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| UFS > SEC Filings for UFS > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with Domtar Corporation's unaudited interim consolidated financial statements and notes thereto included elsewhere in this Quarterly Report. You should also read the MD&A in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission ("SEC") on February 27, 2009 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009, filed with the SEC on May 8, 2009 and August 7, 2009, respectively. Throughout this MD&A, unless otherwise specified, "Domtar Corporation," "the Company," "Domtar," "we," "us" and "our" refer to Domtar Corporation and its subsidiaries, as well as its investments. 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").
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 and the term "MFBM" refers to million foot board measure. 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. Starting in 2008, the fiscal year was based on the calendar year and ends on December 31. 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 volume are based on the three-month and nine-month periods ended September 30, 2009 as compared to the three-month period ended June 30, 2009 and thirteen and thirty-nine week periods ended September 28, 2008. The three-month and nine-month periods ended September 30, 2009 are also referred to as the third quarter of 2009 and first nine months of 2009, respectively, the three-month period ended June 30, 2009 as the second quarter of 2009 and the thirteen and thirty-nine week periods ended September 28, 2008 as the third quarter of 2008 and first nine months of 2008. The additional one day in the third quarter of 2009, when compared to the third quarter of 2008, had no significant impact on the comparability of results of operations.
EXECUTIVE SUMMARY
In the third quarter of 2009, we reported operating income of $295 million, an improvement of $156 million when compared to operating income of $139 million in the second quarter of 2009. In the third quarter of 2009, we saw an improvement in our papers business, which experienced a 5% volume increase compared to the second quarter of 2009 as well as higher shipments for our pulp business, which experienced a 13% volume increase compared to the second quarter of 2009. Our strategy of maintaining our production levels in line with our customer demand has resulted in taking lack-of-order downtime and machine slowdowns of 101,000 tons of paper and 38,000 metric tons of pulp in the third quarter of 2009 compared to 101,000 tons of paper and 141,000 metric tons of pulp, in the second quarter of 2009. The lack-of-order downtime and machine slowdowns continued to negatively impact our earnings. Our results for the third quarter of 2009 were also impacted by an increase of $28 million in the refundable excise tax credits recorded for the production and use of alternative bio fuel mixtures, higher average selling prices for pulp, lower costs for raw materials, including chemicals, energy and fiber, and lower costs related to maintenance, partially offset by lower average selling prices for paper and the unfavorable impact of a stronger Canadian dollar, net of our hedging program.
For the fourth quarter, we expect lower paper volumes due to the seasonality of our business as well as higher costs due to planned maintenance shutdowns when compared to the third quarter. The strengthening of the Canadian dollar will also negatively impact the profitability of our Canadian mills. However, we expect our Papers segment to benefit from recently announced price increases implemented in the fourth quarter of 2009. Inventory levels remain lean and we will continue to balance our production with customer demand.
These and other factors that affected the quarter-over-quarter comparison of financial results are discussed in the quarter-over-quarter and segment analysis.
Restructuring activities
We regularly review our overall production capacity with the objective of aligning our production capacity with anticipated long-term demand. The decline in demand for paper and pulp has accelerated beyond our original expectations as a result of the sharp decline in economic activity earlier this year. Accordingly, we have continued to close facilities.
Our Woodland pulp mill, which was indefinitely idled in May 2009, was reopened effective June 26, 2009, and substantially all employees were called back to work in June for the restart of pulp production. The timely benefits from the refundable tax credits for the production and use of alternative bio fuel mixtures, and other important conditions, such as stronger global demand, improving prices and favorable currency exchange rates have made the reopening possible. Our Woodland pulp mill has an annual hardwood production capacity of approximately 398,000 metric tons, and approximately 300 employees were affected by this measure.
In April 2009, we announced that we would idle our Dryden pulp facility for approximately ten weeks, effective April 25, 2009. This decision was taken in response to continued weak global demand for pulp and the need to manage inventory levels. In addition, we also idled our Ear Falls sawmill for approximately seven weeks, effective April 10, 2009, as this sawmill is a supplier of chips to our Dryden pulp mill. These temporary measures affected approximately 500 employees at the pulp mill, sawmill and related forestland operations. Our Dryden pulp mill has an annual softwood pulp production capacity of 319,000 metric tons. The Ear Falls sawmill has an annual production capacity of 190 MFBM. Our Dryden pulp mill restarted its pulp production in July 2009. Our Ear Falls sawmill restarted its operations in August 2009, but will be indefinitely idled again in the fourth quarter of 2009.
In February 2009, we announced the permanent shut down of a paper machine at our Plymouth pulp and paper mill, effective at the end of February 2009. This measure resulted in the permanent curtailment of approximately 293,000 tons of paper production capacity per year and affected approximately 185 employees.
We continue to evaluate potential adjustments to our production capacity, which may include additional closures of machines or entire mills, and we could recognize significant cash and/or non-cash charges relating to any such closures in future periods.
RECENT DEVELOPMENTS
Marlboro to install a steam turbine generator to provide power
On October 28, 2009, we announced that we will expand our Marlboro pulp and paper mill production by installing a steam turbine generator. We expect to invest approximately $40 million and the turbine will allow us to generate most of the electricity needed to power our Marlboro pulp and paper mill.
Plymouth mill to be converted to 100% fluff pulp production
On October 20, 2009, we announced that we will convert our Plymouth, North Carolina mill to 100% fluff pulp production. This will require approximately $74 million of investment. Our annual fluff pulp making capacity will increase almost threefold to 444,000 metric tons. The mill reconfiguration, which is expected to be completed in the fourth quarter of 2010, will also result in the permanent shutdown of Plymouth's remaining paper machine. This will reduce our annual uncoated freesheet production capacity by approximately 199,000 tons. The mill reconfiguration will help preserve approximately 360 positions.
The aggregate pre-tax earnings charge in connection with this conversion is estimated to be $67 million which includes an estimated $56 million in non cash charges relating to accelerated depreciation of the carrying amounts of the manufacturing equipment as well as the write-down of related spare parts. Of the estimated pre-tax cash charges of $11 million, $10 million relates to severance and employee benefits and $1 million relates to other items such as training. Of the estimated total pre-tax charge of $67 million, $66 million is expected to be recognized in the fourth quarter of 2009 and $1 million is expected to be incurred during 2010.
As a result of the fourth quarter decision to change the nature and use of the Plymouth pulp and paper mill, the carrying amount of the remaining assets of the Plymouth mill are being tested for impairment which may result in a write-down during the fourth quarter of 2009. The carrying amount of such assets was approximately $284 million at September 30, 2009.
Closure and restructuring costs are based on management's best estimates. Although the Company does not anticipate significant changes, actual costs may differ from these estimates due to subsequent developments such as the results of new environmental studies as well as other business developments. As such, additional costs, further write-downs and impairment charges may be required in future periods.
OUR BUSINESS
Our reporting segments correspond to the following business activities: Papers, Paper Merchants and Wood. A description of our business is included in Part I, Item 1, Business of our Annual Report on Form 10-K for the year ended December 31, 2008.
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