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UFS > SEC Filings for UFS > Form 10-K on 24-Feb-2014All Recent SEC Filings

Show all filings for DOMTAR CORP

Form 10-K for DOMTAR CORP


24-Feb-2014

Annual Report


ITEM 7. 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 audited consolidated financial statements and notes thereto included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K. 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 twelve month periods ended December 31, 2013, 2012 and 2011. The twelve month periods are also referred to as 2013, 2012 and 2011.

EXECUTIVE SUMMARY

On July 31, 2013, we sold our Ariva business in the United States ("Ariva U.S."). The results of our former Distribution segment have been reclassified under the Pulp and Paper segment.

In 2013, we reported operating income of $161 million, a decrease of $206 million compared to $367 million in 2012. Our results were impacted by the repayment of $26 million of Alternative Fuel Tax Credit ("AFTC") in the first quarter of 2013 (in our Pulp and Paper segment), and the settlement of a litigation with George Weston Limited for $49 million in the second quarter of 2013 (in our Corporate segment). In addition, our operating results decreased when compared to 2012 mostly due to a decrease in operating income in our Pulp and Paper segment.

In our Pulp and Paper segment, our operating income decreased by $159 million when compared to 2012. This decrease in operating income is mostly due to lower selling prices for manufactured paper ($73 million, reflecting a selling price decrease of approximately 2% when compared to 2012), the conversion of AFTC in 2013 ($26 million) as mentioned above, higher raw materials costs including fiber ($28 million), energy ($17 million) and chemicals ($3 million) as well as the negative impact of lower production in pulp and paper ($45 million) and a decrease in manufactured paper and pulp shipments ($25 million). In addition, we had an increase in costs related to maintenance ($15 million), as well as an increase in freight charges ($13 million) and salaries and wages ($11 million). These cost increases were partially offset by higher selling prices for pulp ($43 million, reflecting a selling price increase of approximately 5% when compared to 2012), lower restructuring costs ($19 million) as well as favorable exchange rates, net of our hedging program ($29 million).

In our Personal Care segment, operating income decreased by $2 million when compared to 2012. This decrease in operating income is mostly due to an increase in selling, general and administrative expenses and an increase in raw material costs. The decrease in operating income was mostly offset by the inclusion of a full year of Attends Healthcare Limited ("Attends Europe") and EAM Corporation ("EAM") following their acquisitions in the first and second quarter of 2012, respectively, as well as the acquisition of Associated Hygienic Products LLC ("AHP") on July 1, 2013.

These and other factors that affected the year-over-year comparison of financial results are discussed in the year-over-year and segment analysis.


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Outlook

In 2014, we expect our paper shipments to be in-line with 2013 while we expect the market demand for uncoated free sheet to decline with long-term secular trends. Our paper prices are expected to benefit from the implementation of recently announced prices increases. We expect softwood pulp markets to maintain positive momentum but new scheduled industry hardwood pulp capacity makes the latter part of the year more uncertain. Personal care will continue to see earnings growth with the recent acquisition of Laboratorios Indas, S.A.U. ("Indas") and with the addition of the new production lines towards the end of the year.

ACQUISITION OF BUSINESSES

Associated Hygienic Products LLC

On July 1, 2013, we completed the acquisition of 100% of the outstanding shares of AHP. AHP manufactures and markets infant diapers in the United States. AHP has approximately 600 employees and operates two manufacturing facilities, a 376,500 square foot manufacturing facility in Delaware, Ohio and a 312,500 square foot manufacturing facility in Waco, Texas. The results of AHP's operations are included in the Personal Care reportable segment starting July 1, 2013. The purchase price was $276 million in cash, including working capital, net of cash acquired of $2 million. For details, refer to Part II, Item 8, Financial Statements and Supplementary Data, under Note 3 "Acquisition of Businesses" of this Annual Report on Form 10-K.

Xerox

On June 1, 2013, we completed the acquisition of Xerox's paper and print media products' assets in the United States and Canada. The transaction includes a broad range of coated and uncoated papers and specialty print media including business forms, carbonless as well as wide-format paper formerly distributed by Xerox. The results of this business are presented in the Pulp and Paper reportable segment. The purchase price was $7 million in cash plus inventory on a dollar for dollar basis.

For details, refer to Part II, Item 8, Financial Statements and Supplementary Data, under Note 3 "Acquisition of Businesses" of this Annual Report on Form 10-K.

Laboratorios Indas, S.A.U.

On January 2, 2014, we completed the acquisition of Laboratorios Indas, S.A.U. a branded incontinence products manufacturer and marketer in Spain. Indas has approximately 440 employees and operates two manufacturing facilities in Spain. The results of Indas' operations are included in the Personal Care reportable segment as of January 2, 2014. The purchase price is estimated to be $546 million (€399 million), in cash, including working capital, net of cash acquired of $46 million (€34 million). We have not completed the valuation of assets acquired and liabilities assumed; however, we anticipate providing a preliminary purchase price allocation in our 2014 first quarter Form 10-Q filing.

CLOSURE AND RESTRUCTURING ACTIVITIES AND IMPAIRMENT AND WRITE-DOWN OF PROPERTY,
PLANT AND EQUIPMENT AND INTANGIBLE ASSETS

Closure and Restructuring Activities

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



                                                                    Year ended
                                                                December 31, 2013
                                       Pulp and Paper          Personal Care        Corporate         Total
                                      $                       $                     $                $
Severance and termination costs                     (2 )                    2               -             -
Inventory write-down reversal                       (1 )                   -                -             (1 )
Pension settlement and withdraw
alliability                                         11                     -                 6            17
Other                                                2                     -                -              2

Closure and restructuring costs                     10                      2                6            18


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                                                                      Year ended
                                                                   December 31, 2012
                                                                             Personal
                                                    Pulp and Paper             Care           Total
                                                   $                        $                $
Severance and termination costs                                    6                -              6
Inventory write-down                                               5                -              5
Loss on curtailment of pension benefits and
pension withdrawal liability                                      16                -             16
Other                                                              2                 1             3

Closure and restructuring costs                                   29                 1            30

                                                                     Year ended
                                                                  December 31, 2011
                                                           Pulp and Paper            Total
                                                          $                         $
Severance and termination costs                                          5                5
Inventory write-down                                                     2                2
Loss on curtailment of pension benefits and pension
withdrawal liability                                                    41               41
Other                                                                    4                4

Closure and restructuring costs                                         52               52

Multiemployer Pension Plan - 2011, 2012 and 2013

In 2011, we decided to withdraw from one of our multiemployer pension plans and recorded a withdrawal liability and a charge to earnings of $32 million. In 2012, as a result of a revision in the estimated withdrawal liability, we recorded a further charge to earnings of $14 million. Also in 2012, we withdrew from a second multiemployer pension plan and recorded a withdrawal liability and a charge to earnings of $1 million. In the first quarter of 2013, as a result of another revision in the estimated withdrawal liability, we recorded a further charge to earnings of $1 million. During the second and third quarter of 2013, we withdrew from our remaining U.S. multiemployer pension plans and recorded a withdrawal liability and a charge to earnings of $14 million, of which $3 million is recorded in Closure and restructuring cost and $11 million related to the sale of our Ariva U.S. business included in Other operating loss (income) on the Consolidated Statement of Earnings and Comprehensive Income. At December 31, 2013, the total provision for the withdrawal liabilities is $63 million. While this is our best estimate of the ultimate cost of the withdrawal from these plans at December 31, 2013, additional withdrawal liabilities may be incurred based on the final fund assessment and in the event of a mass withdrawal, as defined by statute, occurring anytime within the next three years.

During the second quarter of 2013, we also incurred aggregate pension settlement costs in the amount of $13 million related to the previously closed Big River sawmill and Dryden paper mill for $6 million and $7 million, respectively.

In the fourth quarter of 2011, we incurred a $9 million cost from an estimated pension curtailment associated with the conversion of certain of our U.S. defined benefit pension plans to defined contribution pension plans recorded as a component of closure and restructuring costs.

Kamloops, British Columbia pulp facility - 2012 (Pulp and Paper segment)

On December 13, 2012, we announced the permanent shut down of one pulp line at our Kamloops, British Columbia mill. This decision resulted in a permanent curtailment of our annual pulp production by approximately 120,000 ADMT of sawdust softwood pulp and affected approximately 125 employees. In 2012,


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we recorded severance and termination costs ($5 million) and a write-down of inventory ($4 million). The pulp line ceased production in March 2013. As a result, during the first quarter of 2013 we reversed $1 million of severance and termination costs. During the second quarter of 2013, we reversed an additional $1 million of severance and termination costs, reversed $1 million of inventory obsolescence, and incurred $2 million of other costs.

Lebel-sur-Quévillon pulp mill and sawmill - 2011 and 2012 (Pulp and Paper segment)

Operations at the pulp mill were indefinitely idled in November 2005 due to unfavorable economic conditions and the sawmill was indefinitely idled since 2006 and then permanently closed in 2008. At the time, the pulp mill and sawmill employed approximately 425 and 140 employees, respectively. The Lebel-sur-Quévillon pulp mill had an annual production capacity of 300,000 metric tons. During 2011, we reversed $2 million of severance and termination costs related to our Lebel-sur-Quévillon pulp mill and sawmill and following the signing of a definitive agreement for the sale of our Lebel-sur-Quévillon assets. During the second quarter of 2012, we concluded the sale of our pulp and sawmill assets to Fortress Paper Ltd., and our land related to those assets to a subsidiary of the Government of Quebec for net proceeds of $1.

Langhorne forms plant - 2011 (Pulp and Paper segment)

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

Ashdown pulp and paper mill - 2011 (Pulp and Paper segment)

On March 29, 2011, we announced that we would permanently shut down one of four 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. In 2011, we recorded a $1 million write-down of inventory and $1 million of severance and termination costs. Operations ceased on August 1, 2011.

Plymouth pulp and paper mill - 2010 and 2011 (Pulp and Paper segment)

On February 5, 2009, we announced a permanent shut down of a paper machine at our Plymouth, North Carolina pulp and paper mill effective at the end of February 2009. We further announced in 2009 that our Plymouth mill would be converted to a 100% fluff pulp mill. This measure resulted in the permanent curtailment of 293,000 tons of paper production capacity and the shutdown affected approximately 185 employees. During 2011, we reversed $2 million of severance and termination costs.

Other costs

During 2013, other costs related to previous and ongoing closures include $2 million of severance and termination costs. During 2012, other costs related to previous and ongoing closures included $1 million in severance and termination costs, a $1 million write-down of inventory, $1 million in pension and $3 million in other costs. During 2011, other costs related to previous closures included $4 million in severance and termination costs, a $1 million write-down of inventory and $4 million in other 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 more information relating to all our closure and restructuring activities, refer to Item 8, Financial Statements and Supplementary Data of the Annual Report of this Form 10-K, under Note 16 "Closure and Restructuring Costs and Liability."


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Impairment of Property, Plant & Equipment

Attends Europe - 2013 (Personal Care segment)

During the fourth quarter of 2013, we recorded a $2 million write-down of property, plant and equipment, due to the replacement of certain equipment at our Attends Europe location, in Impairment and write-down of property, plant and equipment and intangible assets (a component of Impairment and write-down of property, plant and equipment and intangible assets on the Consolidated Statement of Earnings and Comprehensive Income).

Pulp and paper converting site - 2013 (Pulp and Paper segment)

During the fourth quarter of 2013, we recorded a $5 million write-down of property, plant and equipment in one of our converting sites in the Pulp and Paper segment, in Impairment and write-down of property, plant and equipment and intangible assets (a component of Impairment and write-down of property, plant and equipment and intangible assets on the Consolidated Statement of Earnings and Comprehensive Income).

Ariva U.S. - 2013 (Pulp and Paper segment)

On July 31, 2013, we completed the sale of Ariva U.S. which had approximately 400 employees in the United States. As a result of this agreement, during the second quarter of 2013, we recorded a $5 million impairment of property, plant and equipment at our former Ariva U.S. location, in Impairment and write-down of property, plant and equipment and intangible assets (a component of Impairment and write-down of property, plant and equipment and intangible assets on the Consolidated Statement of Earnings and Comprehensive Income). For details, refer to Part II, Item 8, Financial Statements and Supplementary Data, under Note 26 "Sale of Ariva U.S." of this Annual Report on Form 10-K.

Kamloops, British Columbia pulp facility - 2012 (Pulp and Paper segment)

As a result of the announced shut down as described above, we recognized, under Impairment and write-down of property, plant and equipment, $7 million of accelerated depreciation under Impairment and write-down of property, plant and equipment in 2012. In 2013, we recognized $10 million of accelerated depreciation under Impairment and write-down of property, plant and equipment. Given the decision to close the pulp line, we assessed in the fourth quarter of 2012 our ability to recover the carrying value of the Kamloops mill's long-lived assets from the undiscounted estimated future cash flows. We concluded that the undiscounted estimated future cash flows associated with the long-lived assets exceeded their carrying value and, as such, no additional impairment charge was required.

Mira Loma, California converting plant - 2012 (Pulp and Paper segment)

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

Lebel-sur-Quévillon pulp mill and sawmill - 2011 and 2012 (Pulp and Paper segment)

As a result of the permanent closure described above, we recorded a $12 million write-down for the remaining fixed assets net book value, a component of Impairment and write-down of property, plant and equipment and intangible assets (a component of Impairment and write-down of property, plant and equipment and intangible assets on the Consolidated Statement of Earnings and Comprehensive Income).


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Ashdown pulp and paper mill - 2011 (Pulp and Paper segment)

As a result of the permanent shut down described above, we recorded $73 million of accelerated depreciation, a component of Impairment and write-down of property, plant and equipment and intangible assets. Given the substantial decline in production capacity at our Ashdown mill, we conducted a quantitative impairment test in the fourth quarter of 2011 and concluded that the recognition of an impairment loss for our Ashdown mill's remaining long-lived assets was not required.

Impairment of Intangible Assets

During 2012, deterioration in sales and operating results of Ariva U.S., a subsidiary included in our Pulp and Paper segment, had led us to test the customer relationships of this asset group for recoverability. As of December 31, 2012, we recognized an impairment charge of $5 million included in Impairment and write-down of property, plant and equipment and intangible assets related to customer relationships in the Pulp and Paper segment, based on the revised long-term forecast in the fourth quarter of 2012.

Changes in the assumptions and estimates may affect our forecasts and may lead to an outcome where impairment charges would be required. In addition, actual results may vary from our forecasts, and such variations may be material and unfavorable, thereby triggering the need for future impairment tests where our conclusions may differ in reflection of prevailing market conditions.

DIVIDEND AND STOCK REPURCHASE PROGRAM

In 2013, we repurchased 2,509,803 shares of our common stock at an average price of $73.10 for a total cost of $183 million and paid quarterly cash dividends in an aggregate amount of $67 million.

RECENT DEVELOPMENT

Acquisition of Indas

On January 2, 2014, we completed the acquisition of Indas, a branded incontinence products manufacturer and marketer in Spain. Indas has approximately 440 employees and operates two manufacturing facilities in Spain. The results of Indas' operations are included in the Personal Care reportable segment as of January 2, 2014. The purchase price is estimated to be $546 million (€399 million), in cash, including working capital, net of cash acquired of $46 million (€34 million). We have not completed the valuation of assets acquired and liabilities assumed; however, we anticipate providing a preliminary purchase price allocation in our 2014 first quarter Form 10-Q filing.

OUR BUSINESS

A description of our business is included in Part I, Item 1, under the section "Business" of this Annual Report on Form 10-K. On July 31, 2013, we sold our Ariva U.S. business and the results of our former Distribution segment have been reclassified under the Pulp and Paper segment. We now operate in two reportable segments: Pulp and Paper and Personal Care. Each reportable segment offers different products and services and requires different manufacturing processes, technology and/or marketing strategies.


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CONSOLIDATED RESULTS OF OPERATIONS AND SEGMENTS REVIEW

The following table includes the consolidated financial results of Domtar
Corporation for the years ended December 31, 2013, 2012 and 2011:



                                              Year ended            Year ended            Year ended
                                             December 31,          December 31,          December 31,
FINANCIAL HIGHLIGHTS                             2013                  2012                  2011
(In millions of dollars, unless
otherwise noted)
Sales                                        $       5,391         $       5,482         $       5,612
Operating income                                       161                   367                   592
Net earnings                                            91                   172                   365
Net earnings per common share (in
dollars)1:
Basic                                                 2.73                  4.78                  9.15
Diluted                                               2.72                  4.76                  9.08
Operating income (loss) per segment:
Pulp and Paper                               $         171         $         330         $         581
Personal Care                                           43                    45                     7
Corporate                                              (53 )                  (8 )                   4

Total                                        $         161         $         367         $         592

                                              At December           At December           At December
                                               31, 2013              31, 2012              31, 2011
Total assets                                 $       6,278         $       6,123         $       5,869
Total long-term debt, including current
portion                                      $       1,514         $       1,207         $         841

1 Refer to Part II, Item 8, Financial Statements and Supplementary Data, under Note 6 "Earnings Per Share" of this Annual Report on Form 10-K.


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YEAR ENDED DECEMBER 31, 2013 VERSUS

YEAR ENDED DECEMBER 31, 2012

Sales

Sales for 2013 amounted to $5,391 million, a decrease of $91 million, or approximately 2%, from sales of $5,482 million in 2012. This decrease in sales is mainly attributable to the sale of Ariva U.S. in the third quarter of 2013 ($158 million), a decrease in our average selling price for manufactured paper ($73 million, reflecting a selling price decrease of approximately 2% when compared to the average selling price of 2012), a decrease in our pulp volume ($52 million) and a decrease in our manufactured paper volume ($27 million). These decreases were partially offset by the increase in sales due to the acquisition of AHP at the beginning of the third quarter of 2013 as well as inclusion of a full year of sales from Attends Europe and EAM. In addition, our average selling price for pulp increased ($43 million, reflecting a selling price increase of approximately 5% when compared to the average selling price of 2012).

Cost of Sales, excluding Depreciation and Amortization

Cost of sales, excluding depreciation and amortization, amounted to $4,361 million in 2013, an increase of $40 million, or approximately 1%, compared to cost of sales, excluding depreciation and amortization, of $4,321 million in 2012. This increase is mainly attributable to the acquisition of AHP at the beginning of the third quarter of 2013, which resulted in an increase in cost of sales as well as the inclusion of a full year of cost of sales for Attends Europe and EAM. We had higher costs of raw materials, including fiber ($31 million), energy ($17 million) and chemicals ($3 million), higher maintenance costs ($15 million), higher freight costs ($12 million) and higher fixed costs ($13 million mostly due to an increase in salaries and wages). These increases were partially offset by a decrease in cost of sales for Ariva U.S., following its sale in the third quarter of 2013 ($144 million), lower shipments for pulp and paper ($47 million and $18 million, respectively) . . .

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