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UFS > SEC Filings for UFS > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for DOMTAR CORP


3-May-2013

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 the Quarterly Report. The MD&A should also read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission ("SEC") on February 28, 2013. 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 periods ended March 31, 2013 and 2012. The three-month periods are also referred to as the first quarter of 2013 and 2012.

EXECUTIVE SUMMARY

In the first quarter of 2013, we repaid $26 million of Alternative Fuel Tax Credit ("AFTC") and executed a conversion election to claim $55 million of Cellulosic Biofuel Producer Credit ("CBPC") ($33 million after-tax, all reflected in Income tax expense in the Consolidated Statement of Earnings and Comprehensive Income). The repayment of the AFTC resulted in $26 million of Other operating loss in the Consolidated Statement of Earnings and Comprehensive Income for the first quarter of 2013 and an $8 million tax benefit related to the reversal of previously unrecognized tax benefits associated with the $26 million of AFTC that we repaid. Also in the first quarter of 2013, we sold a portion of our assets in Port Edwards, Wisconsin and recorded a gain on the sale of $10 million.

We reported operating income of $49 million, an increase of $6 million compared to $43 million in the fourth quarter of 2012. In addition to the factors explained above, operating income increased mainly due to a decreased operating loss in our Distribution segment, partially offset by decreased operating income in our Pulp and Paper segment. In our Distribution segment, operating income improved mostly due to a $5 million write-off of customer relationships recorded in the fourth quarter of 2012 as well as higher deliveries of approximately 10% when compared to the fourth quarter of 2012. In our Pulp and Paper segment, we experienced lower selling prices for paper ($8 million, reflecting a selling price decrease of approximately 1% when compared to the fourth quarter of 2012), higher raw materials costs, including energy ($5 million), fiber ($5 million) and chemicals ($2 million), the negative impact of lower production volume ($6 million), and higher salaries and wages ($2 million). In addition, in the first quarter of 2013, we had an increase in bad debt expenses ($1 million) and an increase in environmental provision ($1 million). This decrease was partially offset by higher selling prices for pulp ($6 million, reflecting a selling price increase of approximately 2% when compared to the fourth quarter of 2012) and higher paper shipments ($8 million, reflecting an increase in demand for our paper by approximately 3% when compared to the fourth quarter of 2012) as well as lower maintenance costs ($4 million) and the positive impact of a weaker Canadian dollar on our Canadian denominated expenses, net of our hedging program.

We expect continued momentum in pulp markets with moderate improvement in pricing and steady shipments. In papers, our volumes are expected to stay relatively similar to the first quarter in the near term. The second quarter will be affected by the usual seasonal higher maintenance activity in pulp, while input costs are expected to decline slightly, notably due to lower usage of energy.

Closure and Restructuring Activities and Impairment and Write-down of Property, Plant and Equipment and Intangible Assets

Multiemployer Pension Plan

In relation to the withdrawal from one of our multiemployer pension plans in 2011, we recorded an additional charge to earnings of $1 million due to a revision in the estimated withdrawal liability during the first quarter of 2013, resulting in a current accrual balance of $48 million. While this is our best estimate of the ultimate cost of the withdrawal from this plan at March 31, 2013, additional withdrawal liabilities may be incurred based on the final fund assessment expected to occur in the second quarter of 2013. Further, we remain liable for potential additional withdrawal liabilities to the fund in the event of a mass withdrawal, as defined by statute, occurring anytime within the next three years.

Kamloops, British Columbia pulp facility - 2012 and 2013

On December 13, 2012, we announced the permanent shut down of one pulp machine at our Kamloops, British Columbia mill. This decision resulted in a permanent curtailment of our annual pulp production by approximately 120,000 air dried metric tons of sawdust softwood pulp and affected approximately 125 employees. As a result, we recorded $10 million of accelerated depreciation, a component of Impairment and write-down of property, plant and equipment on the Consolidated Statement of Earnings and Comprehensive Income in the first quarter of 2013. The pulp machine ceased production in March 2013. Further, during the first quarter of 2013, we reversed $1 million of severance and termination costs.


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Mira Loma, California converting plant - 2012

During the first quarter of 2012, we recorded a $2 million write-down of property, plant and equipment at our Mira Loma California converting plant, in Impairment and write-down of property, plant and equipment, a component of Impairment and write-down of property, plant and equipment and intangible assets on the Consolidated Statement of Earnings and Comprehensive Income.

Other Costs

During the first quarter of 2013, other costs related to previous and ongoing closures are nil (2012- $1 million in severance and termination costs).

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. For information relating to all our closure and restructuring activities, refer to Item 1, Financial Statements and Supplementary Data, of this Quarterly Report on Form 10-Q, under Note 11 "Closure and Restructuring cost and liability."

Sale of Port Edwards assets

On March 22, 2013, we sold the building, remaining equipment and related land of our Port Edwards Wisconsin pulp and paper mill, and recorded a gain on the sale of $10 million. The transaction includes specific machinery, equipment, furniture, parts, supplies, tools, real estate, land improvements, and other fixed or tangible assets. The assets were sold "as is" for proceeds of $9 million and the environmental provision of $3 million related to these assets was contractually passed on to the buyer and released from our liabilities. The net book value of the assets sold was $2 million.

Redemption of Certain Outstanding Notes

During the first quarter of 2013, we redeemed our outstanding 5.375% Notes due 2013, for par value of $71 million. We incurred $2 million of premiums and additional charge of $1 million, included in Interest expense on the Consolidated Statements of Earnings and Comprehensive Income.

OUR BUSINESS

Information relating to our business is contained in our Annual Report on Form 10-K for the year ended December 31, 2012. There has not been any material change in our business since December 31, 2012.


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