Attached files

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EX-31.2 - EX-31.2 - Domtar CORPufs-ex312_9.htm
EX-32.2 - EX-32.2 - Domtar CORPufs-ex322_10.htm
EX-32.1 - EX-32.1 - Domtar CORPufs-ex321_7.htm
EX-31.1 - EX-31.1 - Domtar CORPufs-ex311_6.htm
EX-12.1 - EX-12.1 - Domtar CORPufs-ex121_8.htm
EX-10.1 - EX-10.1 - Domtar CORPufs-ex101_311.htm

 

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 September 30, 2016

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. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

 

 

(do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

At October 31, 2016, 62,585,337 shares of the issuer’s common stock were outstanding.

 

 

 

 


 

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2016

INDEX

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

3

 

 

 

 

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (LOSS)

3

 

 

 

 

CONSOLIDATED BALANCE SHEETS

4

 

 

 

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

5

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

6

 

 

 

 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

41

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

51

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

51

 

 

 

PART II

OTHER INFORMATION

52

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

52

 

 

 

ITEM 1A.

RISK FACTORS

52

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

53

 

 

 

ITEM 3.

DEFAULT UPON SENIOR SECURITIES

54

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

54

 

 

 

ITEM 5.

OTHER INFORMATION

54

 

 

 

ITEM 6.

EXHIBITS

54

 

 

 

 

 


 

PART I: FINANCIAL INFORMATION

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

 

 

For the nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Sales

 

 

1,270

 

 

 

1,292

 

 

 

3,824

 

 

 

3,950

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding depreciation and amortization

 

 

969

 

 

 

1,026

 

 

 

3,032

 

 

 

3,140

 

Depreciation and amortization

 

 

87

 

 

 

89

 

 

 

263

 

 

 

270

 

Selling, general and administrative

 

 

107

 

 

 

95

 

 

 

314

 

 

 

294

 

Impairment of property, plant and

   equipment (NOTE 11)

 

 

5

 

 

 

20

 

 

 

29

 

 

 

57

 

Closure and restructuring costs (NOTE 11)

 

 

10

 

 

 

1

 

 

 

33

 

 

 

3

 

Other operating loss (income), net (NOTE 6)

 

 

 

 

 

 

 

 

4

 

 

 

(8

)

 

 

 

1,178

 

 

 

1,231

 

 

 

3,675

 

 

 

3,756

 

Operating income

 

 

92

 

 

 

61

 

 

 

149

 

 

 

194

 

Interest expense, net

 

 

17

 

 

 

64

 

 

 

49

 

 

 

115

 

Earnings (loss) before income taxes

 

 

75

 

 

 

(3

)

 

 

100

 

 

 

79

 

Income tax expense (benefit) (NOTE 7)

 

 

16

 

 

 

(14

)

 

 

19

 

 

 

(6

)

Net earnings

 

 

59

 

 

 

11

 

 

 

81

 

 

 

85

 

Per common share (in dollars) (NOTE 4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

0.94

 

 

 

0.17

 

 

 

1.29

 

 

 

1.34

 

Diluted

 

 

0.94

 

 

 

0.17

 

 

 

1.29

 

 

 

1.34

 

Weighted average number of common  shares

   outstanding (millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

62.6

 

 

 

62.9

 

 

 

62.6

 

 

 

63.4

 

Diluted

 

 

62.7

 

 

 

63.0

 

 

 

62.7

 

 

 

63.5

 

Cash dividends per common share

 

 

0.42

 

 

 

0.40

 

 

 

1.22

 

 

 

1.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

59

 

 

 

11

 

 

 

81

 

 

 

85

 

Other comprehensive income (loss) (NOTE 13):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative (losses) gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (losses) gains arising during the period, net of tax of

   $4 and $(14), respectively (2015 - $13 and $24,

   respectively)

 

 

(6

)

 

 

(19

)

 

 

23

 

 

 

(35

)

Less: Reclassification adjustment for losses included in net

   earnings, net of tax of $(2) and $(10), respectively

   (2015 - $(5) and $(13), respectively)

 

 

1

 

 

 

7

 

 

 

14

 

 

 

18

 

Foreign currency translation adjustments

 

 

6

 

 

 

(58

)

 

 

61

 

 

 

(182

)

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

 

Other comprehensive income (loss)

 

 

3

 

 

 

(69

)

 

 

103

 

 

 

(194

)

Comprehensive income (loss)

 

 

62

 

 

 

(58

)

 

 

184

 

 

 

(109

)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

3

 


 

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

 

 

 

At

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

168

 

 

 

126

 

Receivables, less allowances of $6 and $6

 

 

616

 

 

 

627

 

Inventories (NOTE 8)

 

 

770

 

 

 

766

 

Prepaid expenses

 

 

46

 

 

 

21

 

Income and other taxes receivable

 

 

33

 

 

 

14

 

Total current assets

 

 

1,633

 

 

 

1,554

 

Property, plant and equipment, net

 

 

2,887

 

 

 

2,835

 

Goodwill (NOTE 9)

 

 

548

 

 

 

539

 

Intangible assets, net (NOTE 10)

 

 

600

 

 

 

601

 

Other assets

 

 

162

 

 

 

125

 

Total assets

 

 

5,830

 

 

 

5,654

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Trade and other payables

 

 

645

 

 

 

720

 

Income and other taxes payable

 

 

25

 

 

 

27

 

Long-term debt due within one year

 

 

63

 

 

 

41

 

Total current liabilities

 

 

733

 

 

 

788

 

Long-term debt

 

 

1,309

 

 

 

1,210

 

Deferred income taxes and other

 

 

692

 

 

 

654

 

Other liabilities and deferred credits

 

 

342

 

 

 

350

 

Commitments and contingencies (NOTE 15)

 

 

 

 

 

 

 

 

Shareholders' equity (NOTE 14)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Additional paid-in capital

 

 

1,961

 

 

 

1,966

 

Retained earnings

 

 

1,190

 

 

 

1,186

 

Accumulated other comprehensive loss

 

 

(398

)

 

 

(501

)

Total shareholders' equity

 

 

2,754

 

 

 

2,652

 

Total liabilities and shareholders' equity

 

 

5,830

 

 

 

5,654

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

4

 


 

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

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

5

 


 

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

 

 

 

For the nine months ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

(Unaudited)

 

 

 

$

 

 

$

 

Operating activities

 

 

 

 

 

 

 

 

Net earnings

 

 

81

 

 

 

85

 

Adjustments to reconcile net earnings to cash flows from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

263

 

 

 

270

 

Deferred income taxes and tax uncertainties

 

 

6

 

 

 

(50

)

Impairment of property, plant and equipment

 

 

29

 

 

 

57

 

Net gains on disposals of property, plant and equipment

 

 

 

 

 

(15

)

Stock-based compensation expense

 

 

5

 

 

 

5

 

Other

 

 

(3

)

 

 

4

 

Changes in assets and liabilities, excluding effect of acquisition of business

 

 

 

 

 

 

 

 

Receivables

 

 

19

 

 

 

(11

)

Inventories

 

 

6

 

 

 

(70

)

Prepaid expenses

 

 

(5

)

 

 

(3

)

Trade and other payables

 

 

(53

)

 

 

8

 

Income and other taxes

 

 

(18

)

 

 

30

 

Difference between employer pension and other post-retirement

   contributions and pension and other post-retirement expense

 

 

(16

)

 

 

2

 

Other assets and other liabilities

 

 

(4

)

 

 

4

 

Cash flows provided from operating activities

 

 

310

 

 

 

316

 

Investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(302

)

 

 

(202

)

Proceeds from disposals of property, plant and equipment

 

 

 

 

 

35

 

Acquisition of business, net of cash acquired

 

 

(1

)

 

 

 

Other

 

 

1

 

 

 

9

 

Cash flows used for investing activities

 

 

(302

)

 

 

(158

)

Financing activities

 

 

 

 

 

 

 

 

Dividend payments

 

 

(76

)

 

 

(75

)

Stock repurchase

 

 

(10

)

 

 

(50

)

Net change in bank indebtedness

 

 

1

 

 

 

(9

)

Change in revolving bank credit facility

 

 

60

 

 

 

75

 

Proceeds from receivables securitization facility

 

 

140

 

 

 

 

Repayments of receivables securitization facility

 

 

(40

)

 

 

 

Issuance of long-term debt

 

 

 

 

 

300

 

Repayments of long-term debt

 

 

(40

)

 

 

(439

)

Other

 

 

(3

)

 

 

1

 

Cash flows provided from (used for) financing activities

 

 

32

 

 

 

(197

)

Net increase (decrease) in cash and cash equivalents

 

 

40

 

 

 

(39

)

Impact of foreign exchange on cash

 

 

2

 

 

 

(7

)

Cash and cash equivalents at beginning of period

 

 

126

 

 

 

174

 

Cash and cash equivalents at end of period

 

 

168

 

 

 

128

 

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

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

6

 


 

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1

BASIS OF PRESENTATION

8

 

 

 

NOTE 2

RECENT ACCOUNTING PRONOUNCEMENTS

9

 

 

 

NOTE 3

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

12

 

 

 

NOTE 4

EARNINGS PER COMMON SHARE

17

 

 

 

NOTE 5

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

18

 

 

 

NOTE 6

OTHER OPERATING LOSS (INCOME), NET

19

 

 

 

NOTE 7

INCOME TAXES

20

 

 

 

NOTE 8

INVENTORIES

21

 

 

 

NOTE 9

GOODWILL

22

 

 

 

NOTE 10

INTANGIBLE ASSETS

23

 

 

 

NOTE 11

CLOSURE AND RESTRUCTURING COSTS AND LIABILITY AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

24

 

 

 

NOTE 12

LONG-TERM DEBT

25

 

 

 

NOTE 13

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

26

 

 

 

NOTE 14

SHAREHOLDERS’ EQUITY

28

 

 

 

NOTE 15

COMMITMENTS AND CONTINGENCIES

29

 

 

 

NOTE 16

SEGMENT DISCLOSURES

32

 

 

 

NOTE 17

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

33

 

 

 

NOTE 18

SUBSEQUENT EVENT

40

 

 

 

7

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2016

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 1.

_________________

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 nine 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 year ended December 31, 2015, as filed with the Securities and Exchange Commission. The December 31, 2015 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

 

SEPTEMBER 30, 2016

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

ACCOUNTING CHANGES IMPLEMENTED

PRESENTATION OF DEBT ISSUANCE COSTS

In April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of 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.

 

The Company adopted the new requirements on January 1, 2016 with retrospective application. The effect of this change in accounting policy on our Consolidated Balance Sheet as at December 31, 2015 was a reduction of $9 million in Other assets and Long-term debt.

FUTURE ACCOUNTING CHANGES

REVENUE FROM CONTRACTS WITH CUSTOMERS

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The core principal of this guideline 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.

 

The Company is currently evaluating these changes to determine how they will impact the consolidated financial statements.

 

INVENTORY

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies 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 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.

 

The Company does not expect this new guidance to have a material impact on the consolidated financial statements.

 

9

 


DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2016

(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 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 Company 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,” 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. 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 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, 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 have a material impact on the consolidated financial statements.

 

DERIVATIVES AND HEDGING

In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships,” which clarifies that "a 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" or "a 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

 

SEPTEMBER 30, 2016

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

CLASSIFICATION OF CASH FLOWS

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash 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.

 

 

11

 


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

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 September 30, 2016, one of Domtar’s Pulp and Paper segment customers located in the United States represented 12% ($77 million) (2015 – 12% ($78 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, bank 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 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.

 

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 2016 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

 

Natural Gas

 

 

 

 

 

 

 

 

 

 

 

 

2016 (1)

 

4,620,000

 

 

$

14

 

 

 

 

80%

 

2017

 

8,980,000

 

 

$

28

 

 

 

 

34%

 

2018

 

5,085,000

 

 

$

15

 

 

 

 

19%

 

2019

 

6,560,000

 

 

$

20

 

 

 

 

25%

 

2020

 

5,750,000

 

 

$

18

 

 

 

 

22%

 

2021

 

2,930,000

 

 

$

10

 

 

 

 

15%

 

 

(1)

Represents the remaining three months of 2016

(2)

MMBTU: Millions of British thermal units

The natural gas derivative contracts were fully effective as of September 30, 2016. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 resulting from hedge ineffectiveness (three and nine months ended September 30, 2015 – 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 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 used to hedge a portion of forecasted sales by its 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 its European subsidiaries over a period 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

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.

The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of September 30, 2016 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

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

CDN/USD

 

Pulp and Paper

 

 

 

137 CDN

 

 

71%

 

 

1 USD = 1.2584

 

1 USD = 1.3008

USD/Euro

 

Personal Care

 

 

 

13 USD

 

 

64%

 

 

1 Euro = 1.1344

 

1 Euro = 1.1344

Euro/USD

 

Pulp and Paper

 

 

 

9 EUR

 

 

75%

 

 

1 Euro = 1.1321

 

1 Euro = 1.1321

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

CDN/USD

 

Pulp and Paper

 

 

 

468 CDN

 

 

60%

 

 

1 USD = 1.3045

 

1 USD = 1.3557

USD/Euro

 

Personal Care

 

 

 

49 USD

 

 

66%

 

 

1 Euro = 1.1357

 

1 Euro = 1.1357

Euro/USD

 

Pulp and Paper

 

 

 

19 EUR

 

 

50%

 

 

1 Euro = 1.1370

 

1 Euro = 1.1370

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

CDN/USD

 

Pulp and Paper

 

 

 

142 CDN

 

 

18%

 

 

1 USD = 1.2890

 

1 USD = 1.3528

USD/Euro

 

Personal Care

 

 

 

14 USD

 

 

18%

 

 

1 Euro = 1.1532

 

1 Euro = 1.1532

 

The foreign exchange derivative contracts were fully effective as of September 30, 2016. There were no amounts reflected in the Consolidated Statements of Earnings and Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 resulting from hedge ineffectiveness (three and nine months ended September 30, 2015 - 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

 

SEPTEMBER 30, 2016

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

 

NOTE 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) below) at September 30, 2016 and December 31, 2015, 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

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

18

 

 

 

 

 

 

18

 

 

 

 

(a)

Prepaid expenses

Natural gas swap contracts

 

 

3

 

 

 

 

 

 

3

 

 

 

 

(a)

Prepaid expenses

Currency derivatives

 

 

8

 

 

 

 

 

 

8

 

 

 

 

(a)

Other assets

Natural gas swap contracts

 

 

2

 

 

 

 

 

 

2

 

 

 

 

(a)

Other assets

Total Assets

 

 

31

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency derivatives

 

 

12

 

 

 

 

 

 

12

 

 

 

 

(a)

Trade and other payables

Natural gas swap contracts

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Trade and other payables

Currency derivatives

 

 

4

 

 

 

 

 

 

4

 

 

 

 

(a)

Other liabilities and deferred credits

Natural gas swap contracts

 

 

5

 

 

 

 

 

 

5

 

 

 

 

(a)

Other liabilities and deferred credits

Total Liabilities

 

 

25

 

 

 

 

 

 

25