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UFS > SEC Filings for UFS > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for DOMTAR CORP


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. 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, 2011, filed with the Securities and Exchange Commission ("SEC") on February 27, 2012. 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. 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 volume are based on the three-month and nine-month periods ended September 30, 2012 as compared to the three-month period ended June 30, 2012 and the three-month and nine-month periods ended September 30, 2011. The three-month and nine-month periods ended September 30, 2012 and 2011 are also referred to as the third quarter of 2012 and 2011, respectively, and the first nine months of 2012 and 2011, respectively, and the three-month period ended June 30, 2012 as the second quarter of 2012.

EXECUTIVE SUMMARY

In the third quarter of 2012, we reported operating income of $109 million, an increase of $3 million compared to $106 million in the second quarter of 2012. This increase is due to higher shipments for both pulp and paper, lower maintenance, and the curtailment of the post-retirement benefit plan of $13 million. These factors were partially offset by cyclically low selling prices for pulp and costs related to lower efficiency mostly due to lack-of-order and maintenance downtime for pulp and paper.

Due to seasonal factors, Domtar paper shipments are expected to decline in the fourth quarter when compared to the third quarter. In pulp, we anticipate that prices will begin to gradually increase in the medium term due to favorable market dynamics and low softwood inventory levels. Input costs, notably energy and chemicals are expected to increase slightly in the fourth quarter.

Closure and restructuring activities

We regularly review our overall production capacity with the objective of aligning our production capacity with anticipated long-term demand.

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

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

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


Table of Contents

On March 29, 2011, we announced the permanent shut down of one of our paper machines at our Ashdown, Arkansas pulp and paper mill. This measure reduced our annual uncoated freesheet paper production capacity by approximately 125,000 short tons. The mill's workforce was reduced by approximately 110 employees. For the three and nine months ended September 30, 2011, we recorded $1 million recovery and $1 million expense, respectively, of inventory obsolescence and nil and $2 million, respectively, of severance and termination costs, as well as $8 million and $73 million, respectively, of accelerated depreciation on property, plant and equipment, a component of Impairment and write-down of property, plant and equipment. Operations ceased on August 1, 2011.

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

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

RECENT DEVELOPMENTS

Senior notes offering

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

OUR BUSINESS

Information relating to our business is contained in our Annual Report on Form 10-K for the year ended December 31, 2011. There has not been any material change in our business since December 31, 2011, except for the completion of the acquisitions of Attends Healthcare Limited ("Attends Europe") and EAM. The acquired businesses are presented under our Personal Care reporting segment.


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