
| -2 | % |
|
| - | % |
|
| -3 | % |
|
| -2 | % |
|
| 1 | % |
|
| - | % |
|
| -1 | % |
Commentary:
(a) | Includes sales of HDIS acquired on October 1, 2016. |
ANALYSIS OF OPERATING INCOME (LOSS) |
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| Three months ended |
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| Six months ended |
| ||||||||||||||||||||||||||
By Business Segment |
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| Variance |
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| Variance |
| ||||||||||
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| June 30, 2017 |
|
| June 30, 2016 |
|
| $ |
|
| % |
|
| June 30, 2017 |
|
| June 30, 2016 |
|
| $ |
|
| % |
| ||||||||
Operating income (loss) |
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|
Pulp and Paper |
|
| 65 |
|
|
| 35 |
|
|
| 30 |
|
|
| 86 | % |
|
| 99 |
|
|
| 54 |
|
|
| 45 |
|
|
| 83 | % |
Personal Care |
|
| 13 |
|
|
| 15 |
|
|
| (2 | ) |
|
| -13 | % |
|
| 29 |
|
|
| 29 |
|
|
| - |
|
|
| - | % |
Corporate |
|
| (14 | ) |
|
| (11 | ) |
|
| (3 | ) |
|
| -27 | % |
|
| (22 | ) |
|
| (26 | ) |
|
| 4 |
|
|
| 15 | % |
Consolidated operating income (loss) |
|
| 64 |
|
|
| 39 |
|
|
| 25 |
|
|
| 64 | % |
|
| 106 |
|
|
| 57 |
|
|
| 49 |
|
|
| 86 | % |
Analysis of Operating Income (Loss) |
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| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||||||||
By Business Segment |
|
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| Variance |
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| Variance |
| ||||||||||
|
| September 30, 2016 |
|
| September 30, 2015 |
|
| $ |
|
| % |
|
| September 30, 2016 |
|
| September 30, 2015 |
|
| $ |
|
| % |
| ||||||||
Operating income (loss) |
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pulp and Paper |
|
| 89 |
|
|
| 54 |
|
|
| 35 |
|
|
| 65 | % |
|
| 143 |
|
|
| 184 |
|
|
| (41 | ) |
|
| -22 | % |
Personal Care |
|
| 15 |
|
|
| 18 |
|
|
| (3 | ) |
|
| -17 | % |
|
| 44 |
|
|
| 45 |
|
|
| (1 | ) |
|
| -2 | % |
Corporate |
|
| (12 | ) |
|
| (11 | ) |
|
| (1 | ) |
|
| -9 | % |
|
| (38 | ) |
|
| (35 | ) |
|
| (3 | ) |
|
| -9 | % |
Consolidated operating income (loss) |
|
| 92 |
|
|
| 61 |
|
|
| 31 |
|
|
| 51 | % |
|
| 149 |
|
|
| 194 |
|
|
| (45 | ) |
|
| -23 | % |
Third quarter of 2016 versus Third quarter of 2015 |
|
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| ||||||||||||||||||||||||||||||||||||
Second quarter of 2017 versus Second quarter of 2016 |
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| ||
|
| $ Change in Segmented Operating Income (Loss) due to |
|
| $ Change in Segmented Operating Income (Loss) due to |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (a) |
|
| Operating expenses (b) |
|
| Currency, net of hedging |
| Depreciation/ impairment (c) |
|
| Restructuring (d) |
|
| Other Income/ expense (e) |
|
| Total |
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (b) |
|
| Operating Expenses (c) |
|
| Currency |
| Depreciation/ Impairment (d) |
|
| Restructuring (e) |
|
| Other Operating Income/ Expense (f) |
|
| Total |
| ||||||||||||||||||
Pulp and Paper |
|
| — |
|
|
| (27 | ) |
|
| 13 |
|
|
| 32 |
|
|
| 9 |
|
| 19 |
|
|
| (9 | ) |
|
| (2 | ) |
|
| 35 |
|
|
| (10 | ) |
|
| (10 | ) |
|
| 8 |
|
|
| — |
|
|
| 11 |
|
| 11 |
|
|
| 21 |
|
|
| (1 | ) |
|
| 30 |
|
Personal Care |
|
| 2 |
|
|
| (6 | ) |
|
| 7 |
|
|
| (3 | ) |
|
| (1 | ) |
| (2 | ) |
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| 2 |
| (a) |
| (4 | ) |
|
| 2 |
|
|
| (2 | ) |
|
| — |
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) | |
Corporate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| — |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2 | ) |
|
| — |
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| (3 | ) |
Consolidated operating income (loss) |
|
| 2 |
|
|
| (33 | ) |
|
| 20 |
|
|
| 26 |
|
|
| 8 |
|
| 17 |
|
|
| (9 | ) |
|
| — |
|
|
| 31 |
|
|
| (8 | ) |
|
| (14 | ) |
|
| 10 |
|
|
| (4 | ) |
|
| 11 |
|
| 11 |
|
|
| 21 |
|
|
| (2 | ) |
|
| 25 |
|
(a) | Includes results of HDIS acquired on October 1, 2016. |
(b) | Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy expenses. |
| Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs. |
| In the |
| In the |
(e)
(f)
expense includes: | Second quarter of 2016 other operating |
|
- - Bad debt expense ($1 million) - Other income ($1 million) | - -
|
Commentary – ThirdSecond quarter of 20162017 compared to ThirdSecond quarter of 20152016
Interest Expense, net
We incurred $17 million of net interest expense in the thirdsecond quarter of 2016, a decrease2017, an increase of $47$2 million compared to net interest expense of $64$15 million in the thirdsecond quarter of 2015.2016. This decreaseincrease was mostly due to a premium of $42 million paidreduction in August 2015 oncapitalized interest and an increase in interest expense related to the partial repaymentTerm Loan Agreement and was partially offset by the maturity of the 9.5% Notes due in August 2016 and of the 10.75% Notes due 2017 as well as a decrease in interest expense as a result of the partial repayment. In addition, interest expense also decreased due to the repayment at maturity of the 7.125% Notes due in August 2015 as well as the maturity of the 9.5% Notes in August 2016. This decrease was partially offset by interest expense related to borrowing under the Term Loan Agreement drawn down in the third quarter of 2015.June 2017.
Income Taxes
In the thirdsecond quarter of 2016,2017, our income tax expense was $16$9 million, consisting of current income tax expense of $5$17 million and a deferred income tax expensebenefit of $11$8 million. This compares to an income tax benefitexpense of $14$6 million in the thirdsecond quarter of 2015,2016, consisting of a current income tax expense of $4$8 million and a deferred income tax benefit of $18$2 million. We made income tax payments, net of refunds, of $10$23 million during the thirdsecond quarter of 2016.2017. Our effective tax rate was 21%19% compared with an effective tax rate of 467%25% in the thirdsecond quarter of 2015.2016. The effective tax rates for both the third quarter of 2016 and the third quarter of 2015 were impacted by the finalization of certain estimates in connection with the filing of our 2015 and 2014 income tax returns,
respectively. Additionally, the effective tax rate for the thirdsecond quarter of 20152017 was favorably impacted by enacted law changes in several U.S. states and by the impairmentrecognition of property, plant, and equipment charges occurring in a high-tax jurisdiction.additional tax credits associated with the filing of certain 2016 income tax returns.
First nine months of 2016 versus First nine months of 2015 |
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| ||||||||||||||||||||||||||||||||||||
First half of 2017 versus First half of 2016 |
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| ||||||||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ Change in Segmented Operating Income (Loss) due to |
|
| $ Change in Segmented Operating Income (Loss) due to |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (a) |
|
| Operating expenses (b) |
|
| Currency, net of hedging |
|
| Depreciation/ impairment (c) |
|
| Restructuring (d) |
|
| Other Income/ expense (e) |
|
| Total |
|
| Volume/Mix |
|
| Net Price |
|
| Input Costs (b) |
|
| Operating Expenses (c) |
|
| Currency |
|
| Depreciation/ Impairment (d) |
|
| Restructuring (e) |
|
| Other Operating Income/ Expense (f) |
|
| Total |
| ||||||||||||||||||
Pulp and Paper |
|
| (8 | ) |
|
| (116 | ) |
|
| 47 |
|
|
| 9 |
|
|
| 38 |
|
|
| 34 |
|
|
| (31 | ) |
|
| (14 | ) |
|
| (41 | ) |
|
| (19 | ) |
|
| (32 | ) |
|
| 14 |
|
|
| (1 | ) |
|
| 16 |
|
|
| 42 |
|
|
| 23 |
|
|
| 2 |
|
|
| 45 |
|
Personal Care |
|
| 5 |
|
|
| (18 | ) |
|
| 23 |
|
|
| (10 | ) |
|
| (2 | ) |
|
| (1 | ) |
|
| 1 |
|
|
| 1 |
|
|
| (1 | ) |
|
| 7 |
| (a) |
| (7 | ) |
|
| 7 |
|
|
| (5 | ) |
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Corporate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 4 |
|
Consolidated operating income (loss) |
|
| (3 | ) |
|
| (134 | ) |
|
| 70 |
|
|
| (5 | ) |
|
| 36 |
|
|
| 33 |
|
|
| (30 | ) |
|
| (12 | ) |
|
| (45 | ) |
|
| (12 | ) |
|
| (39 | ) |
|
| 21 |
|
|
| (3 | ) |
|
| 14 |
|
|
| 42 |
|
|
| 23 |
|
|
| 3 |
|
|
| 49 |
|
(a) | Includes results of HDIS acquired on October 1, 2016. |
(b) | Includes raw materials (such as fiber, chemicals, nonwovens and super absorbent polymers) and energy expenses. |
| Includes maintenance, freight costs, selling, general and administrative (“SG |
| In the first |
| In the first |
(e)
(f)
First expense includes: | First expense includes: | |
- Environmental provision ($2 million) - Foreign currency loss on working capital items ($1 million) - Bad debt expense ($1 million) - Other income ($3 million) | - Foreign currency loss on working capital items ($ - Litigation settlement ($2 million) - Other income ($ |
|
Commentary – First nine monthshalf of 20162017 compared to first nine monthshalf of 20152016
Interest Expense, net
We incurred $49$34 million of net interest expense in the first nine monthshalf of 2016, a decrease2017, an increase of $66$2 million compared to net interest expense of $115$32 million in the first nine monthshalf of 2015.2016. This decreaseincrease was mostly due to a premium of $42 million paidreduction in August 2015 on the partial repayment of the 9.5% Notes due 2016capitalized interest and on the 10.75% Notes due 2017 as well as a decreasean increase in interest expense on these Notes as a result of the partial repayment. In addition, interest expense also decreased duerelated to the repayment at maturity of the 7.125% Notes due in August 2015 as well asTerm Loan Agreement. This increase was partially offset by the maturity of the 9.5% Notes due in August 2016. This decrease was partially offset by interest expense related to borrowing under2016 and of the Term Loan Agreement drawn downmaturity of the 10.75% Notes due in the third quarter of 2015.June 2017.
Income Taxes
In the first nine monthshalf of 2016,2017, our income tax expense was $19$14 million, consisting of current income tax expense of $13$26 million and a deferred income tax expensebenefit of $6$12 million. This compares to an income tax benefitexpense of $6$3 million in the first nine monthshalf of 2015,2016, consisting of a current income tax expense of $44$8 million and a deferred income tax benefit of $50$5 million. We made income tax payments, net of refunds, of $37$15 million during the first nine monthshalf of 2016.2017. Our effective tax rate was 19% compared to an effective tax rate of -8%12% in the first nine monthshalf of 2015. 2016. The effective tax rates for both the first nine months of 2016 and the first nine months of 2015 were impacted by the finalization of certain estimates in connection with the filing of our 2015 and 2014 income tax returns, respectively. Additionally, the effective tax rate for the first nine monthshalf of 2017 was favorably impacted by the recognition of previously unrecognized tax benefits due to a statute expiration in a foreign jurisdiction and also a U.S. state tax audit finalization, enacted law changes in several U.S. states, and the recognition of additional tax credits associated with the filing of certain 2016 income tax returns. The effective tax rate for the first half of 2016 was impacted by the approval of a state tax credit in the U.S. The effective tax rate for the first nine months of 2015 was impacted by the recognition of previously unrecognized tax benefits due to the expiration of certain statutes of limitations, by enacted law changes in several U.S. states, and by the impairment of property, plant, and equipment charges occurring in a high-tax jurisdiction.
Commentary – Segment Review
Pulp and Paper Segment
Sales in our Pulp and Paper segment decreased by $38$55 million, or 3%,5% when compared to sales in the thirdsecond quarter of 2015.2016. This decrease in sales is mostly due to a 2%1% decrease in net average selling prices, mostly due to a decrease in our net average selling price for pulp and paper, as well as a decrease in our paper sales volumes,volumes. This decrease was partially offset by an increase in our pulp sales volume.
Operating income in our Pulp and Paper segment amounted to $65 million in the second quarter of 2017, an increase of $30 million, when compared to operating income of $35 million in the second quarter of 2016. Our results were positively impacted by:
Lower restructuring costs mostly related to the conversion of a paper machine to a high quality fluff pulp line at our Ashdown mill, recorded in the second quarter of 2016 ($21 million)
Lower depreciation charges ($11 million) due to accelerated depreciation related to our 2014 decision to convert a paper machine at our Ashdown facility to a high quality fluff pulp line in the second quarter of 2016 and lower depreciation charges due to certain assets being fully depreciated
Positive impact of a weaker Canadian dollar on our Canadian denominated expenses as well as from our hedging program ($11 million)
Lower input costs ($8 million) mostly related to lower fiber costs as a result of improved yields and lower energy costs, partially offset by higher chemicals costs
This increase was partially offset by:
Lower average selling prices for paper partially offset by higher average selling prices for pulp ($10 million)
Lower volume/ mix ($10 million) mostly related to lower volume of paper, partially offset by higher volume of pulp
Higher other operating income/expense ($1 million)
Sales in our Pulp and Paper segment decreased by $67 million, or 3% when compared to sales in the first half of 2016. This decrease in sales is mostly due to a 1% decrease in net average selling prices for paper as well as a decrease in our paper sales volumes. This decrease was partially offset by an increase in our pulp sales volumes.
Operating income in our Pulp and Paper segment amounted to $89$99 million in the third quarterfirst half of 2016,2017, an increase of $35$45 million, when compared to operating income of $54 million in the third quarterfirst half of 2015.2016. Our results were positively impacted byby:
Lower depreciation charges ($42 million) due to accelerated depreciation related to our 2014 decision to convert a paper machine at our Ashdown facility to a high quality fluff pulp line in the first half of 2016 and lower maintenancedepreciation charges due to certain assets being fully depreciated
Lower restructuring costs due mostly related to the timingconversion of maintenance outages,a paper machine to a high quality fluff pulp line at our Ashdown mill, recorded in the second quarter of 2016 ($23 million)
Positive impact of our hedging program as well as a weaker Canadian dollar on our Canadian denominated expenses ($16 million)
Lower input costs ($14 million) mostly related to lower accelerated depreciation charges,fiber costs as a result of improved yields and better weather and lower raw materialsenergy costs, lower hedging losses, lower freightpartially offset by higher chemicals costs and an increase in our pulp sales volume.
Lower other operating income/expense ($2 million)
This increase was partially offset by lowerby:
Lower average selling prices for paper while average selling prices for pulp and paper, higher restructuring chargeswere stable ($32 million)
Lower volume/ mix ($19 million) mostly related to the Ashdown conversion and the closurelower volume of apaper, partially offset by higher volume of pulp dryer and idling of related assets at
Higher operating expenses ($1 million)
The markets in which our Plymouth mill, higher SG&A costs and a decrease in our paper sales volume.
Sales in our Pulp and Paper segment decreased by $155 million, or 5%, when compared to sales in the first nine months of 2015. This decrease in sales is mostly due to a 4% decrease in net average selling prices for pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. In uncoated freesheet, we compete primarily on the basis of product quality, breadth of offering, service solutions and competitively priced paper products. We also compete with electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products. Most of our products offering are commodities that are widely available from other producers as well as a decrease inwell. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand.
The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and competitively priced pulp products.
For the remainder of the year, we expect our paper sales volumes, partially offset by an increase in ourshipments to be in-line with market demand. Our pulp sales volumes.
Operating income in our Pulp and Paper segment amounted to $143 million in the first nine months of 2016, a decrease of $41 million, when compared to operating income of $184 million in the first nine months of 2015. Our results were negatively impacted by lower average selling prices for pulp and paper,shipments should be higher restructuring charges relateddue to the ramp-up of the Ashdown conversion and the closure of afluff pulp dryer and idling of related assets at our Plymouth mill, a decrease in our paper salesline, while mix should continue to improve as we convert more volume the gain on sale of property, plant and equipment in Q2 2015, lower productivity, higher compensation costs and higher SG&A costs. This decrease was partially offset by lower raw materials costs, favorable currency impacts (net of hedging), lower freight costs, lower accelerated depreciation charges, an increase in pulp sales volume and lower depreciation charges.to fluff pulp.
Personal Care Segment
Sales in our Personal Care segment increased by $17$13 million, or 8%6% when compared to sales in the thirdsecond quarter of 2015.2016. This increase in sales was driven by higher sales volume/mix of 11%,9% mostly due to the acquisition of HDIS on October 1, 2016. This increase was partially offset by lower selling prices of approximately 3%. Foreign1% and unfavorable foreign currency impacts, netrates of hedging, were flat when compared2% due to the third quarter of 2015.fluctuation between European currencies.
Operating income decreased by $3$2 million or 17%,13% in the thirdsecond quarter of 20162017 compared to the thirdsecond quarter of 2015.2016. Our results were negatively impacted by lowerby:
Unfavorable average net selling prices ($4 million)
Higher operating expenses ($2 million) mostly due to higher compensation costssalaries and SG&A costs. wages and higher selling, general and administrative expenses
This decrease was partially offset by favorableby:
Higher sales volume and mix ($2 million) in part due to the inclusion of HDIS as a result of the acquisition on October 1, 2016
Lower input costs ($2 million) mostly due to favorable raw material pricing related to indicesas a result of lower negotiated contract pricing as well as favorable negotiated procurement savings and an increase in sales volume.insourcing initiatives
Sales in our Personal Care segment increased by $27$46 million, or 4%,10% when compared to sales in the first nine monthshalf of 2015.2016. This increase in sales was driven by higher sales volume/mix of 7% and was14%, partially offset by lower selling prices of approximately 3%. Foreign2% and unfavorable foreign currency impacts, netrates of hedging, were relatively flat2% due to fluctuations between European currencies.
Operating income remained stable in the first half of 2017 when compared to the first nine monthshalf of 2015.2016.
Operating income decreased by $1 million, or 2%, in the first nine months of 2016 compared to the first nine months of 2015. Our results were negatively impacted by lowerby:
Unfavorable average net selling prices ($7 million)
Higher operating expenses ($5 million) mostly due to higher compensation costssalaries and wages and higher SG&A costs. selling, general and administrative expenses
Unfavorable foreign exchange mostly between the GBP and the Euro and the U.S. Dollar and Euro, net of our hedging program ($2 million)
This decrease was partially offset by favorableby:
Higher sales volume and mix ($7 million)
Lower input costs ($7 million) mostly due to favorable pricing as a result of lower negotiated contract pricing as well as insourcing initiatives
In our absorbent hygiene products business, we compete in an industry with fundamental drivers for long-term growth. While we are expected to benefit from the overall increase in healthcare spending due to an aging population, it is not clear how recent administrative changes in the various national governments may impact the source of the funding. Changes in the balance of public versus private funding may be forthcoming and these could impact overall consumption or the channels in which consumption occurs. The principal methods and elements of competition include brand recognition and loyalty, product innovation, quality and performance, price and marketing and distribution capabilities.
For the remainder of the year, we expect investments in advertising and promotion. New customer wins should drive higher sales, while raw material pricing, lower manufacturing costs and anare expected to increase in sales volume.marginally.
STOCK-BASED COMPENSATION EXPENSE
For the first nine monthshalf of 2016,2017, stock-based compensation expense recognized in our results of operations was $11$7 million for all outstanding awards which includes the mark-to-market recovery related to liability awards of $2 million. This compares to a stock-based compensation expense of $9$6 million for all outstanding awards which includes the mark-to-market recovery related to liability awards of $3 million in the first nine monthshalf of 2015.2016. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.
LIQUIDITY AND CAPITAL RESOURCES
Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt.debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds
from our operations and, to the extent necessary, through borrowings under our contractually committed $700 million credit facility, of which $590$680 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $2$11 million is currently undrawn and available. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.
Our ability to make payments on the requirements mentioned above will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our credit and receivable securitization facilities and debt indentures impose various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.
A portion of our cash is held outside the U.S. by foreign subsidiaries. The earnings of the foreign subsidiaries, which reflect full provision for local income taxes, are currently indefinitely reinvested in foreign operations. We do not intend on repatriating those
funds and no provision is made for income taxes that would be payable upon the distribution of earnings from foreign subsidiaries as computation of these amounts is not practicable.
The June 23, 2016 referendum by British voters to exit the European Union (“Brexit”) adversely impacted global markets, including currencies, and resulted in a sharp decline in the value of the British pound, as compared to the U.S. dollar and other currencies. Volatility in exchange rates is expected to continue in the short term as the United Kingdom (U.K.) negotiates its exit from the European Union. A weaker British pound compared to the U.S. dollar during a reporting period causes local currency results of our U.K. sales to be translated into fewer U.S. dollars. For the year ended December 31, 2015, net sales in the U.K. constituted 1% of our consolidated net sales (for the nine month period ended September 30, 2016, net sales in the U.K. constituted 2% or our consolidated sales). In the longer term, any impact from Brexit on our U.K. sales will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. The macroeconomic impact on our results of operations from this vote remains unknown. To date, the foreign exchange impact has been minimal since we currently hedge a portion of our British Pound Sterling exposure through the second quarter of fiscal 2018, thus reducing our currency risk.practical.
Operating Activities
Our operating cash flow requirements are primarily for salaries and benefits, the purchase of fiber, energy and raw materials, including fiber and energy and other expenses such as income tax and property taxes.
Cash flows provided from operating activities totaled $310$212 million in the first nine monthshalf of 2016,2017, a $6$3 million decrease compared to cash flows provided from operating activities of $316$215 million in the first nine monthshalf of 2015.2016. This decrease in cash flows provided from operating activities is primarily due to an increase in working capital requirements in the first nine monthshalf of 20162017 when compared to the first nine monthshalf of 2015 as well as lower profitability.2016, partially offset by an increase in profitability (excluding the non-cash impairment charge of $24 million in the first half of 2016). We made income tax payments, net of refunds of $37$15 million in the first nine monthshalf of 20162017 compared to income tax payments, net of refunds of $16$27 million during the first nine monthshalf of 2015.2016.
Investing Activities
Cash flows used for investing activities in the first nine monthshalf of 20162017 amounted to $302$71 million, a $144$149 million increasedecrease compared to cash flows used for investing activities of $158$220 million in the first nine monthshalf of 2015.2016.
The use of cash in the first nine monthshalf of 2017 was attributable to additions to property, plant and equipment of $71 million.
The use of cash in the first half of 2016 was attributable to additions to property, plant and equipment of $302$219 million.
The use of cash in the first nine months of 2015 was attributable to additions to property, plant and equipment of $202 million. The use of cash was partially offset by the proceeds from the disposal of assets, totaling $35 million. During the first nine months of 2015, we sold $9 million of asset-backed notes and received proceeds of $26 million (CDN $32 million) from the sale of Gatineau assets.
Our capital expenditures for 20162017 are expected to be approximately between $340$210 million and $350$230 million.
Financing Activities
Cash flows provided fromused for financing activities totaled $32$148 million in the first nine monthshalf of 20162017 compared to cash flows used for financing activities of $197$11 million in the first nine monthshalf of 2015.2016.
The use of cash flows provided from financing activities in the first nine monthshalf of 2017 was primarily the result of dividend payments ($52 million), the net repayments of borrowings under our credit facilities (revolver and receivable securitization) and long-term debt ($83 million) and a decrease in our bank indebtedness ($12 million).
The use of cash in the first half of 2016 was primarily the result of dividend payments ($50 million), the repurchase of our common stock ($10 million) and the repayment of long-term debt ($1 million). These were partially offset by the net proceeds from borrowings under our credit facilities (revolver and receivable securitization) ($12050 million) and an increase in our bank indebtedness ($1 million). These were partially offset by dividend payments ($76 million) and the repurchase of our common stock ($10 million).
The use of cash in the first nine months of 2015 was primarily the result of dividend payments ($75 million), a net repayment of our long-term debt ($64 million), the repurchase of our common stock ($50 million), and a reduction in our bank indebtedness ($9 million).
Capital Resources
Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $1,204$1,080 million as of SeptemberJune 30, 20162017 compared to $1,125$1,168 million as of December 31, 2015.2016.
Notes RedemptionMaturity
Our 9.5% Notes, in the aggregate principal amount of $39 million, matured on August 1, 2016.
In the third quarter of 2015, we redeemed $55 millionOur 10.75% Notes, in aggregate principal amount of our 9.5% Notes due 2016, representing approximately 59% of the outstanding notes, and $215 million in aggregate principal amount of our 10.75% Notes due 2017, representing approximately 77% of the outstanding notes. The redemption price was equal to 100% of the principal amount of such notes, plus accrued and unpaid interest, plus the applicable make-whole premium.
In addition, our 7.125% notes in the aggregate principal amount of $167$63 million, matured on August 15, 2015.
The above-noted redemptions and repayment of notes were funded through a combination of cash on hand, borrowings under our credit facilities and proceeds from a new $300 million 10-year term loan agreement with a syndicate of bank lenders.
June 1, 2017.
Term Loan
In the third quarter of 2015, a wholly owned subsidiary of Domtar entered into aborrowed $300 million under an unsecured 10-year Term Loan Agreement that matures on July 20, 2025.2025, with certain domestic banks. The facility was fully drawn down on August 19, 2015. The Company and certain significant domestic subsidiaries of the Company unconditionally guarantee any obligations from time to time arising under the Term Loan Agreement. On August 18, 2016, weDomtar entered into an amendment (the “Amendment”) to ourits Term Loan Agreement, pursuant to which, among other things, certain of ourinsignificant subsidiaries were designated as “insignificant subsidiaries” and were released from their guarantees of the borrower’s obligations under the Term Loan Agreement, as amended by the Amendment. Agreement.
Borrowings under the Term Loan Agreement bear interest at LIBOR plus a margin of 1.875%. The Term Loan Agreement contains customary covenants, including two financial covenants: (i) an interest coverage ratio, as defined in the Term Loan Agreement, that
must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Term Loan Agreement that must be maintained at a level of not greater than 3.75 to 1. At SeptemberJune 30, 2016,2017, we were in compliance with these financial covenants.
All borrowings under the Term Loan Agreement are unsecured. The Company and certain domestic subsidiaries of the Company unconditionally guarantee any obligations under the Term Loan Agreement.
BankRevolving Credit Facility
OnIn August 18, 2016, we amended and restated our existingunsecured revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks, increasing the amount available from $600 million to $700 million and extending the Credit Agreement. The amended 2016 Credit Agreement matures onAgreement’s maturity date from October 3, 2019 to August 18, 2021.
The maximum aggregate amount of availabilityamendment also allows certain foreign subsidiaries to be borrowers under the 2016 Credit Agreement is $700 million, an increase of $100 million from the existing Credit Agreement of $600 million.facility. The termsmaturity date of the 2016 Credit Agreement are generally consistent with the terms of the existing Credit Agreement.
The 2016 Credit Agreement provides for a revolving credit facility (including a letter of credit sub-facility and a swingline sub-facility), which may be borrowed in U.S. Dollars, Canadian Dollarsextended by one year and Euros. Wethe lender commitments may increase the maximum aggregate amount of availability under the 2016 Credit Agreementbe increased by up to $400 million, borrow this increased amount as a term loan,subject to lender approval and extendcustomary requirements.
Borrowings by the final maturity ofCompany under the 2016 Credit Agreement are guaranteed by one year, subjectour significant domestic subsidiaries. Borrowings by foreign borrowers under the Credit Agreement are guaranteed by the Company, our significant domestic subsidiaries and certain of our foreign significant subsidiaries. The amendment allowed certain insignificant domestic subsidiaries that were previously guarantors, to be released from their guarantees of any obligations under the agreement of applicable lenders.credit facility.
Borrowings under the 2016 Credit Agreement bear interest at the LIBOR, EURIBOR or the Canadian bankers’ acceptance or prime ratesrate as applicable, plus a margin linked to our credit rating at the time of borrowing.rating. In addition, we pay facility fees quarterly at rates dependent on our credit ratings.
The 2016 Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the 2016 Credit Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the 2016 Credit Agreement that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain
qualifying material acquisitions). At SeptemberJune 30, 2016,2017, we were in compliance with these financial covenants, and $110 million was borrowed under the 2016 Credit Agreement (Septembercovenants. At June 30, 2015 – $75 million). At September 30, 2016,2017, we had $20 million of borrowing (June 30, 2016– nil) and no outstanding letters of credit under this 2016 Credit Agreement (September 30, 2015 – nil). At September(June 30, 2016 we had $590– nil), leaving $680 million unused and available under this 2016 Credit Agreement.
All borrowings under the 2016 Credit Agreement are unsecured. The Company and certain domestic subsidiaries of the Company unconditionally guarantee any obligations from time to time arising under the Credit Agreement.facility.
Receivables Securitization
We have a $150 million receivables securitization facility that matures in March 2019.
At SeptemberJune 30, 2016,2017, borrowings under the receivables securitization facility amounted to $100$80 million and $48$59 million of letters of credit were issued under the program (September(June 30, 20152016 – nil$100 million and $44$38 million, respectively). The program contains certain termination events, which include, but are not limited to, matters related to receivable performance, certain defaults occurring under the credit facility or our failure to repay or satisfy material obligations. At SeptemberJune 30, 2016,2017, we had $2$11 million unused and available under the accounts receivable securitizationthis facility.
Common Stock
On February 22, 2016,21, 2017 and May 3, 2016 and August 2, 2016,2017, our Board of Directors approved a quarterly dividend of $0.40, $0.415 and $0.415 per share, respectively, to be paid to holders of our common stock. Total dividendsDividends of approximately $25 million, $26 million and $26 million, respectively, were paid on April 15, 2016,17, 2017 and July 15, 2016 and October 17, 2016,2017, respectively, to shareholders of record on April 4, 2016,3, 2017 and July 5, 2016 and October 3, 20162017, respectively.
On NovemberAugust 1, 2016,2017, our Board of Directors approved a quarterly dividend of $0.415 per share to be paid to holders of our common stock. This dividend is to be paid on January 17,October 16, 2017, to shareholders of record on January 3,October 2, 2017.
OFF BALANCE SHEET ARRANGEMENTS
In the normal course of business, we finance certain of our activities off balance sheet through operating leases.
GUARANTEES
Indemnifications
In the normal course of business, we offer indemnifications relating to the sale of our 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 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 SeptemberJune 30, 2016,2017, we were 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 significant expenses in the past.
Pension Plans
We have indemnified and held harmless the trustees of our 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 us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At SeptemberJune 30, 2016,2017, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 “Recent Accounting Pronouncements,” of the financial statements in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, goodwill and intangible assets impairment, pension and other post-retirement benefit plans, income taxes, business combinations and contingencies.contingencies related to legal claims. These critical accounting estimates and policies have been reviewed with the Audit Committee of our Board of Directors. We believe these accounting policies, and others, should be reviewed as they are essential to understanding our results of operations, cash flows and financial condition. Actual results could differ from those estimates.
There has not been any material change to our policies since December 31, 2015.2016. For more details on critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
FORWARD-LOOKING STATEMENTS
The information included in this Quarterly Report on Form 10-Q, including the “Outlook” section above, contains forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate”, “believe”, “expect”, “intend”, “aim”, “target”, “plan”, “continue”, “estimate”, “project”, “may”, “will”, “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occurs, what effect they will have on Domtar Corporation’s results of operations or financial condition. These factors include, but are not limited to:
continued decline in usage of fine paper products in our core North American market;
our ability to implement our business diversification initiatives, including strategic acquisitions;
product selling prices;
raw material prices, including wood fiber, chemical and energy;
conditions in the global capital and credit markets, and the economy generally, particularly in the U.S., Canada and Europe;
performance of Domtar Corporation’s manufacturing operations, including unexpected maintenance requirements;
the level of competition from domestic and foreign producers;
the effect of, or change in, forestry, land use, environmental and other governmental regulations (including taxation)tax), and accounting regulations;
the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters;
transportation costs;
the loss of current customers or the inability to obtain new customers;
legal proceedings;
changes in asset valuations, including impairment of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons;
changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar and European currencies;
the effect of timing of retirements and changes in the market price of Domtar Corporation’s common stock on charges for stock-based compensation;
performance of pension fund investments and related derivatives, if any; and
the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2015.2016.
You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. Unless specifically required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking statements to reflect new events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Except as presented below, thereThere have been no material changes in our exposure to market risk since December 31, 2015.2016. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 3 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.
FOREIGN CURRENCY RISK
Cash flow hedges
We have manufacturing operations in the United States, Canada and Europe. As a result, we are 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, our earnings are affected by increases or decreases in the value of the Canadian dollar and European currencies. Our European subsidiaries are also exposed to movements in foreign currency exchange rates on transactions denominated in a currency other than their Euro functional currency. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's June 23, 2016 referendum in which voters approved the United Kingdom's exit from the European Union, commonly referred to as “Brexit.” Our risk management policy allows us to hedge a significant portion of the exposure to fluctuations in foreign currency exchange rates for periods up to three years. We may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate our exposure to fluctuations in foreign currency exchange rates.
Derivatives are used to hedge a portion of forecasted purchases in Canadian dollars by our Canadian subsidiary over the next 24 months. Derivatives are also used to hedge a portion of forecasted sales by our U.S. subsidiaries in Euros and in British pounds over the next 12 months. Derivatives are also used to hedge a portion of forecasted sales in British pounds and Norwegian krone and a portion of forecasted purchases in U.S. dollars and Swedish krona by our European subsidiaries over a periods of between 12 to 24 months. 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of SeptemberJune 30, 2016,2017, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of SeptemberJune 30, 2016,2017, our disclosure controls and procedures were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.
PART IIART II OTHER INFORMATION
See Note 1514 “Commitments and Contingencies” of the financial statements in this Quarterly Report on Form 10-Q for the discussion regarding legal proceedings.
For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Our Annual Report on Form 10-K for the year ended December 31, 2015,2016, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. Except as presented below, thereThere have been no material changes from the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2015.
Failure to comply with applicable laws and regulations could have a material adverse affect on our business, financial results or condition.
In addition to environmental laws, the Company’s business and operations are subject to a broad range of other laws and regulations in the United States and Canada as well as other jurisdictions in which the Company operate, including antitrust and competition laws, occupational health and safety laws, healthcare reimbursement laws, such as Medicare and Medicaid, and employment laws. Many of these laws and regulations are complex and subject to evolving and differing interpretation. If the Company is determined to have violated any such laws or regulations, whether inadvertently or willfully, it may be subject to civil and criminal penalties, including substantial fines, loss of authorizations to participate in or exclusion from government programs, claims for damages by third parties or fines or monetary penalties which may have a material adverse effect on the Company’s financial position, results of operations or cash flows. For additional information, refer to Part II, Item 8, Note 22 “Commitments and Contingencies” under the caption “Spanish Competition Investigation” of our Annual Report on Form 10-K for the year ended December 31, 2015.
The efficiency of our operations could be adversely affected by disruptions to our Information Technology (IT) Services.
The Company’s information technology systems, some of which are dependent on services provided by third parties, serve an important role in the efficient operation of its business. The protection of customer, employee and company data is critical to its business. This role includes ordering and managing materials from suppliers, managing its inventory, converting materials to finished products, facilitating order entry and fulfillment and processing of transactions, summarizing and reporting its financial results, facilitating internal and external communications, administering human resources functions, retaining certain personal information and providing other processes necessary to manage its business. The Company is exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property or other sensitive information or may be the result of unintentional events. Like most companies, the Company's information technology systems may be vulnerable to interruption due to a variety of events beyond the Company's control, including, but not limited to, natural disasters, terrorist attacks, power and/or telecommunications failures, computer viruses, hackers and other security issues. The Company has technology security initiatives and disaster recovery plans in place to mitigate the Company's risk to these vulnerabilities, including protection of confidential or personal information, but these measures may not be adequate or implemented properly to ensure that the Company's operations are not disrupted. The Company’s IT systems have been, and will likely continue to be, subject to computer viruses or other malicious codes, unauthorized access attempts, phishing and other cyber-incidents. The Company cannot guarantee that its security efforts will prevent breaches or breakdowns to its IT systems or those of its third party providers. Potential consequences of a material cyber incident, which could result in confidential or personal information being accessed, obtained, damaged or used by unauthorized or improper persons, include damage to the Company’s reputation, litigation, inefficiencies or production downtimes and increased cyber security protection and remediation costs. Such consequences could have a negative impact on the Company’s ability to meet customers’ orders, resulting in a delay or decrease to its revenue and a reduction to its operating margins.
Conditions in the global political and economic environment, including the global capital and credit markets, can adversely affect the Company’s business, results of operations and financial position.
A significant or prolonged downturn in the general economic environment may affect the Company’s sales and profitability. The Company has exposure to counterparties with which it routinely executes transactions. Such counterparties include commercial banks, insurance companies and other financial institutions, some of which may be exposed to bankruptcy or liquidity risks. A bankruptcy or illiquidity event by one of its significant counterparties may materially and adversely affect the Company’s access to capital, future business and results of operations.
In addition, the Company’s customers and suppliers may be adversely affected by severe economic conditions. This could result in reduced demand for its products or its inability to obtain necessary supplies at reasonable costs, or at all.
The Company may be negatively impacted by political issues or crises in individual countries or regions, including sovereign risk related to a default by or deterioration in the credit worthiness of local governments.
For example, on June 23, 2016, the United Kingdom held a referendum in which a majority of voters voted to exit the European Union (“Brexit”). The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could adversely affect European and global economic or market conditions and could contribute to instability in global financial markets. Any of these effects of Brexit, and others the Company cannot anticipate, may have a negative effect and may adversely affect the Company’s business.
Certain countries in Europe provide medicare coverage for adult incontinence products. The governments of these countries may decide to no longer reimburse part or all of the costs of adult incontinence products, and this may have a negative impact on the Company’s profitability in the future.
The Company is affected by changes in currency exchange rates.
The Company has manufacturing operations in the United States, Canada, Sweden and Spain. 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 European subsidiaries are exposed to movements in foreign currency exchange rates on transactions denominated in a different currency than its Euro functional currency. Additionally, there has been, and may continue to be, volatility in currency exchange rates as a result of the United Kingdom's June 23, 2016 referendum in which voters approved the United Kingdom's exit from the European Union. 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 order to hedge the subsidiary’s cash flow risk for purposes of the Consolidated Financial Statements. There can be no assurance that the Company will be protected against substantial foreign currency fluctuations. This factor could adversely affect the Company’s financial results.2016.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share repurchase activity under our share repurchase program was as follows during the three-month period ended September 30, 2016:
Period |
| (a) Total Number of Shares Purchased |
|
| (b) Average Price Paid per Share |
|
| (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| (d) Approximate Dollar Value of Shares that May Yet be Purchased under the Plans or Programs (in 000s) |
| ||||
July 1 through July 31, 2016 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 322,572 |
|
August 1 through August 31, 2016 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 322,572 |
|
September 1 through September 30, 2016 |
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| — |
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| $ | — |
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|
| — |
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| $ | 322,572 |
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|
| — |
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| $ | — |
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|
| — |
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(1)During the thirdsecond quarter and the first half of 2016,2017, we did not repurchase any shares under our stock repurchase program (the “Program”). We currently have $323 million of remaining availability under our Program. The Program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the Program. The Program has no set expiration date. We repurchase our common stock, from time to time, in part to reduce the dilutive effects of our stock options and awards and to improve shareholders’ returns. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions, availability under the program as well as corporate and regulatory considerations. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.
ITEM 3. DEFAULT UPONUPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
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| Incorporated by reference to: | |||||||
Exhibit Number |
| Exhibit Description |
| Form | Exhibit | Filing Date | |||||
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10.1* |
| Amended and Restated DB SERP for Management Committee Members of Domtar | |||||||||
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10.3* |
| Amended and Restated Supplementary Pension Plan for Designated Managers of Domtar Inc. | |||||||||
10.4* | Amended and Restated DC SERP for Designated Executives of Domtar Personal Care | ||||||||||
10.5* | Amended and Restated Domtar Corporation 2007 Omnibus Incentive Plan | DEF14A | Annex B | 03/31/2017 | |||||||
10.6* | Domtar Corporation Annual Incentive Plan for Members of the Management Committee | DEF14A | Annex A | 03/31/2017 | |||||||
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12.1 |
| Computation of Ratio of Earnings to Fixed Charges | |||||||||
31.1 |
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| Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||||
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31.2 |
| Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||
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32.1 |
| Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||
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32.2 |
| Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||
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101.INS |
| XBRL Instance Document | |||||||||
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101.SCH |
| XBRL Taxonomy Extension Schema | |||||||||
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase | |||||||||
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase | |||||||||
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase | |||||||||
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101.PRE |
| XBRL Extension Presentation Linkbase |
* Indicates management contract of compensatory arrangement
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
DOMTAR CORPORATION | |
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Date: | |
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By: | /s/ Daniel Buron |
| Daniel Buron |
| Senior Vice-President and Chief Financial Officer |
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By: | /s/ Razvan L. Theodoru |
| Razvan L. Theodoru |
| Vice-President, Corporate Law and Secretary |
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